Ampol Limited (ALD) Earnings Call Transcript & Summary

Thank you, operator, and good morning, everyone. My name is Matt Halliday. I'm the Managing Director and CEO of Ampol Limited, and welcome to our full 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. We also have here today, Brent Merrick, Andrew Brewer, Kate Thomson; and Mike Bennetts on the call who are joining us. During the presentation, we'll be referring to the document lodge with both the ASX and NZX this morning. I'll start off with our safety performance on Slide 3. Personal Safety remains a key focus for Ampol with convenience retail and Z energy maintaining strong performance as the annual safety improvement plans and continuous improvement of key controls delivers results, including through our focus of leadership time in the field. The F&I performance, while still strong, has had an uptick in TRIFR from the exceptional performance levels seen in 2021. When it comes to process safety, we had no Tier 1 process incidents, which is a track record we've maintained now since October 2018. And our comprehensive spill prevention program, which involves working closely with our carrier partners, has been embedded into business as usual. We flagged in August last year, the Kurnell terminal wastewater overflow event in April. After several weeks of extreme rainfall, a combination of events, including very intense range during a short period in early April, led to a discharge of oily water from the site impacting the Kurnell community. Importantly, we have completed the investigation and cleanup work and continue to work with the New South Wales EPA Kurnell community and the Council to address the findings. Turning now to the performance highlights Slide 4. 2022 has been a successful year for Ampol with record financial performance and shareholder returns. While we delivered on our strategic priorities and maintained reliable supply to our customers in what was a period of unprecedented supply chain disruptions. Looking at our financial performance first. RCOP EBITDA was $1.76 billion and RCOP EBIT was $1.32 billion. We saw all parts of the integrated value chain contribute to this result with strong performances from Lytton, F&I ex-Lytton, convenience retail and with the addition of Z Energy during the year. Our ROCE increased to 18%, up more than 50% on 2021 levels. Total fuel sales increased to 24.3 billion liters, our highest ever volume due mainly to the ongoing recovery in jet fuel sales and the addition of Z. Leverage was 1.7x on a last 12 months basis, which is an exceptional result, considering the fully debt-funded acquisition of Z in May 2022 and reflects the strong cash conversion from record earnings levels net of working capital movements, which Greg will speak to shortly. The strength of our financial performance, balance sheet and a strong outlook has led the Board to declare a final ordinary dividend of $1.05 per share, taking the total ordinary dividend for 2022 to $2.25 per share, representing a payout ratio of 70% of RCOP NPAT, excluding significant items. This is at the top of our dividend policy range. In addition, the Board has declared a special dividend of $0.50 per share for a total of an additional approximately $120 million, in line with the proceeds received from the sale of a 49% interest in the Z properties to the limited partnership. This is consistent with our practice of returning surplus capital from asset sales to our shareholders. The total dividends declared for this year releases a further $281 million of franking credits, and we've now returned about 60% of our franking balance since 2019, reflecting strong progress on the promise we made at the time to return these credits into the hands of our shareholders. Turning now to our strategic priorities. We continue to execute on our strategy to diversify and grow internationally by completing the Z acquisition and gold divestment, making Ampol the leading transact on fuels and convenience provider. The convenience retail team had a stellar year as the strategy gained further traction and delivered the nonfuel RCOP EBIT target of $85 million, 2 years ahead of schedule. We've also completed the rebrand of the entire network and finished the construction of 50 MetroGo sites across our network. Since launching our future energy strategy last year, we have continued to build capability and take some important steps forward, including launching the AmpCharge brand for our EV charging offering. Amidst the market disruption that has followed the Russian invasion of Ukraine, we've maintained our focus on creating value for all stakeholders. Our resilient supply chain ensured fuel security for our customers despite the significant disruption to global crude and product flows. And our teams in the areas impacted by flooding provided much needed support to local communities cut off by floodwaters as they needed supplies and refuge. And recognizing the increasing cost of living pressures, the Ampol Foundation and Z Energy's Good in the Hood program have provided increased support to the communities where we operate. Turning now to Slide 5. The benefits of our integrated supply chain were never more evident than in a year of heightened volatility and disruption from extreme weather and COVID. The strength of our integrated model shone through, and Ampol was certainly a net beneficiary of the prevailing market conditions. This includes refiner margin strength well above historical levels and the attractive trading opportunities that elevated volatility provided. Conversely, quality premiums, representing the cash price paid over mops to secure spot cargoes rose sharply during the year, reducing earnings from fuel sales to contracted B2B middle distillates customers. Product freight also rose affecting margins on aviation contracts. I'd like to now turn to an update on our strategy on Slide 6. We have delivered on our key strategic priorities outlined for 2022 that we talked about last February. Looking at the enhanced strategic pillar, the rebrand is complete, including the EG network with over 1,800 sites now carrying the iconic Ampol brand. And we extended the Ampol brand into EV charging, launching the AmpCharge brand, which has appeared at our forecourts with the first 5 EV charging sites going live through the second half of last year. Our expand strategy was focused on international growth and nonfuel earnings. We completed the Z acquisition in mid-May '22 and the gold divestment in late July. The Z Energy team are making very good progress with actions being taken to now deliver on the expected synergies. As mentioned earlier, the nonfuel EBIT target was achieved 2 years ahead of schedule, which is a tremendous achievement and reflects the significant progress we have made in building our convenience retail capability. Not only has the nonfuel target been delivered early, total convenience retail earnings, including fuel, have increased by nearly $150 million or 73% over the same period. And it's important to note this outcome does not rely heavily on the format enhancements like MetroGo, where we continue to test options to better leverage our network footprint. We completed the 50th store last year and continue to work with Woolworths on optimizing the MetroGo offer to deliver acceptable levels of return. I'll talk more about the Evolve pillar later, but the key achievements are e-mobility focused with the commencement of the EV charging network rollout and on decarbonizing our own operations to meet our 2025 targets for Scope 1 and Scope 2 emissions. I'm now going to hand over to Greg to take you through the details of the group and segment performance.

Thank you, Matt. Good morning, everyone. You might recall in August, we highlighted a couple of accounting changes that you will see in the 2022 results and in the '21 comparator. So I'll just recap quickly on those before moving into the detail. Results for Z Energy are included from May 2022. At the half year and the third quarter trading update, we presented preliminary purchase price or acquisition accounting adjustments as required with any acquisition. While we have a window of 12 months to finalize these adjustments, the numbers presented in the accounts today are pretty close to final and unlikely to move materially from this point forward. We have also modified our RCOP methodology to align with Z Energies, and we communicated this at the time of our first quarter results release. And with the divestment of Gull completed in July 2022, we have reported it as a discontinued operation. A reconciliation of these adjustments is included in the appendix on Slide 27 to help you update your models. So if we turn to Slide 8, you'll be able to see the detail behind our fuel sales volumes. Group volumes were up 10%, inclusive of 8 months of Z Energy sales of 2.76 billion liters. While we didn't own Z in 2021, its volumes were up 19% on the same time last year, a period that was heavily covered affected. Australian wholesale volumes grew 12%, benefiting particularly from jet fuel as air travel continued its recovery. We also saw an improved second half performance from EG, noting the rebranding of sites was completed during the period. While convenience retail fuel sales were lower in absolute terms, on a like-for-like basis, they grew by 0.5%. The second half saw strong growth compared to the first half, which was impacted by flooding, Omicron outbreaks and higher pump prices. Taking both of these markets into account, the combined Australian demand grew by 7.6%. International third-party sales are a mix of term and spot sales. In the supply-constrained market, the team prioritized security of supply to our termed-up customers limiting the opportunity for spot sales. Pleasingly, they are able to capture opportunities to profit on term volumes on the term volumes that were secured. So when you look at the results on Slide 9. For the reasons I stepped through earlier, there's quite a lot of detail on this slide, and it will take some time to digest, but I'll just call out the highlights. As Matt said, this is a record for Ampol and one that was delivered in very challenging market conditions, of which we were undoubtedly a net beneficiary. The performance was driven primarily by Lytton, which benefited from a significant step-up in refining margins. Of course, realizing this benefit requires consistently good operational performance to capture the benefit, and the team were really tested given the balancing of crude supply during the year in particular. We also saw really strong performances from F&I ex-Lytton, which grew EBIT by 28% on a continuing operations basis and convenience retail, which delivered its best result in 5 years, growing EBIT by 37%. And of course, we added 8 months of Z Energy earnings, which also performed well in the second half. So I'll talk more about each segment in a moment. We reported an RCOP NPAT of $763 million and a statutory result of $796 million. The statutory result includes $90 million of inventory losses after tax, reflecting the adjustment to bring Costa sales to their historic cost for statutory accounting purposes. It also includes net favorable significant items of $123 million after tax, the bulk of which relates to the release of tax provisions after settlement was reached with the ATO, as outlined in our releases to the exchanges today. If we look at Slide 10, you'll see the key contributions to growth in group EBITDA and EBIT. It highlights just how important Lytton's performance was to the group as well as the significant contributions from other divisions. I'll talk to the other businesses in subsequent slides, but we'll just note the uplift in corporate costs of $15 million. This is largely due to increased accruals for short-term incentives consistent with the strong results as well as the costs related to self-insurance where we lifted premiums to cover flood damage earlier in the year at affected retail sites. We've continued to invest in future energy in a measured and targeted way, consistent with what we flagged earlier in the year. The team is making great progress and Matt will update on this shortly. Looking at each of the businesses. On Slide 11, we can see the F&I result in more detail. Obviously, the refinery is a standout. The Lytton refining margin averaged USD 17.86 per barrel for the year, well above long-term averages. There are a number of factors at work here, including COVID demand recovery and lower inventory levels, especially for diesel as well as the market rebalancing following Russian sanctions and fluctuations in Chinese exports. These factors drove refined product prices higher and increased land at crude premiums and product freight costs. At Lytton, reliable operations maximize the benefit from elevated refiner margins. The total production for the year was 6.1 billion liters, a strong performance in line with last year. So I'll move to the next slide to talk more about F&I ex-Lytton's performance. So you can see that on Slide 12. And on Slide 12, we presented the balance of F&I to demonstrate the importance of the supply chain as a whole. The constituent parts have broken down consistent with prior year reporting to help with your modeling. Collectively, EBIT grew 28% year-on-year. That's a really pleasing overall result. The makeup of the result very much reflects the dynamics in the market during the year and the way our business was able to adapt. F&I saw growth in aviation volumes as international travel resumed. Margins, however, were impacted by elevated input costs from middle distillate quality premiums and high product freight costs in the aviation business. This compares to legacy standard contract pricing that hadn't contemplated the extreme market conditions we were operating in. This was more than mitigated by the combination of sourcing, blending and price risk management to supply both our Australian and international businesses, with our international business more than doubling its profitability year-on-year. So while this is a high-quality result in the circumstances, we have more to do, and the team continues to progressively renew customer contracts on revised terms to reduce our exposure to high quality premiums and product freight. Slide 13 looks at our KPIs for the convenience retail business. It's fair to say we couldn't be happier with how the business is performing at the moment. We've seen strong operational execution all year and experienced a far more favorable retail fuel environment in the second half. These factors combined to produce a 37% increase in earnings this year. The retail fuel volumes were 3.84 billion liters, up 0.5% on a like-for-like basis for the reasons I mentioned earlier. Premium fuel sales penetration was quite resilient considering the higher prices throughout the year and was only down 0.7 of a percentage point for the year. The good progress in shop performance continued as we delivered on our nonfuel EBIT uplift target ahead of schedule. Network shop sales grew by 2.3% on a like-for-like basis, and shop income increased as gross margin that's post waste and shrink expanded to 33.9%, an increase of 2.7 percentage points from the same time last year. Improved product mix, promotional activity, labor efficiency, reduce waste and shrink and reduce cost of doing business all contributed to the improved performance. Our network rationalization is nearing completion. 645 stores remains in the company-controlled network. That's a reduction in store count of 5.7% this year and down from nearly 800 stores before the transition to company operations commenced. On Slide 14, you can see how the combination of these factors contributed to improved convenience retail earnings. After a pretty challenging retail fuel environment in the first half, conditions were much more favorable in the second half. And we were also comping a more cover impacted period last year, which will help with comparisons. As I mentioned, the strong shop performance saw its contribution increased by $28 million. Cost of doing business also reduced with a focus on spend across the board. So if we turn to Slide 15, you can see our results on Z Energy. The acquisition of Z Energy completed on May 10, 2022, so we have 8 months of trading, which contributed USD 124.6 million to the group EBIT. As Matt has said previously, we're really happy with the business, the way our teams are working together and the progress that Z team is making in delivering on the performance improvement initiatives. Total fuel sales were 2.76 billion liters for the period of ownership, which is an improvement of 19% on the same period last year. Z's transition to a full import model was completed with no material disruption to customers. Their exit from the national inventory agreement has also allowed Z to gain share through its superior infrastructure position in the key markets they operate in. You can see here the purchase price accounting adjustments have totaled AUD 72.8 million and is predominantly due to the revaluation of emissions trading units that Z had on hand at the date of acquisition. So while there's a number of moving parts, the post-PPA result for 2022 is the best basis from which to extrapolate full year equivalent performance going forward. In doing so, you should note that it includes the delivery of $22 million of synergy and performance improvements within the result and that represents an annualized run rate of $55 million. Furthermore, the transition to Ampol's supply arrangements will be completed in April of this year, providing another opportunity to add value beyond the current run rate. If we turn to Slide 16, we can just talk to our balance sheet and cash flow. As you now know, the acquisition of Z Energy was fully debt funded. In July, we received the proceeds from the divestment of Gull. While the operating environment has presented challenges for working capital this year, particularly the need to opportunistically buy crudes and at times support increased length in our supply chain, the team has managed this effectively over the course of the year. As a result, full year operating cash flows reflect the strong EBITDA performance net of a $600 million increase in accounts receivable due almost entirely to higher sales volume and higher Aussie dollar prices year-on-year. We continue to look for opportunities to optimize our balance sheet with a second Australian Property Trust as well as adopting a similar structure with the Z retail properties. Capital expenditure was just over $400 million, including rebranding and the progression of our highway sites at Fess Nest. Now cash outflows from dividends during the period represent the final dividend for FY '21 of $0.41 per share and the interim dividend for FY '22 of $1.20 per share. The payment of the ordinary and special dividends declared today will fall into 2023 cash flows. So just finally from or lastly from me on Slide 17. The heading on Slide 17, I think very much reflects the approach that the Ampol Board and management team are striving to achieve. That is delivering for our shareholders today, investing in core business opportunities where it makes sense to improve returns and beginning to position Ampol for the energy transition in a measured way over time. As Matt said earlier, for FY '22, we have declared a $1.05 per share final ordinary dividend, taking total ordinary dividends to $2.25 per share and to the top of our payout range of 70% of RCOP NPAT. That is in our most profitable year ever. In addition, Ampol has declared a $0.50 per share special dividend equivalent to the proceeds from the Z Energy property right and consistent with our commitment to return surplus capital from asset sales to shareholders. That takes total dividends for FY '22 to $2.75 per share or $636 million fully franked. Not only is this the highest amount returned by Ampol in a given year, it occurs just 8 months after acquiring Z Energy, which was an all debt funded transaction. We remain committed to our capital allocation framework. The graph on the left-hand side of Slide 17 really demonstrates the consistency with which we return capital and earnings to shareholders where we see the opportunity. And it will be -- and we will be continuing to look for opportunities in the period ahead. As you saw in the previous slide, net debt finished at $2.4 billion. As a result, leverage was 1.7x EBITDA, which of course, includes a pretty exceptional Q2 performance. This has enabled the dividends that we declared today, and we continue to target leverage towards the bottom end of our 2 to 2.5x EBITDA range by the end of 2023. So thanks for listening. I'll hand back to Matt to complete today's presentation. Thank you.

Great. Thanks for that overview, Greg. I'm now going to move on to Slide 19. I want to take a moment to reiterate our unique competitive strengths that have helped underpin our delivery in 2022. And looking forward, will allow us to successfully execute on our strategy to enhance, expand and evolve. We believe Ampol possesses qualities that are unmatched in the Australian and New Zealand transport fuel industries. We have a portfolio of privileged infrastructure assets across both countries, including 1 of only 2 refineries and are uniquely positioned through the underpin of earnings provided by the fuel security services payment should refiner margins weaken materially. As the largest integrated fuel supplier in the region, we have a strong manufacturing, distribution and trading and shipping capability that this year has delivered a 28% increase in F&I ex-Lytton earnings and demonstrated its value to the group. And our deep B2B and consumer customer base provides an excellent foundation to launch our energy transition offerings, leveraging our iconic brands Evampole, Z and now AmpCharge. We know we need to position to evolve alongside our customers as they seek to meet their own decarbonization emissions ambitions rather, but recognizing the complexity of the overall task and the time that, that will take to deliver. Turning to the range of energy transition scenarios on Slide 20. Throughout 2022, we made significant progress in deepening our knowledge around the key focus areas of EV charging, electricity, renewable fuels and hydrogen. We are focused on identifying viable commercial opportunities and appropriately pacing initial investment given uncertainty over the energy transition pathway. And as the economics and policy approaches around the various technologies continues to evolve. The tragedy in Ukraine last year and the ensuing energy crisis has reinforced the importance of balancing the energy trilemma around energy security, energy affordability and energy transition. Ampol is committed to the journey of energy transition and the early steps we are taking to demonstrate the important role we can play in providing solutions to our customers. As always, we will remain disciplined in assessing returns from our investments in this area, recognizing they will be longer dated and involve partnerships, including with governments where we maintain strong relationships. EV charging is most advanced with the pilot sites operational. You'll see in the appendix some interesting statistics on their performance. It's early days, but there are some encouraging signs. We have a commitment to complete the ARENA co-funded rollout and with the awarding of a grant from the New South Wales government's drive electric program, we will have about 140 charging sites operational by the end of 2024. Our focus on electricity is driven by customers who are seeking a combined fuel and electrons offer, especially B2B customers as they renew their fleets through the energy transition. As these companies embark on their journeys, mixed fleets are going to be a feature for a very long time to come and getting this offer right and delivering a simple solution for our customers should have pull-through benefits back into the core fuels business. In the renewable fuel space, we are close to completing our initial study work and are focused on sustainable aviation fuels and renewable diesel as the products of most interest to our B2B customers. Hydrogen continues to appear as a possible solution for long and heavy haul transport but is a longer-term play, acknowledging the economics are some way off today. We continue to build our understanding and are working alongside our customers who are seeking to start testing options for a safe and efficient distribution solution rather than on the production side. Looking ahead on Slide 21. We're clear on our priorities for 2023. I've just spoken about the Evolve pillar, so I'll focus on enhance and expand. Looking at enhance, our focus will be on making the final investment decision on the Lytton Fuel Standards project once the Australian fuel standard changes are resolved by government. In retail, we will focus on consolidating the rebrand and continuing to optimize our strong convenience retail performance, and we will continue to de-risk legacy B2B diesel and aviation customer contracts. For the expand pillar, delivering on the Z energy synergies is critical and importantly, it's on track. At the heart of the deal was leveraging our significant short and supply chain capabilities and strengthening the base from which we can keep growing our international volumes and find further margin enhancement opportunities. However, it also extends to steps Z is taking to better leverage its asset base to strengthen its market position and to simplify its business to drive out further costs. Convenience Retail has now shifted from network rationalization to growth with focus areas, including the development of the key New South Wales highway sites and progressing a QSR pilot with a Tier 1 fast food chain. I'd like to close today's presentation on Slide 23 with a view of the current trading conditions and macro-outlook. I think it's fair to say we've had a relatively strong start to 2023. LRM has strengthened to USD 1.40 per barrel in January as gasoline cracks have recovered from the lows that we saw during the fourth quarter of last year. Fuels & Infrastructure ex-Lytton is well positioned to benefit from the ongoing recovery in fuel demand from COVID impacts and from the potential for the return of net migration to Australia. And while quality premiums and product freight remain above historical levels, we've made good progress in de-risking fixed premium contracts, which remains a key focus for us in 2023. Total Australian fuel volumes in January were up 19% on January 2022 levels as new business wins are reflected and aviation recovery continues to play through. Noting, of course, that 2022 was, to some extent, impacted by COVID. Convenience Retail trading for January also improved with volumes up 5.6% on a like-for-like basis on the same period in '22. Shop sales were also up 0.6% on a like-for-like basis, acknowledging again the COVID impacts last year, but I think further demonstrating the strong momentum that we have in that business. Z energy Trading in January '23 was impacted by the Auckland flooding event and now the East Coast impacts of Cyclone Gabriel, which have caused further disruption. Our focus, as you would expect, is on the safety of our people and our customers and supporting local communities during this time. Despite those impacts, January volumes were up 28% against the same period in 2022, which again suffered from a COVID lockdown. Looking ahead for Z, we're confident we can deliver the targeted synergies, having already made good progress and with the volume supply arrangements commencing in April as existing contracts roll off. At a macro level, geopolitical factors, including Russian sanctions and Chinese product export decisions as their economy reopens and demand bounces back are likely to continue to influence crude and refined product markets during 2023 and into the medium term. The fundamentals of supply and demand continue to support a relatively tight market for refined product. And finally, our expectation for capital expenditure for this year is about the same level as 2022, reflecting the investment in the key highway sites mentioned, the Lytton Fuel Standards project and progression of our EV charging network rollout commitments in partnership with governments. So that ends our presentation of the results today. Now Greg and I will take your questions. And just a reminder that we also have Brent, Andrew, Kate and Mike on the line, and I may also direct questions to them. So with that, we'll take our first question, please, operator.

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

And well done on the results. The first one from me is on Z Energy. I just want to understand exactly how we should be thinking about the acquisition adjustments as well as the gain on emission trading credits. Greg. I think you try to comment that the go forward for the business, the best way to think about the base is including the acquisition adjustments. So I just want to understand exactly what you mean there, given I would have thought most of them should be one-off in nature? And then just on the synergies, you're already at $55 million run rate without the full supply coming on. I would have thought the $60 million to $80 million range looks pretty conservative from here.

Okay. Thanks, Michael. Maybe I'll pick up the first question at least. So you heard correctly. So just to step back very briefly with purchase price accounting adjustments. Essentially, what happens is we have to revalue the balance sheet of Z, for one of a better term, to market value and allocate the residual to goodwill. That's essentially the process. So that includes revaluing your property, your plant and equipment or your intangible assets, your inventory, if it can be marked, which we needed to do as well as these ETUs - these emissions trading units. When we acquired project Z, they were long these units. The market actually ripped between when we approached and when we completed the transaction. So the value of those we consider it as cash, but we needed to make that adjustment and reflect that in our purchase price accounting adjustments. Essentially, the difference between the cost Z carried the math and the market value we revalue them at. So that value remains. Obviously, we buy more units at market price today to satisfy our obligations. So I think the simplest way to think about this business is to walk forward the 8 months of results, which is -- includes '22 of synergies delivered and a $55 million run rate. So if you're in very simple terms, deducted the AUD 22 from the AUD 124.6 reported result divided by 8x by 12 and added the $55 million of run rate synergies. That's a pretty good steer to how we should sort of think about underlying performance in these conditions going forward.

And in terms of the second part of your question, Michael, I think we're very pleased with Z. The business is performing well, notwithstanding it's been a choppy period. I think Greg mentioned that the business is growing share, reflective of the strength of the infrastructure position that we have at said. We're not going to get too far ahead of ourselves in talking about synergies beyond the 60 to 80 at this stage. We have had the opportunity to manage the supply contracts that were in place and optimize those. And obviously, we take oversupply from April, which is positive. So we're going to focus on delivering the synergies that we have communicated. But we're very confident that we can do that, and we're very happy that the business is performing well.

Great. And can I just clarify just to come back to the Z accounting. If we use the $125 million as a base, doesn't that then implicitly assume that the purchase price accounting adjustment continue?

So we've -- essentially, it continues to the extent that it is more reflective of the market -- the profit at the market price for those ETUs today.

Okay. All right.

Just to put in sorry, you go.

I'll go ahead. I was just going to say in the second -- I was just going to be on the convenience retail that's okay. Fourth quarter was a better result than the third quarter, even though industry margins were a lot better in the third quarter than the fourth quarter. So I just want to understand the drivers there. And in particular, there were some gain on sales of $16 million. I think they all came in the second half. Can you just give us a little bit of color on which they landed.

Yes. So look, Michael, Q4 is typically stronger in the end of the year is typically a stronger period for convenience retail. I think the shop performance was very strong, and you can see that in the numbers, and that certainly plays through, and we typically do see that play through towards the back end of the year. And I think we continue to see the benefits of reaching the end of our network rationalization program, which has allowed us to really focus our efforts on the sites that have the upside potential and where we can invest appropriately to deliver strong returns. And I think you can see that playing through both the shop and the fuel side of the business in the numbers. Obviously, the result of the network rationalization has meant that we are divesting sites from time to time. And so you saw that occur largely during the second half. And so that relates to the $16 million you're talking about.

All right. And was that pretty evenly spread across the...

Was pretty -- it's even enough, yes. And you referenced, I think, gain on sales or something like that. That was really -- I think you're referring to a waterfall that shows that as a movement year-on-year. So it was more reflective of the absence of a loss on sale in the previous year from recollection.

Your next question comes from Dale Koenders with Barrenjoey.

I was hoping just on capital returns, especially if above market expectations. Just some thoughts behind why you paid $0.50 per share special, why not $0.70 a share to get to the bottom end of your leverage target range and sort of the signal of potentially more going forward, the view of webisode specials, obviously off-market buybacks are gone, but will it be a special rather than increased payout ratio, -- just some thoughts around that.

Yes. Thanks, Dale. It's Greg Barnes, and I'll take that one. Look, at the end of the day, the way I sort of think about what we've done is, typically, we would pay a 60% straight down the middle of our payout range dividend. If you look at the lift to 70 for the full year, so that's on a record first half. The lift to 70% for the full year plus the additional $0.50 a share, that's the equivalent of about a $200 million sort of uplift from what we would typically do is how I think about it. I think at that size and giving our franking credit balance and mix of -- on the share registry, it makes sense to distribute those franking credits. So that's why we went down the special dividend path. And really, the -- you could think about the special dividend in a couple of ways, but the $0.50 a share essentially was nice and around the $200 million but also could be easily linked to the proceeds from the REIT we undertook in New Zealand. So that's the rationale. I think going forward, we continue to carry a franking balance, but we worked that down quite significantly. I think from memory, it's down about 60% from where it was 3 or 4 years ago. So we've made really good inroads there. But we're always mindful of the fact we hold franking credits. I think that's a very efficient way to return proceeds or returns of some sort of shareholders. But on market buybacks, we would look at, depending on the size that was available and at the end of the day, it will be value driven and look at it from a value perspective for both Ampol and our shareholders. So I think both are on the table. Probably special dividends are more likely the go to, but I wouldn't rule out on markets.

But I guess, should we be assuming then that any absence of further asset sales, you're more likely to pay out at 70% and slowly go back towards your leverage target range?

Look, I'm going to be careful trying to preempt what our Board might do in a given period. But I think as we said in the ASX release, we'll -- the balance sheet is strong. Our -- we've obviously got off to a good start to the year. I think the Board and the management team will provide advice to the Board depending on conditions at the time. But I think the natural order of merit would be operate within your range and go to the top as a first instance, special dividends if -- or on market buybacks if there was a specific event that warranted that, and then we're value-driven in terms of which instrument we or mechanism we use.

Okay. Second question, maybe one for Brent. Just trying to understand refining margin $18 something in January. It's still well below industry benchmarks that are published on Bloomberg and other sites of around '23. Just sort of wondering why if you had a view of why you're tracking below industry benchmarks in the area, also noticing that you're producing a lot more gasoline now than diesel and gasoline margins have taken a hit last year. So just sort of thought towards that strategy as well?

Sure. Thanks, Dale. So for Lytton, we continue to operate in the input parity market. So we are impacted by how we source crude and how the product and crude freight markets move. So that we just got to acknowledge our position geographically in the crude mix. In terms of the benchmarks, you're referring to, I don't have any specific comparative to give you other than just acknowledging the crude mix that we buy. In terms of our yields, you're right, there's been a big movement in gasoline to diesel and jet from one period to another. And we continue to look to optimize our crude slate, our product yields and then what we need to do to match product demand through import supply chain. So we'll continue to adjust and optimize total value across the value chain with the refinery being a critical part of that.

Dale, the only thing I'd add is that the clean dirty freight spread or the level of freight protection squeezed up in January. It's opened up again in February from what we've seen. So that's the other factor in addition to continuing to see elevated crude premiums in the market that I'd call out.

Your next question comes from Mark Samter with MST Marquee.

At the risk of asking questions, I did about 6 or 7 years ago about breakup values and I certainly hope we don't get another pre or doing strategic review on it all. But when we look at what the business now and convenience retail, perhaps some noise over the last 12, 18 months, but you being exceptionally good results in Convenience Retail, as you said, the refinery has got the underpin from the government support. It certainly looks on benchmark multiples for the obvious bits of the business are still trading massively below break up some of the parts valuation. Is there any inclination within the business to look at the infrastructure or even partial sales of fits to the businesses to extract or highlight the value in these assets on a stand-alone basis?

Yes. Thanks, Mark. Look, I think, obviously, we've had a choppy few years since probably those conversations were topical a few years ago. What I would say is the business today looks quite different to the way the business looked back then. We've got a relatively clean, very strong set of numbers. We're starting 2023, I think, on the front foot. And that gives us a very good platform to go out and engage with the market, including internationally in terms of the value proposition for the business. So that's the focus of our efforts now. We -- yes, that's what we'll be doing. And we'd like to think that as the results are digested and as the progress is digested, we see that gap that you're pointing to close up.

The next question comes from Mark Wiseman of Macquarie Group.

Congratulations on the result. Just a few questions here. Firstly, on Lytton. I was just wondering if you could give some sort of a guide on when you expect the low-sulfur fuels project to be ready to execute? And how much of an impact will that have on utilization?

So in terms of when it's ready to execute, we've been doing preliminary work. The government still hasn't made a final determination on aromatics. So it's made a determination as far as low sulfur in gasoline specifications. It in the coming months, we would expect to see an aromatics standard change. And the project that we're considering needs to consider both of those things, we think the aromatics change is likely. So that's really on a government time line, we're doing our final stages of preparation in advance of making a decision. Andrew, in terms of the impact on utilization, I might hand to you on that one?

Sure, Matt. Mark. So the project that we're looking to execute, assuming as the conditions come through for approval. It doesn't change dramatically the utilization or the yield of the refining operation. It maintains the performance that you see today. And so that would continue post implementation of the project.

Okay. Great. And is there a shutdown of key units in the refinery to implement that upgrade?

I can take that one as well. So in broad terms, no, we do turnarounds of various process units, and we'll use the opportunity in those turnarounds to do any necessary tie-in work. But fundamentally, no significant interruption to unit operation when the low sulfur plant comes to commissioning.

Okay. Fantastic. And just if I can ask a question on nonfuel. I mean, it looks like the shop sales were pretty flat on an absolute basis, but you've obviously closed and let go of close to 40 sites. Achieving the $85 million target. Is this a case of getting the retail business to where you wanted it to be? Or is this going to be a case of moving the goalpost that actually setting more ambitious targets going forward? Can this business continue to improve?

Look, I think it's -- the result is a demonstration, Mark, of the strong capability that we've built up over a period of time from franchise transition and now through the network review to, as I mentioned earlier, getting really focused on the sites that really add value and where we can drive further value from. But I think it's an exceptionally good result to say network shop sales grew 2.3% like-for-like. And -- the shop margins were up 2.7 percentage points on a gross margin basis. So they're pretty strong outcomes. We're going to continue to optimize our performance in the shop, and I think we're well placed to do that. But we really now shift to developing out the network and focusing on those highway sites that I mentioned. We've got a high-quality small portfolio of NTIs that we'll be bringing into the network. And we're focused on a Tier 1 QSR pilot that's underway. And that is an important next step for us as we look to leverage what is a very high-quality network, and underutilized real estate footprint, high traffic flow. And I think when we think about those kinds of opportunities to optimize format, we want to complete our pilots, and then we'll come back when we have more to say on the results of that work.

Your next question comes from Joseph Wong with UBS.

Congratulations on the strong result. The first question I have is just in the F&I division, you've called out the fixed price challenges in the business. Can you provide the mark some detail of when these contracts will progressively be rolled off?

Yes. We've made strong progress already, Joseph, and I think you can see that is evident in the Q4 result. If I take premiums and freight, you've seen a couple of things. You've seen the progressive roll through to re-contracting to reflect those higher costs. The costs have also come down a bit from the sort of elevated peaks that we saw in the Q3. So over the course of this year, largely, we'll be moving through the balance of the position and the team is making really good progress on it.

Great. The second question I have is just on the energy transition, you're kind of targeting rolling out more charging stations. Can you provide the market a bit more detail on how we should think about the economics of these charging stations? Is it looking forward a [ WACC ] plus 200 basis point return is what we kind of should be expecting?

Look, Joseph, I'd be sort of relatively measured about it in the first instance. We're doing the pilot work. We've got 5 sites. It's a little early to draw significant conclusions from that. We need to put the base network down in partnership with the government grants, as I mentioned, and then we'll learn a lot, another 34 sites into the network in the first half. We'll learn a lot more from those. The only thing I would say is that you might have seen BP talked to its investment in e-mobility last week. And they were talking about e-mobility returns in the context of e-mobility or EV charging and convenience, delivering plus 15% return. So certainly, for fast charging, we see it as an attractive opportunity. It's something our customers, especially on the B2B side at this stage are really interested in. We think it's going to have integrated benefits back into fuels, as I talked about mixed fleets and the role that will play over time. So we wouldn't disagree with the BP numbers that they're talking about. They've got a lot more experience than us, but it's early days, and we need to complete our pilot work.

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

The part of the result, I want to focus on, Matt and Greg is the convenience retail side. Particularly, I mean, it's a terrific performance that second half in particular, I mean it's probably an all-time record. But where I'm interested in is your cost of doing business, particularly on a per site basis, you've actually been able to reduce the cost of doing business per site by 1.5%. Now what really interests me is I'm assuming that you've got a higher quality mix of sites now, and I'm presuming that you've rationalized the smaller ones where the site costs or the cost per site would be less. So I'm actually thinking that those site costs would go up on a per site basis. But also this year, when you've had so much disruption, you imagine you would have had a son tees, you would have had to have duplicated so. I'm just really intrigued as to how you've been able to do that. And my fear is, and I suppose this is not a comment, but my fear is that you might be under investing in the costs that might be causing your growth in sales and that [ scalar ] business. But if you could go through that a bit, that would be really appreciated how you've actually been able to reduce those costs. I mentioned -- you mentioned wastage, but that's probably in the gross margin. But your cost of doing business is just an exceptional result. Obviously, a retailer in the land, be able to deliver reduced cost of doing business in this current environment where wages are going up, absentees and so high. I mean, it's just a really tough run of business at the moment, and you guys are just doing exceptionally well.

Look, David, you point to the network review. I'd point to 2 things fundamentally. One is we have inherited a franchise network, and that has been quite a mixed bag, I would say. And we had our challenges along the way in sort of bringing that network together and then developing the capability to manage and optimize it. The network review has enabled us to get rid of some of the higher-cost sites where there wasn't a pathway to efficiency that made sense. And so that has been part of the benefit. But really, what you're seeing is part of the rationale for franchise transition to company operations in the first instance, which is when you leverage the benefits of scale, and you bring a consolidated operating capability to the network, we can drive out savings. It's taken us time, but we've been on the journey for a while. And what you see in this result, including around costs and that's through -- and that's through labor. It's through the way we manage maintenance through the way we manage utilities. There are real benefits of scale and on bringing the right capability to the right quality of network. So that's -- yes, that's what I'd say, and that's really what's underpinned the delivery.

And so consequently, we can expect that to continue. So you'd be expecting relatively low cost going forward, Matt. And -- and if you still got a bit more leverage to do that sort of thing that you're doing that we can look forward to?

So we'll continue to optimize, as I mentioned. The one other call that I would make is that through the rebrand exercise has been -- has also been probably -- well, a very significant third limb that I should have talked to. That's been extremely positive for our people and our customers. But over the last couple of years, the marketing spend as part of that has been a significant item through the P&L over the 2-year sort of contracted rebrand period. We're now out of that. So we're going to be moderating our marketing spend this year, but it will be going through the P&L.

Your next question comes from Gordon Ramsay with RBC Capital Markets.

Great result, good capital management. Z Energy, I just want to focus on what happens in April when the supply agreement expires. Can you just kind of run through some of the options that you've got to deliver improved performance once that supply agreement is over?

I might pass that one to Brent. Thanks, Gordon.

Yes. Thanks for the question, Gordon. So similar to how we look at business today for Australia, we have the ability to consolidate demand and then look for improved ways to fulfill that demand. So it can be a mix of traditionally that have been a very -- a good buyer of term barrels that have often flown from - flowed from Korea, and we can bring with the scale in the training shipping business, a bit more flexibility to that decision-making. So that will continue as a part of our supply chain -- but we then have other alternatives such as alternate locations of sourcing and things like blending rather than just buying direct from refinery. The piece around the infrastructure is also something that the teams are working on with the closure of the New Zealand refinery and the ceasing of the industry storage agreements then over time, we'll look to optimize our own flow of product as well, which is quite a big change from how New Zealand's operated in the past with the refinery running.

Okay. And just on the refining margin outlook. Obviously, diesel has been somewhat weak because of China's exports. But petrol margins have been recovering. Not to have a view on the EU disruption on the band on the 5th of February, what that could mean for diesel in the region?

Yes. Look, we expect and what we've seen is that although supply chains recut, Gordon, we expect and are seeing products continue to flow. This will play out over some time, obviously. I think China is the big story for 2023 as the reopening continues to bounce as aviation continues to recover what we see happening to Chinese exports and including around middle distillate cracks.

The next question comes from Daniel Butcher with CLSA.

I was hoping maybe you could just help us understand a bit more depth the turnaround, the F&I loss from $18 million in third quarter to scale $70 million turnaround to $50 something in the fourth quarter. It looks like what you're saying that you're still running through some of those jet fuel contracts freight rates. So that probably wasn't the main driver and wasn't the main driver to start with the loss in third quarter. Can you just give us a bit more detail about what the main drivers are and what's changed in the fourth quarter and maybe the risk profile for trading going forward, please?

Yes. So thanks, Dan. So what we saw in the third quarter were a range of factors, and we called out at the time, I think, the high premiums on diesel and jet. We have seen them moderate as I called out earlier. We have made good progress on the pass-through to contracted bulk fuel customers. So that is an important part of the recovery. And then some of the natural offsets that exist within the supply chain. And if you take jet margins, when you're talking about MR and LR freight, the LR, MR freight spread is an important offset to that freight item, if you like, or impact in the B2B contract. So we saw the freight spread squeeze up in Q3, but really opened back up in Q4 as an important value driver for the business. And so I'd point to all 3 of those factors. We also saw a sharp market backwardation shift in the fourth quarter. that had an impact. So it's really all of those factors that they were temporary in nature. And I think when you look across the integrated value chain, the strength of the business is evident in this result and the strength of F&I ex-Lytton is evident in the result when you look at an $80 million quarter for that part of the business. But all of those factors moderated or improved, and you got back to a more reasonable sort of level of profitability.

Sure. You mentioned you rolled out some of your jet contracts, so the fit was presumably so at a higher rate and now it's falling. Does that mean you might at some extraordinary profit on these contracts for a year on the ones that have already rolled?

No, that's not our expectation.

Fair enough. Maybe one quick third one then. -- future lost $31 million this year, obviously grew the loss grew year-on-year. I'm just sort of wondering where you see the losses on that peaking. What is sort of time frame for learning and then making a decision point it's going to turn around with more investment and more scale or whether you abandon that list on the EV side?

Yes. So look, I think you look at where the run rate was through the second half. That's a reasonable run rate for that part of the business. We think it's a reasonable investment given the potential that we see for our network to play a crucial role in the transition. I mentioned the BP results last week, and they're thinking in a very similar way when you read their presentations and expectations of returns. We need to prove that out, but we've got customers looking to us for solutions, fleet customers in particular. And so we think a spend around that level to make sure we can leverage the strong position we have in Ampol [ card ], and we can deliver an integrated solution for a fleet customer that's looking for a mixed fleet solution for both fuel and electrons over time. That's what we're testing and that level of spend over the next couple of years as we prove out our investment case is roughly where we'll be.

The next question comes from Adam Martin with E&P Financial.

Greg, just perhaps you could discuss the sort of fuel volume recovery in the business, so getting to you sort of operating leverage. If you go back and look at F&I, excluding Lytton sort of $400 million business 5 years ago. Today, sort of $200 million assume growing. But can you just talk about any areas there you're optimistic, whether it's aviation or of EG Group. Perhaps you just talk to that, please?

Yes. Maybe I'll pick that up. And then I think if you break down the components, obviously, convenience retail, there's a couple of drivers there. We should expect to have -- you would hope to think a cover for year next year. And over time, the benefits of immigration, which we haven't seen for a few years. And so that's historically been served as at least a partial, if not full mitigant for sort of underlying fuel efficiency in vehicles, which then impacts fuel demand. The other thing we've got on foot over the next couple of years is our highway sites. So Fees Nest 4, and we'll be doing some work on the M1 side, sort of 24, 25x as well. I think, from memory, we'll be spending there. So they are big sites for us, they do about 10x the volume of an average site. So they're quite important for us in the network. And of course, we -- as we said in the presentation, we're largely through the rationalization program. And the addition of those sites, I think, will put us in really good stead. The rebrand, if you look elsewhere in retail beyond our owned and operated business and look at the channel that's served out of F&I Australia, similar dynamics, obviously, with immigration and then you've got EG that's been through its own site rationalization and of course, is now rebranded. And we're quite encouraged by what we saw in EG's performance. They've had obviously the rebrand of both our brand and their store brand, their Woolies related store brand there. So that's -- seems to have served them quite well. So we're positive on retail and sort of realistic about what we face there. But I think we're quite encouraged by what we see. Aviation still got some time to grow. I think the last forecast I saw from the industry still had it sort of reaching 2019 levels out sort of in a 24 sort of period, possibly longer, 25. So we should see continued growth there. I think China's reengagement for one of a better word will be supportive of international travel. So that's quite encouraging. And of course, commodity prices remain healthy, and that's a good thing for mining. I guess from a margin perspective, when and how markets rebalance and settle down to -- so quality premiums are less of a feature. I think, is going to take some time to play out, and we continue to revise and variabilize where we can our contracts in that regard. And then obviously, we've got a strong trading and shipping capability to help sort of source and add capability. And we're going to be looking for adjacent growth in other markets and other products into existing markets through trading and shipping, where we leverage the short in Australia and New Zealand and in Seal, which performed very well this year, particularly from a supply perspective, we see opportunities to grow that as well. So that's a bit of around the ground there. There's -- we're encouraged by what we're seeing. I think -- as I said in the note, we've got more work to do on the contract side of things. And in the meantime, we'll continue to manage that pricing and source as optimally as we can.

Next question comes from Scott Ryall with Rimor Equity Research.

I just wanted to ask first a follow-up on the Aviation margins that you've mentioned. It's very clear what has happened. So thank you, the disclosure has been quite clear there. I was just wondering if you could talk to the time frame for resolving and whether you see that as more driven by market conditions reverting to normal or whether there is a meaningful contract renegotiation that needs to take place for these, please?

Yes. Thanks, Scott. So it really relates to -- I mean market conditions have moderated, as I mentioned, but when we talk about the progression of addressing those contracts, it's about recontracting as they roll off. We've made good progress already. And the vast majority will be recontracted through the course of this year.

Okay. Very clear. And then the next question I had was on Slide 20, talking about the energy transition strategy. And this is an area that I know you get some focus, and I'm very supportive of your spending money here because you need to. I was wondering on the -- you've said in the development phase for EV charging that you've completed test and learn of the first 5 sites. And I know it's not many sites, but what did you -- what -- specifically what were you testing? And are you able to say what you learned for those first sites.

Yes. I mean, it's really the first pilot. I would say our test and learn journey continues with the next 34 sites that we're going to be rolling out over the next couple of months over April and May, principally. So I would say site selection is an important learning from the first 5 sites. The utilization relative to business case, we've seen as pretty encouraging at this stage. We see that connectivity and cost is important. So -- the group is going to have constraints in our view, everywhere as the transition towards electrification continues. That means getting in in securing grid connection and surplus capacity, if you like, is important. We have a network that covers the length and breadth of the country. And so the initial learnings are really focused on where are EVs coming, what network coverage to our fleet customers need principally. And then where can we install and connect to grid sort of from a returns perspective to make sure we get in early. So I would say 5 sites, completed test and learn, maybe is not quite the right framing of it. We've learned a lot from the first 5 sites. We're going to learn a lot more from the next 34. And as we roll out the ARENA program and the New South Wales program over the next sort of 12 to 24 months.

The next question comes from Rob Koh with Morgan Stanley.

Congratulations on the results. Can I maybe just ask a question on convenience retail. I know you talked about it a lot. But maybe you may have disclosed this previously, and I haven't got the history, but the stores that are being rationalized, are they loss-making? And I guess if I look at Slide 14, maybe if you could give us a steer as to where the impact of those closures hit in the waterfall.

Yes. So in terms of -- and operator, this might be the last -- this month, we might need to make this the last question, given we're running over a little bit. But look, Rob, in terms of the sites, some were loss-making, so cutting off the tail, some required further investment and that might mean we're coming into the end of a lease. It might mean that we're coming into a tank relining or replacement. And so it's those kind of -- it's those key points that are key decision points for the sites, especially for marginal sites. So a number of them, loss-making but a number of them also needing capital and not meeting our returns criteria that we're quite disciplined about. And so we closed them down rather than putting more investment into them with the investment then being focused on the 645 sites and the sites where we can really deliver strong returns from an extra dollar of investment.

Okay. And then maybe if I can just sneak in a final question. I just noticed a one-liner in hydrogen, where you've paused the Lytton pilot facility and acknowledging its very early days on this. Maybe could we just ask a bit more color on that one?

Yes. So we communicated that sort of in the mid part of last year. But when we looked at the business case and we looked at the capital cost to implement the project, it just didn't give us the level of returns that was appropriate even for an early-stage pilot project. We're very conscious of the need to be measured and be focused in terms of where we're investing. We've got a real focus on e-mobility, as you can tell. And our focus in terms of the role Lytton can play. I think it's fair to say it's shifted a bit towards SAF and renewable diesel, and that's kind of the focus of the study work we're doing there at the moment.

Thank you. We have completed our Q&A session. I'll now hand back to Mr. Halliday for closing remarks.

Thank you, operator, and thanks, everyone, for your time today. Sorry, we've overrun a little bit. Look, I think it is a strong result for the group. The foundations for the business right across the integrated value chain are in good condition. We have started the year well and the balance sheet is very strong. So we're in good shape to build on what is a strong result in '22, continue to focus on delivering strong results and strong returns for our shareholders in 2023 and continue to execute on our strategy. So thanks. I look forward to talking to you again soon, and have a nice day.