Ampol Limited (ALD) Earnings Call Transcript & Summary

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

Thank you, and good morning, everyone. My name is Matt Halliday. I'm the Managing Director and CEO of Ampol Limited. And welcome to our 2023 full year results call. I'm joined by our CFO, Greg Barnes, who will discuss the financial results in more detail. And following the presentations, we'll take your questions. Also joining us on the call today are Brent Merrick, Andrew Brewer, Kate Thomson and Lindis Jones. And during the presentation, we'll be referring to the documents lodged with the exchanges in Australia and New Zealand this morning. I'll start with our safety performance on Slide 3. As you know, personal safety remains a key focus for all of us at Ampol, and I'm pleased to report that we are close to our best ever performance levels in all parts of the business. But it's clear that we must remain vigilant to ensure everyone goes home safely at the end of their day's work. When it comes to process safety, we've again extended our run of no Tier 1 process incidents, a track record we have maintained now since October 2018. And our comprehensive spill prevention program, which involves working closely with our carrier partners has been embedded into the business. Turning to the performance highlights on Slide 4. And looking at our financials first, we have delivered another strong performance. On an RCOP EBITDA basis, EBITDA was a little over $1.75 billion and EBIT was nearly $1.3 billion. We saw all parts of the integrated value chain contributed to this result with strong performances from each of the non-refining businesses of F&I Ex Lytton, Convenience Retail and New Zealand, offsetting the lower contribution from the refinery as margins normalized. Total fuel sales increased to 28.4 billion liters, a record volume for Ampol. This was driven mainly by the ongoing recovery in jet fuel, a full 12 months contribution from Z and ongoing growth in international sales, particularly from the U.S. operation. Leverage finished at 1.6x and net borrowings were just below $2.2 billion, which Greg will speak more about in a moment. Reflecting the strength of our financial performance, our balance sheet and outlook, the Board has declared an ordinary final dividend of $1.20 per share fully franked, representing a payout ratio of 69% of RCOP NPAT, excluding significant items. This is at the top of the target payout range. In addition, the Board has declared a special dividend of $0.60 per share fully franked, taking the total dividends with respect to the 2023 year to $2.75 per share or $655 million in total distributions. This is in line with the record dividend declared in 2022 and represents a payout ratio of 89%. Turning now to our strategic priorities. The strong performance of the business reflects the ongoing delivery of our strategic objectives. This includes continuing to build our international and retail capabilities that provide the foundations for further growth. Our earnings from international operations really differentiate Ampol and now represent 30% of the group's total earnings. Similarly, our convenience retail earnings when combined across both sides of the Tasman now represent 40% of group earnings. I think each of these points underlines how Ampol's earnings have not only grown significantly over the past few years, but also have a higher quality composition that leaves us well placed to continue to grow and evolve the business. In 2023, the Australian retail strategy focused on premium sites with the rebranding of the 50 sites from MetroGo to Foodary and investment in our highway sites with the marquee presence new sites opened and the refurbishment of the M1 Northbound near Wyong. In each case with multiple QSR options, providing an enhanced offer for our customers. And we've made good progress in establishing an early position in on-the-go EV charging, reaching 82 bays in Australia and 104 in New Zealand. We're also making good progress with regard to the decarbonization of our own operations and with transparent reporting. In July '23, we released Ampol's first TCFD-aligned Climate Report covering the activities undertaken to invest in future energy and decarbonization over the period from May 2021 to May 2023. We're on track to achieve our operational emissions targets in Australia, covering Scope 1 and 2 emissions over which we have control, and Z continues to progress its goals for reducing the emissions it controls. Turning now to Slide 5. In another year of volatility and disruption, the benefits of our integrated supply chain were demonstrated again. We achieved our highest earnings on a continuing basis after adjusting for the divestment of Gull, and treating it as a discontinued operation in the '22 results. Total sales volumes were a record with a pleasing increase in Australian sales volumes to 15.6 billion liters, now being within 5% of pre-COVID 2019 levels. Z grew commercial and wholesale volumes to reach close to 4.4 billion liters, which is nearly 30% higher than the 3.5 billion liters in the 12 months to the end of March '22, just prior to us acquiring the business. And our F&I International volumes, excluding Z, also increased the supply constraints eased providing more spot opportunities, particularly for the U.S. operation. These international volumes have increased at a compound rate of 15% per annum since 2019 as we have continued to build out our capability to optimize supply chains through global sourcing, freight management, blending and price risk management solutions for our customers, all leveraging the quality of our infrastructure assets, which underpin the highly attractive demand short we supply across Australia and New Zealand. I'll now move on to Slide 6. As we have continued to execute our strategy and after a messy couple of COVID impacted years, the results are becoming more evident as our track record shows here. Our earnings have more than doubled since 2019, and importantly, the mix has significantly improved compared to 2022, particularly through growth in international and convenience earnings. In both areas, we continue to see considerable growth ahead with attractive returns. Our volumes have grown by about 1/3 over the period shown, reflecting our ability to extract improved supply margins over time as the strategy delivers. I'll now hand over to Greg to take you through the details of the group and segment performance.

Thank you, Matt. Good morning, everyone. I will just go to Slide 8, where you can see the growth in our sales volumes. Group volumes were up 17% to 28.4 billion liters. That's inclusive of 12 months of the Z Energy sales of 4.4 billion liters. We didn't know Z for the full 12 months of 2022, but its volumes were up 11% on a pro forma basis, driven by growth largely in wholesale markets. Australian wholesale volumes grew by 16% with growth across petrol, diesel and particularly from jet fuel as air travel continued its post-COVID recovery. Convenience retail sales fell 1.6% at a headline level and 1% on a like-for-like basis, mainly in base grades. Our network optimization program and premium position or positioning has really helped product mix and profitability. Taking both these markets into account, the combined Australian demand grew 11%. International sales were up 12% as we captured more spot opportunities as the constraints in that market eased from last year. So if we turn to the results on Slide 9. Just a reminder that we sold the Gull business in July 2022, and therefore, it has been shown in the comparative year as a discontinued operation. I'll be focusing on continuing operations. RCOP EBITDA for the group was $1.75 billion and RCOP EBIT was nearly $1.3 billion. These results were up 2.9% and 2.2% on a continuing basis, noting the comparator excludes the first 4 months of Z Energy trading. It's worth remembering we were comparing a period of record refining margins in 2022, and combined with the impacts of the refinery outages this year, to be within 0.5% of last year's record EBITDA, inclusive of discontinued operations is an extremely pleasing outcome. Arguably, this is a high-quality result with stronger performances across all non-refining divisions. We reported an RCOP NPAT of $740 million in a statutory NPAT of $549 million. The statutory result includes significant items of $64 million after tax, the largest item of which relates to unrealized losses from the mark-to-market of our electricity power purchase agreement in New Zealand, noting we had a much larger unrealized gain in the prior period. So Slide 10 shows the key movements in group EBITDA and EBIT. Note again, this slide reflects continuing operations only, and therefore, excludes goal from the comparative. We obviously experienced an extraordinary period of refining margins in the first half of 2022, which this graph highlights. However, what is really pleasing about this result is how well our sourcing, distribution and retail businesses are performing. Each of the teams has done a terrific job operating in some pretty challenging markets. I'm going to step through each of those businesses over the next few slides. But while we're on this slide, I'll note we've continued to invest in future energy in a measured but targeted way. We have made some very good progress in e-mobility, which is our primary focus and in our thinking on renewable fuels. Matt will update you on the progress the team are making later in the presentation. So on Slide 11, that slide looks at our F&I results in more detail. The Lytton refiner margin averaged USD 1.81 per barrel per barrel for the year, down from USD 17.86 per barrel in 2022. The first half variance is largely due to 2 events: the impact of the Russian invasion of Ukraine on global oil markets in 2022 and the impact of the FCCU outage in Q2 of 2023, which we estimate reduced earnings from the refinery of about $75 million, noting there were modest offsets in the rest of F&I. Nonetheless, refiner margins have held above long-term averages during 2023 as geopolitical tensions impacted markets and tight supplies conditions generally left and continue to leave the market susceptible to these events and any unplanned outages. We're particularly pleased with the performance of F&I Ex-Lytton, which includes our supply, distribution and B2B sales activities. It might be easiest to dive into that on the next slide. On Slide 12 gives you a good overview of F&I performance, and that's Ex-Lytton, Ex-Future Energy. Collectively, EBIT doubled year-on-year and notably is 26% higher than pre-COVID levels. The result really illustrates the unique combination of capabilities and assets that have been built in Ampol over time. It is particularly evident in conditions like the ones we've seen in the last couple of years where the flexibility of the integrated supply chain can adapt relatively quickly to changing market conditions. So while results for this part of the business will move around period to period, and the composition may vary year-to-year, it should outperform its peers on average over time. If we look at Australia, we saw increased volumes with sales reaching 15.6 billion liters, the highest level since 2019. This reflected a continuing recovery in aviation within the group with the group benefiting from the operational leverage this volume provides. Freight markets were also generally favorable, enabling Ampol to benefit from its East Coast infrastructure, including the use of long range or LR vessels to improve per barrel economics compared to MR vessels, which is a basis for import parity and therefore, market pricing. With the benefit of sourcing desks in key global markets, we're able to use these insights to inform supply decisions, including when, how much and for how long the term contract supply into Australia. This flexibility added real value in a market still adjusting to the rapid rise in premiums in the prior year following the Ukraine invasion. F&I International has also grown to be an important contributor to group results. Our Singapore and U.S. teams are now able to leverage the combined scale of the Australian and now New Zealand demand to generate additional value, be it third-party sales, management of time-chartered vessels or sourcing and blending of components to weak out additional margin per barrel. So we might turn to Slide 13 and look at the KPIs of the convenience retail business in Australia. It's been another really strong performance in retail this period, and Kate and the team are really delivering very consistent improvements across our network. Total retail volumes were 3.8 billion liters. Within total sales, premium fuels as a percentage of total sales volume increased by 2.3 percentage points to 53.7%. This is a great reflection of how well the Amplify and Ampol brands are performing. So while total volumes were down 1% on a like-for-like basis, it came mainly from base grade fuels, reflecting our focus on optimizing profit per site and focusing on the premium segment. The good progress in shop performance continued. Ex-tobacco shop sales grew by 3% on a like-for-like basis. Tobacco sales fell by about 19% during the period as the cost of this high-value product to consumers sent demand largely into illicit markets. Sales in the more immediate consumption areas like bakery, snacks and beverages continue to grow in both volume and value terms. This is supportive of underlying growth in sales and in gross margin. Growth in average basket value is particularly encouraging given the relative unit value of cigarettes and the trends we've seen in that category. Our network rationalization has really been incredibly successful. We now operate 636 stores within the company-controlled network, and that's a reduction of around 20% since the program began in 2019. This high grading of the network has resulted in Ampol having above industry average fuel volumes per site and a higher mix of premium fuel sales, which is supporting our fuel managers. And you can really see this, I think, on Slide 14. You can see the marked improvement in gross margin and growth in the sale of other products as our reliance on tobacco sales is reduced. You can also see the improvement in average basket value. The rationalization of our network has naturally impacted total fuel volumes, but the quality of sites retained in the premium fuel mix and service we offer has enabled gross margins to grow by 75% in value terms since FY '19. So we now have a terrific platform from which we can selectively grow our premium network, enhance our customers' experience and explore more segment approaches to meet local market needs while maintaining scale across the market as a whole. Slide 15 dimensions the drivers of the profitability I just spoke to. With a net reduction in network size of around 9 stores during the year, fuel volumes fell slightly. Likewise, shop contribution also fell with the drop in tobacco sales. However, the continued improvement in our network and with a focus on value over volume, overall site margins improved. Ultimately, the improved margins helped to offset the impacts of higher electricity costs and labor rates to deliver RCOP EBIT of $355 million. That's the strongest EBIT performance since 2017 when we began to report this segment. So turning now to the New Zealand segment on Slide 16. This segment includes the contribution from Z Energy and from our supply team who took over fuel supply from April 2023. It's also worth reminding you we acquired Z Energy in May 2022. So we have 8 months performance in the comparator. The business itself performed well, and the transition to Ampol supply has been relatively seamless, importantly, local management led by Lindis Jones and the supply team have delivered on the business improvements and synergies that we committed to at the time of acquisition. Total fuel sales were approximately 4.4 billion liters, which is an improvement of 11% on the same period last year on a pro forma basis, mainly from growth in wholesale fuel volumes. RCOP EBIT from the New Zealand segment was $263.5 million, that's an Australia dollar, including the contribution from our supply team. And on Slide 17, given this is our first full year of reporting with Z in the fold, we thought to give you a greater understanding of relative performance, we've outlined some of Z's key metrics on an annual basis, so effectively on a pro forma comparative basis. The top left graph shows the fuel and shop margin and a RCOP EBIT for the 189 Z branded retail stores. You can see here the improvement post the COVID lockdowns, which were pretty prolonged in New Zealand. The bottom left graph shows the improvement in gross margin for the store. The other thing that really stands out is the growth in shop revenue despite the fall in tobacco sales. Tobacco represented about 50% of sales in 2019 and is now around 1/3 of a higher sales figure. Z continues to execute on its plan to grow shop sales. Average basket value on the bottom right of the graph peaked during the height of COVID, but has been pretty consistent since given the decline in the tobacco category. To combat this Z, like the Australian retail business has focused on higher-margin on-the-go categories such as coffee, which has grown through a combination of Barista offer and in-app sales. Finally, the top right graph represents fuel sales through all the Z retail channels. This includes Z, Caltex and the Foodstuff brands or branded sites, I should say. Okay. We might to turn to our balance sheet and cash flow on Slide 18. As you will have seen consistently in recent years, we're very focused on ensuring our earnings convert to cash. This has been no easy task with the various market disruptions and general lengthening of supply chains, requiring an integrated effort across the business. So I'm really pleased we're able to deliver such a good outcome with net debt of $2.2 billion and a leverage ratio of 1.6 turns of EBITDA. Just a couple of things I want to call out while we're here. Firstly, the increase in tax paid year-on-year is simply a result of record earnings last year. Secondly, capital expenditure was approximately $525 million, I think it was $521 million. This was higher than I guided at the half, in part due to the slippage of government grants for Lytton and that's for the low sulfur upgrade that sulfur slipped into the New Year. And also, some accelerated effort on this project once the new fuel standards became clear. You can also see cash outflows from dividends of nearly $600 million during the period. This represents the final dividend for FY '22 of $1.05. It includes the FY '22 special dividend of $0.50 per share and the FY '23 interim dividend of $0.95 per share. The payment of the final ordinary dividend and special dividend declared today will fall into the first half cash flows of 2024. And finally for me, just to round out on capital management on Slide 19. As the headline says, we are very focused on getting the balance right and taking a disciplined approach to capital management. The strong earnings and cash flow performance during FY '23 has enabled us to declare a $1.20 per share fully franked final ordinary dividend, which is at the top of our range. In addition, we've declared a special dividend of $0.60 per share fully franked. This takes total dividends with respect to the 2023 financial year to $2.75 per share fully franked, and that's in line with the record dividends we declared last year. If we look ahead, we expect to reach a final investment decision on the ultra-low sulfur fuels project in the coming weeks. We have already made significant progress in design, approvals and groundworks and expect completion in the second half of 2025. We have approximately $250 million of spend remaining net of government grants. Importantly, we expect new grades of gasoline will trade at a premium to existing Australian grades given the availability of import supply in the region. New Zealand supply has provided valuable experience in this regard. We also intend to undertaking a turnaround and inspection at Lytton in Q3 2024. The biggest impact will be the loss of high-value product production during this period. As a result, high-value product production volumes are likely to be at the same level as FY '23, assuming normal operations for the remainder of the year. Details on Lytton's production volumes are provided in the appendix to the investor pack. So beyond that, we continue to target leverage towards the bottom end of our 2 to 2.5 turns of EBITDA range on a sustainable basis. So thanks for listening. I'm going to hand back to Matt, and I'll come back for questions at the end. Thank you.

Okay. Thanks, Greg. We'll now move on to Slide 21. And I'd like to provide an update on our strategic objectives and how they position Ampol to deliver ongoing strong performance. At our 2020 Investor Day, we unveiled a new purpose and strategy designed to build a more resilient business to deliver growth in the medium term, and to evolve the business for the longer-term. Our strategy revolves around 3 pillars: enhancing the core business, expanding from a rejuvenated fuels and convenience platform and evolving the energy offer for our customers as their needs change. As you can see on the slide, we believe the strategy is delivering. The return of the iconically Australian Ampol brand has been a success. We have continued to strengthen our connection with the Australian consumer and brand preference results are supportive of our offer in market. Another data point is that premium fuel sales have also risen to 53.7% of retail fuel sales. Lytton continues to be a significant contributor to the group's success, and we intend to continue to invest to enhance its capabilities. As Greg mentioned, we're on track to make the FID decision on the low sulfur fuel and aromatics project in coming weeks and the 10 ppm gasoline, which the refinery will then be able to produce has sulfur levels consistent with the New Zealand grade, which has historically traded at a meaningful premium to Australian grades. After making the decision to keep Lytton open in 2021, the refining supply-demand balance has swung into a more favorable position, as global demand has recovered quite strongly. The fundamentals now look supportive longer-term, as an aging global refining system has to run harder to keep up with demand and is becoming less reliable. Geopolitical tensions are now compounding the supply side challenge. And although our outlook is quite constructive for the sector, the 2 remaining Australian refineries are in a very unique position with support from the fuel security services payment should the refiner margin deteriorate unexpectedly. Our retail strategy has successfully repositioned the profitability of that business, and we're now preparing to take the next step up. Last year, we had delivered the $85 million non-fuel EBIT uplift and earnings from convenience retail are now 76% higher than they were in 2019 when we were early on in the journey of network transition and rationalization. We have a high-quality network. We've now addressed legacy sites and now is the time to grow shop earnings through our premium site strategy, including highway sites and the development of our QSR portfolio to leverage our real estate and customer footfall. We remain the largest multi-site franchise for Boost Juice in Australia are progressing our trial with Hungry Jack's, and we will be bringing other brands into the portfolio to ensure we have the flexibility to deliver the right customer offer for each local market. We continue to apply a disciplined focus on the F&I business in Australia, which has had a few challenging years due to COVID impacts on throughput. But pleasingly, volumes have increased by more than 20% from COVID lows, with integrated margins supporting a more than tripling of earnings from the lows we saw last year and earnings are now back close to pre-COVID 2019 levels. We continue to deliver on the strategy to grow international earnings, which I think is a real standout in this result. The step out through the Z acquisition, building on our organic growth in trading and shipping is demonstrated from the earnings uplift that we see through our international business. International earnings, including Z now contribute approximately 30% to the group's earnings, which is a clear differentiator for Ampol. I think this is a testament to the capability we have built within the business over the past 10 years to leverage the strength of our demand and infrastructure assets in Australia and now in New Zealand and build on them to optimize our system flows and grow third-party customer volumes in the regions where we source and operate. And as we look to the future, we're evolving the business to support our customers through the energy transition. The on-the-go public fast charging network rollouts are progressing in both Australia and in New Zealand, and we have established our first major agreement with Mirvac to provide fast charging at their shopping centers. We've also entered our first back-to-base charging arrangements with B2B customers. In both cases, we're expanding off our forecourts to extend the strength of our e-mobility network for the future, and in turn connecting customers back into our on-the-go network. A reliable e-mobility offer and strong network coverage not only supports the development of our e-mobility business as EV uptake grows over time, but it also reinforces our fuel business as integrated solutions become attractive in helping customers start to navigate the transition. For the hard-to-abate sectors, we're exploring the development of a supply chain for renewable fuels and potential for manufacturing up at Lytton. Moving now to Slide 22, where we've provided the data on EV penetration through to the end of last year. You can see the increase in EV adoption as supply chains have freed up and more affordable models are entering the market. Despite this, EVs remain a very small proportion of the total fleet. And as our scenario analysis presented in the climate report showed, we expect fuel demand to be robust well into the 2030s. It is important to note that in 2023, just under 75% of our Australian fuel volumes were jet or diesel, where the bulk of demand is for heavy transport, and it's fair to say transition options look to be pushing out as the complexity and cost of this challenge is becoming clearer. The right-hand side shows some key statistics for our own public fast and ultra-fast charging networks. Yes, it's early days, but the stats we're seeing are encouraging in terms of both average charge time and duration. You can see the dwell time is circa 25 to 30 minutes even for fast chargers, and we continue to work on the convenience offering to benefit from the opportunity this presents for our retail businesses. We are starting from a strong position with our significant retail footprint and strong B2B customer relationships. We believe it is these customers with fleets in their own decarbonization targets who will be amongst the early movers, and so we are well placed to provide integrated solutions to their transport energy needs as they evolve. And as noted earlier, we believe this helps to reinforce the strength we have in fuel. We can see from international experience that fast-charging infrastructure is lagging the uptake in EVs, reflecting many of the grid real estate and capability-related challenges in the build-out of this capacity. Higher interest rates are likely to compound this dynamic. We've certainly seen all of these challenges playing out in Australia, at least as pronounced, if not more so. We also know that experience globally indicates that an EV customer spends 20% to 30% more in-store given the longer dwell time. This reinforces our belief that building out this capability as we are doing, will generate attractive returns over time, with speed and reliability of charging the quality of network and convenience offer all being critical success factors. I'll now talk to our key priorities for 2024 on Slide 23. We're approaching FID on the low sulfur fuels and aromatics project with the extension of the compliance deadline to December 2025 allowing more flexibility and the CapEx is included in our guidance provided today. We have a clear strategy to grow our Australian convenience retail footprint and offer. This is with an initial focus on highway sites and upgrades to our premium sites. And we will continue to increase the segmentation of our offer to meet the needs of customers in their local market environment. Our QSR strategy and capability continues to build strongly. And during 2024, we aim to add and operate 10 more Boost Juice stores and a further 10 QSRs, including Hungry Jack's, and other brands. Z will focus on delivering its convenience retail growth targets and continuing the segmentation of its offer between the premium Z brand and the lower cost Caltex offering. During 2024 Z plans a further 35 site upgrades and to grow retail shop sales to New Zealand $500 million by 2025. And we'll continue to pursue our organic growth strategy in F&I International, building on the capabilities we have developed and the strength of our growing demand and asset position. The progress of the EV charging network development will also continue over the next couple of years. And as I mentioned, we'll also explore solutions for hard-to-abate sectors with a real focus on renewable fuels or drop-in solutions in terms of both import supply chains and potential for production of SAF and renewable diesel up at Lytton. Now let's look at our view of the current trading conditions and macro outlook. Slide 25 shows the historical and forecast position from Facts Global Energy for the global refining outlook, showing refining supply adjusted to reflect expected to utilization, utilization rates and their view of demand. Refinery additions have typically been slower to arrive than forecast due to project delays and reliability issues during ramp-up, with some additions in the second half of this year. However, energy demand growth continues with the introduction of low-carbon alternatives relatively limited in the medium-term. Needless to say that making returns stack up on a new refinery today would be very challenging. And so refinery utilization needs to remain high through the forecast period, with the likelihood that interruptions continue to be more common and for cracks to respond accordingly. The key takeaway is production capacity relative to demand is expected to remain tight. Turning now to the current trading conditions and the medium-term outlook on Slide 26. Overall, the group has pleasingly had a strong start to the year. LRM in January was USD 13.33 per barrel, which is well above historic averages and above 2023 levels. The January LRM was impacted to some extent by the recovery from the outage in late December. February has also seen a promising start with strong cracks and a favorable clean dirty freight differential given the Red Sea impacts we have seen. So that's encouraging for the refinery. The retail business or businesses across both sides of the Tasman have observed fuel and shop performance year-to-date that is in line with PCP. And F&I Ex Lytton has had limited direct exposure to the Red Sea impacts, reducing operational risks rather and has been well positioned for a strong start to the year. As mentioned, CapEx in '24 and '25 is expected to rise by around 10% from 2023 levels as we add the low sulfur and aromatics fuel standard project spend enter into a more intensive T&I period, in addition to a greater focus on retail growth. In the medium term, we see geopolitical disruption being likely to continue with Ampol's integrated supply chain assets and risk management capabilities, leaving us well placed to navigate these challenges and find opportunities from them. Our premium retail networks are positioned to grow in the near term and maintain their relevance as the energy transition progresses, which will take time. We are well placed to respond to the pace of transition with the ability to flex investment as proof points emerge, and we will remain disciplined. We're now on Slide 27, and I'd like to close out the presentation with the key reasons we believe you should invest in Ampol. We've built a more resilient business over the last few years by growing both convenience and international earnings, improving the quality of the earnings mix and refining and F&I earnings have recovered in parallel. We own and operate an integrated fuels value chain, including a uniquely positioned refinery with a favorable outlook and with an ability to invest with real confidence, given the returns are underpinned by the fuel security payment program. The outlook for fuel demand is expected to remain robust well into the 2030s, and we have the flexibility to respond to the pace of transition as it evolves and returns become clearer. The Board and management are focused on delivering for our customers, communities and for you, our shareholders. The TSR over the last 3 years has been pleasing at more than 38% and shareholder returns over that period have been over $1.8 billion, all with the distribution of franking credits. We'll continue to focus on getting the balance right between positioning the business to deliver strong returns through growth in the short and long-term, while at the same time, delivering strong dividends for our shareholders. So that ends the presentation. Now, Greg and I will take your questions, and we also have Brent, Andrew, Kate and Lindis on the line, and I may direct questions through them. So with that, operator, we'll take our first question, please.

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

Just wondering about if you could provide some comments on the outlook for the dividend and particularly the strength in terms of payout ratio and specials going forward. Do you think this is something that you can continue to sustain?

Yes, I think, Dale, we've got a business that's performing strongly. I think you can see that in terms of the result for '23 and the quality of it and its composition. I think you can also see that we've put a strong outlook statement out and the business is performing well. So balance sheet in good condition. And I think when I reflect on the track record that we've got over the last few years in terms of our framework, that all comes together to ensure that we're delivering strong returns. Now, we're going to look to get the balance right. We'll look at growth, of course, where the returns are there and look appropriate and we'll look to balance that with strong dividends. So no real change from our perspective in terms of the way we're looking at the business.

Okay. I might direct that slightly more into the details to Greg, if I can. There's a comment there, Greg, that you called out a target to return to 2 to 2.5x the leverage on a sustainable basis. How do you think when you look at your business plan, how and when do you get there? Does 60% payout ratio get you there? Or with the higher CapEx through '24? Or do you think you potentially need to pay more or see further investment in growth?

Look, I think without wanting to repeat what Matt said, I think our track record on this, Dale, is pretty clear. We've done some level of capital management, if you like, beyond ordinary dividends in each of the last 3 years. And in the last couple of years, we've been pretty consistent in terms of paying out at the top of the range. So we exited this year 1.6 turns. If you take our final and special and effectively add that to leverage you somewhere at the lower end of the range, we're coming around 1.9 turns and we're coming into a slightly larger capital envelope, which I think has been well telegraphed, but naturally that's been taken into account. So I see -- I'm very confident about our financial position, our track record, and we'll just follow our capital framework the way we have done. So I think people should be optimistic about the company and the outlook for dividends.

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

Matt, can I delve into your convenience retail numbers, particularly in the network shop? It looked like you had a pretty soft second half in network shop sales. And I've got a couple of pronged questions there. But ex-tobacco, the sales were 3%, whereas in the first half, I think they were about 5.6%. And when I look at your slide, when I'm looking at the cost increases, I think gross margin would have increased by $2 million for the full year, but the costs increased quite sizably more. So it seems to me that your shop has gone backwards in the second half. Can you explain as to what's going on in that part of the business, give a bit of an update with the transition with the MetroGo's into the Foodary? And the last -- this is the -- I've only got one question, but there's 3 parts to it. What's the focus on Hungry Jack's? I mean, when I look at the numbers, Hungry Jack's and Boost, they'd be the 2 brands. I wouldn't want in a quick-serve restaurant. I mean, Hungry Jack's has been in decline for 3 years, whereas the big growth ones, KFC and Guzman y Gomez, Hungry Jack's is sort of like -- seems to me like a bit of a default partner. And Boost seems to be the type of product that you get a very high labor intensity for a very low average selling price item, which doesn't bring in other product, like you go into your Boost Juice, you don't walk out with anything else. You just get your juice and on you go. So what is the infatuation with Hungry Jack's and Boost to base your strategy on? Because I must say that does concern me a little bit going forward.

Yes, thanks, David. Appreciate the questions. Look, in terms of taking that one maybe to start, what we have done a lot of work on over the past few years is making sure we've got a network in the right condition. And we have a very good understanding of what offer will work in the right local market environment. So what we see in terms of Boost and Hungry Jack's is strong complementary nature to the network and the local market environment and opportunity that we have. And we're very disciplined around where we will put the stores. And they are not the only brands, as I mentioned in my comments that we will focus on. What is important in convenience retail is getting the right offer in the right local market environment. And that will come from a range of brands, not a principal partner that is going to roll out across the entire network. So that's the focus. And we can see some really attractive indications already from Hungry Jack's and certainly from Boost in terms of the returns they're able to deliver. I might pass to Kate firstly to talk about what we've seen through the rebranding of the MetroGo. And then we'll come and round out on your question after that.

So our rebranding of the MetroGo sites is now complete. We've seen shop sales be resilient across those MetroGo sites. We have seen as we've changed range in the back quarter, some runoff in chilled perishables in particular, but that's in ranging decisions that we've made and the flow-on effect that we've had to reducing labor and wastage across the skews that we've deleted. So our MetroGo sites are performing broadly in line with expectation.

Thanks, Kate. And I might go to Greg, just in terms of the sales growth and cost escalation we've seen in convenience retail.

Yes, no worries. I mean, I think we've been pretty clear in the slide that the 2 sources of costs were energy as contracts renewed and labor, which is a well-known story across the market. The key thing I would say is if I look at EBITDA performance half-on-half, second half is actually up about 10% on first half. We were cycling a very strong second half last year. And I would say, disproportionately strong to the first half last year just by the nature of the market and where conditions were at last year. So we're really encouraged by the second half performance actually, and the message has been pretty consistent for probably the last 4 reporting periods or so actually.

Your next question comes from Michael Simotas with Jefferies.

And well done on another good result. First one for me, can we just talk a little bit more about what you're seeing in freight rates at the moment? You've given some commentary in the outlook statement, it sort of sounds like you're seeing it as a potential positive. Can I just clarify that you're comfortable you'll be able to recover any increase in product freight rates through your commercial agreements?

Yes. Yes, obviously, over the last couple of years, as we've talked about, we've made a number of changes to the way we're set up to manage freight. And so yes, in terms of the latter part of your question, we're very confident in the recovery through contracts. What we've seen following the Red Sea sort of flare up, if you like, is clean freight or product freight respond much more aggressively at this stage than crude freight. And so that freight differential benefits the refineries margin. And that's one impact that we've seen. And then in terms of the overall step up in freight rates, the trading and shipping businesses has positioned as well to not only avoid the Red Sea, but be set for to manage very well, from a risk point of view, the step up in clean freight.

Okay, loud and clear. And then the second one from me is on convenience retail, and in particular, the impact from tobacco. And there's 2 parts, I guess, one on your shop margin and 2 on your transactions. So if I look at the change in your shop margin and do some rough maths on that, it sort of looks like it would have been largely unchanged other than the tobacco, or the shift away from lower margin tobacco? And then secondly, if you look at the numbers you've given for shop sales, as well as average transaction size, looks like your transaction counts down something in the mid single digits. Is that mostly driven by tobacco? Or is there a bit of economic overlay in there as well?

Yes. I might go to Greg first, and then Kate can build.

Yep. Okay. So there's a couple of things in that. Maybe the best reference for you is, if you think about tobacco sales and margin, roughly 27% of our sales value comes out of tobacco in Australia. That's down quite a way, about 14% is gross margin. So it represents a smaller contribution, if you like, to store gross margin. One of the things the team have been really effective at has been managing both promotional activities and also give away. So what you've seen is a reduction in those sort of free coffees with an Uber contract type arrangement, which would have increased your transaction count, but not necessarily had -- certainly had no positive impact on gross margin. So a combination of that promotional activity, and more targeted promotional activity, have really been the 2 big drivers, along with a lot of good work around just merchandising and how we manage beverages, snacks, confectionery, and baked goods. They've been the big drivers. So net-net, we're really pleased with the store. But obviously tobacco has come off quite sharply, particularly in the last 12 months. Is there anything you want to build on that, Kate?

So I would just build to say products that have traditionally been attached to tobacco continue to perform, so that's milk and in pulse, and the other build just around cost of living pressures and what's important to our customers. We've also launched a value platform in the back half of the year, CraveN Save, and that's giving value across shop items to our customers. We've sold about 0.5 million of those bundled offers, and we've also given offers to customers to attach to fuel. So we've got a bit going on in that space.

Your next question comes from Tom Allen with UBS.

I'd just like to unpack the rising CapEx a little further, and in particular, where the guided CapEx will be spent. So I want to please share some color on the key basket to spend and the indicative returns you expect from that spend?

Yes, why don't I pick up that, Tom? So the appendix in the presentation has a breakdown of CapEx by business, so I'll just draw your attention to that. Obviously, this year, there were 2 things I would say, because I guided at the half year to around $450 million, to be frank with you, and 2 things took place in the second half. One was we accelerated spend in what we call the low sulfur fuels project, which is the upgrade of Lytton to meet the new fuel standard. So once we got clarity on what was coming from the government on that, we pushed the button on spend. We've got a deadline there we're very keen to hit. And then over and above that was because the legislation itself was a little bit delayed was some of the grant money we were expecting to receive this year that was netted out in our $450 million actually drifted into the early part of 2024. So that's not a lift in spend, that's just a timing of grant receipts. The thing around this project is the supply of what is 10 part per million gasoline, the new spec of gasoline, is it's pretty tight in the region. There's not a lot of extra supply. It is a product that's sold into New Zealand, which is very fortuitous for us longer-term and for the Lytton refinery, but it's also sold into markets like Singapore, South Korea, Japan. But there's not a lot of spare capacity. And we have a view that, that is likely to see the cost of import parity for that product to increase. And it could be -- if you go by history and our experience in New Zealand, that could be as much as sort of USD 3 a barrel or more. So remembering we produce about 50% of our slate is gasoline. So that gives you a bit of a sense of what's possible with the incremental investment on that upgrade from here on in, which we've guided to $250 million. The other uplift this year is T&I. So a turnaround inspection or a maintenance shutdown for part of the refinery, that's going to cost us about $40 million to do. Naturally, we incurred some costs on low sulfur this year, net-net we're guiding to a 10% uplift in CapEx year-on-year. In other areas, retail, in particular, you'll see we're upgrade. We've just upgraded Pheasants Nest, northbound M1, southbound being finished M4. And then another highway site near Port Macquarie are all on the radar. And they are -- the investments we've done are performing extremely well. And we're in very good position there.

That's good color. Just a second question. Noting the average EV recharge time you've reported in Australia is about 30 minutes. And also that Ampol's done a good job in recent years improving the outside of the shop. Can you just please discuss a little bit more the initiatives that are planned to drive higher dwell times inside the shop going forth? Assuming the QSR is a part of that, just keen to better understand the pace at which you can unlock the QSR potential. So when you can get comfortable to roll it out faster and how many per annum might a faster rollout be?

Yes, so I'll take that one, Tom. So, as mentioned, we're doing -- QSR is an important part of it and the upgrade of the premium part of the network. So another 10 premium sites this year. In Australia, 10 more Boost and another 10 QSRs. And that's going to give us a really strong data set around returns, but we're increasingly confident in what that can look like to drive earnings growth with pretty attractive returns. And that feeds directly into leveraging that extra dwell time for the customer. Recognizing, though, that EV uptake and fleet penetrations kind of take time. The QSR strategy will deliver from our existing foot traffic, the returns in the first instance, but connects very nicely into the longer-term as we roll out a faster, as we get into a rollout of fast charging. And the same applies across in New Zealand, where we're upgrading 35 sites to premium in 2024 and can see that as an important driver of leveraging existing footfall from a high-quality network, but equally positioning for the EV customer with higher dwell time.

Your next question comes from Adam Martin with E&P.

Just first on commercial or F&I, it's been a big sort of change in performance in 23 versus 22. Obviously, part of that's volume recovery, so jet fuel and all that coming back or continuing to be pre-COVID. But margin has obviously been very good. That's something we don't get a lot of insight into. Just give us a sense how you're thinking about margin in that business in the '24, please?

Yes. Look, as you mentioned, scale coming back is extremely helpful. The supply margin sits in that result, and as we continue to build our scale in terms of the short that we control, we continue to find more margin out of each molecule. So that's an important part of the equation. And we're really in a position then onshore with a strong infrastructure position to ensure that we're delivering the right level of returns. And so overall, the margin and the returns environment in that part of the business is quite constructive.

Yes. And just on the convenience retail business, in the last couple of years, earnings have been a lot more stable, and there's been sort of a big improvement there. If we think out over the next couple of years, I mean, what are the 1 or 2 things that you sort of need to get right to sort of see that business take another step up in terms of earnings?

I'll pass that to Kate.

Thanks, Matt. So over the next couple of years, our focus will be on continued balance across fuels in the shop, specifically around improved range segmentation and differentiation across our tiered sites. Cost control will be important, and that we unlock opportunities to mitigate headwinds in electricity, labor, security controls around the forecourt, and in parallel, delivering the shop growth strategy through segmentation, namely QSR.

So I think, Adam, it's really, the evolution from the arrangements with Woolworths, as we mentioned at the half year last year, give us control back over the top end of our network. So the segmentation and the premium offer, getting it right in each location, is an important part of that. We'll also look to be more targeted from a cost and efficiency point of view at the lower end. So, more segmentation in the offer is critically important. And we're still a few years into the journey of taking control of the network, moving to COCO from a franchise network. So the optimization of the core business, leveraging the scale and the capability we have now, we've got a deep pipeline of initiatives to continue to improve and enhance the returns we're getting out of the business.

Your next question comes from Mark Wiseman with Macquarie.

Matt and Greg, thanks for the update today. Great result. A couple of questions. Firstly, on the electricity offer, you've got 5,000 customers now. I imagine that's still subscale. But what's been learnt from that process of bundling home electricity with fuel? Is it something you're considering rolling out further?

Yes, look, we're really in a test and learn phase in terms of that, Mark. So we're very much mobility focused. There is a connection through to the home as EV uptake increases. And so we're taking the learning's that we have in Queensland, yes, small scale, but some interesting learning's as we're looking to roll out some of the partnerships we have with OEMs. So with a BYD, for example, how does that connect into the home from a charging point of view that then connects back into our on-the-go charging network? So they're the things that we're exploring, but we're not looking to take it to large scale anytime soon. Very much mobility focused from our point of view.

Okay. And just a final one, on the F&I International piece, you've said you're planning to continue growing that business. It's grown sequentially year-on-year for quite a number of years, choppy half-on-half, but there's been good growth there. Where do you think that next step of growth could be? And is it incremental, or is there some sort of step change that you're looking at?

Yes, look, I think we'll continue to build out organically the capabilities that we've got. I think what's underestimated a little bit is how strong the growth out of that part of the business has been, volumes compounding at 15% since 2019. And we'll look to continue to grow those volumes and we see a good pipeline of opportunity to do that. The combination, as I mentioned in my remarks, the combination of the size of the short that we have in this region, together with the assets, so we can blend, we can store, take the largest possible vessels, and we have the capability. So we have a big team in Singapore, we have a team on the ground in Houston, and you'll see us look to establish a presence, most likely somewhere in Europe, closing out that triangle and leveraging the scale of the sourcing that we have to build on the capability to add local customers in those markets where we're sourcing, take some storage, leverage our blending and the scale of the buying that we conduct is a real opportunity for us to continue to grow this business. And I think that's what the track record demonstrates. But certainly when we look out, we continue to see quite a positive outlook for that part of the business.

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

Great result, Matt and team. Just on premium fuel sales, looking forward into 2024, you're going to have a scheduled turnaround, I think you said in the third quarter. How long do you expect that to run for? And I think there was a comment made about losing high value production during that turnaround. Just want to know what that is. Is that 98 octane fuel? And then there was a comment about it being the same level of 2023. So I just want to understand how you're going to maintain earnings during that turnaround period?

Gordon, it's Greg. I'll have a quick go and we've got Andrew here who could fill in any blanks. But in short, we obviously had a refinery outage in Q2 of 2023, and then a smaller one at the back end of the calendar year. So while we produced just under 6 billion liters, we produced closer to 5.5 billion liters, 5.6 billion liters of high value product. It tends to be higher than that. So typically that figure is more like 5.9 billion liters. That's a consequence of those outages. This plan shutdown is about 7 weeks. And as a consequence, you're not producing the same level of high value products, which is gasoline and diesel and jet of all grades. So we will expect a similar high value product number, similar to what we saw this year, obviously just for different reasons. So hopefully that makes sense.

Andrew, any builds from you?

Yes. So the turnaround, as Greg said, 7 weeks. The impact is mostly towards the 98 grade. However, from a customer point of view, no impact because our integrated supply chain sees, ensures delivery. And there are benefits elsewhere in the business from that imported additional volumes.

Okay. The obvious question then is on margin. If you're bringing product in, will that affect margin realized?

So I think you're going to have refining margins. You'll be able to estimate on a supply demand basis. I think this year is a good guide, because naturally we've had to import in terms of volume and import volume, you can -- margins on that. We've had to do that this year to compensate for the refinery being down.

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

I was just wondering if you could talk to the new fuel efficiency standards and how that impacts on the thinking of the refinery upgrades and investments, please? And then also just update us on where your discussions are with ENEOS, please?

Yes. Sure. Thanks, Scott. So just clarifying, your question is about the vehicle emissions standard proposed rather than the fuel standard?

Sorry. Yes, yes, yes. Correct. Sorry.

Yes. So the vehicle emissions standard that's been proposed by the government is out for further consultation. That is designed to encourage the uptake of electric vehicles and put Australia in line with the U.S. in terms of carbon emissions per vehicle by the end of this decade. So look, that's kind of in line with what our modeling had anticipated, I would say. It's still out for consultation over the 3 scenarios. From our point of view, you could see our modeling released in the climate report in the middle of last year. EVs, as uptake increases, there'll be quite a delay through the penetration of the fleet, so it doesn't have any meaningful impact in terms of our assessment of the refinery upgrade. In fact, the investment that you can see going into Lytton would be in anticipation of the site likely to run longer, given it's a strategic asset for the country and the importance of its role in the broader supply security and fuel security for the country. So that's the way we look at it. Sorry, your second question, Scott?

Just on.

Maybe -- maybe sorry. Maybe just a couple of builds. So the refinery produces typically about 6 billion liters. We've just sold 15.6 billion liters in Australia. Of the 6 billion liters, about half of that is gasoline, which is what this upgrade relates to. We do another 4.4 billion liters of fuel, gasoline, jet and diesel in New Zealand. We will be moving to a similar grade of gasoline. So as you start to think about vehicle emissions standards and a shift to electric vehicles, that's likely to be something that would impact gasoline first. But we now have a refinery that's going to be full for a long period. You've heard Matt talk about supply-demand balances in the region, and we now have another tide channel once it's upgraded into New Zealand. So I think, actually, there's quite a lot of positives to take out of this upgrade, which was, as I understood it, the second part of your question.

The second part was if you could update on the discussions with ENEOS, please.

Yes, ENEOS as well.

Sorry. Yes. So they continue. We're working together on a study and would look to take that into a pre-feed sort of second quarter of this year, Scott. We'd be looking at an investment decision sort of late next year, early the year after.

Your next question comes from Rob Koh with MS.

Congratulations on the result. Maybe a question just trying to delve into your views on shop margins in the current period. I guess, we've all followed what's happening with tobacco sales across the legitimate industry. Are you seeing any reversal of that, given that the Federal Government's putting more time and effort into enforcement?

Not really, Rob. It's a trend that we are seeing continue at the moment. And as we discussed a little earlier, our focus is really going into the other parts of the shop offer. And I think the performance of the business has demonstrated that growing in other parts of the business to hold or grow basket at higher margin is where our effort's going. But no, the decline of tobacco continues in line with what we've seen during 2023.

Yes. I'm sorry to hear that, but glad to hear about the rest of your basket composition. That looks amazing. My next question is just around the long-term incentive structure, and pleasing to see your 2023 Roche result of 15.7%. That's well above the stretch target. Can you just remind us if there's any adjustments to the targets going forward for, say, higher rates or for your capital efficiency? And also, how do you take account of commodity price volatility? Is that taken care of in the averaging?

Yes, Rob. So look, we and the Board review the cost of capital on a regular basis, as you would expect, and so the returns expectations are calibrated accordingly. And the same goes as we look to our outlook for commodity prices through our regular planning cycles. They get updated as market context evolves, and that all feeds into where return expectations sit to drive performance.

Your next question comes from Henry Meyer with Goldman Sachs.

Just the first question on fuel margins. There's been a very strong 1.5, 2 years of volatility and broadly declining product prices. Are you able to share just some initial thoughts on competition in the fuel market and expectations for margin normalization through the year?

Yes, sure. So look, I think one of the things we've been really focused on, as we touched on in our remarks, is the quality of our network, a higher quality network that is fit for the future and is increasingly focused on premium, and you can see that premium fuels growth that is playing through. And we've also been clearing out those legacy sites where margins have been more challenged. Yet you can see that the market remains very competitive, and so finding the right place to compete with a quality network is what we've been focused on, and I think that's delivered strong results if you look at the past few years.

Got it. And on convenience retail, it seems that the QSR rollout could be the bigger opportunity for you near term. You acknowledge that you could benefit from that before the EV rollout. I'm just curious, if you could share some early details on the HJ highway side trial, or just broadly any details on margin or sales perhaps relative to non-QSR sites? And then what you're hoping to learn from these next 10 sites before potentially making a no-go or go decision on a broader rollout?

I might start, and I'll pass to Kate. I think what I would say is the results we've seen today have been really encouraging and are giving us the confidence to invest more in building out our capability and invest in CapEx. We'll learn a lot more from the next 10 and 20 sites, if I include boost in that we're rolling out 20 sites this year. What is apparent is we've got high quality real estate, we've got a high quality network and a lot of footfall, so where we've had effectively rental or yield arrangements embedded within our network, that's appropriate in some cases, but there are a lot of sites where we've got the real estate, or we've got the ability and capability to run those sites and deliver much better returns in terms of the return on capital that we're delivering out of those sites, and we can deliver a more consistent high quality offer for the customer. So we're encouraged by what we see, including on the M1s, and I'll let Kate talk to that.

Our sites on the M1s are performing above expectations. They're the highest volume Hungry Jacks. The one Northbound is the highest volume hungry jacks in the country, and we expect our southbound site, when it opens, to replicate that success. We've built significant QSR capability across our business. We're aware that the key drivers for success in QSR are volume and operational execution, and we're single-mindedly focused on higher quality QSR sites that ensure that we've got the right volume opportunities and backing that up with effective operations to make sure we capture that. So the focus across the 10 sites is really going after those high quality locations and doing them brilliantly before we commit to a broader rollout.

Thank you. That is all the time we have for questions today. I'll now hand back to Mr. Halliday for closing remarks.

Thanks very much for your time. It's been another strong result for Ampol. We remain focused on getting that balance right. We're confident about how the business is performing and performing right across the board. We've got good momentum, and we're going to keep getting that balance right between investing in growth, delivering the right level of returns, and continuing to deliver strong returns for our shareholders. So thanks for your time. Look forward to catching up with you soon.