Viva Energy Group Limited (VEA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Viva Energy Half Year 2020 Unaudited Financial Guidance Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Wyatt, Chief Executive Officer. Please go ahead.

Good morning, and thank you all for joining us. My name is Scott Wyatt, the Chief Executive Officer of Viva Energy. And on the call with me today is Jevan Bouzo, our Chief Financial Officer; and Thys Heyns, our Chief Operating Officer. We've got quite a bit to cover with you this morning, including an update on our recent performance, guidance for the half year ended 30 June 2020, the outcome of our turnaround review and our outlook for the refining business and broader vision for our facility at Geelong. As always, we look forward to your questions, and we'll make some time for these at the end of the presentation. There's no doubt that COVID-19 has presented some very challenging trading conditions across our markets, and in my experience, I can't recall another event that has been so pervasive and impactful to so many people and businesses. It's certainly stretched us all, but I'm very proud of the way our partners and the people of Viva Energy have responded to these challenges and delivered what I think are some outstanding results under the circumstances. First and foremost, we have kept all of our people safe. We have successfully implemented measures in the workplace to maintain physical distancing in our operating facilities and have more than half of our 1,200 employees working productively from home. In the parts of our business that have been most heavily impacted, we have kept our workforce intact for as long as possible so that we can support them through this period and give us the time to assess what is a rapidly evolving situation. We naturally want to maintain capability to support our customers when demand recovers and continue the good progress we're making earlier this year. At the beginning of the crisis, we reacted swiftly to avoid holding surplus crude and fuel stocks when demand began to fall. We have taken steps to minimize exposure to the west of the refining margin environment but at the same time, have maintained sufficient refining operations to meet local demand and give us the optionality to lift production as demand recovers. Although the refinery continues to operate below breakeven levels, we believe this gives us a better financial outcome than a full shutdown, and it gives our people the most certainty during uncertain times. JobKeeper has allowed the company to support employees in the most impacted parts of our business, particularly in the aviation and refining businesses. While retail sales fell dramatically during April, they have since begun to recover as restrictions have been lifted and improved, retail margins have helped to minimize the impact in this part of our business. Aviation sales are clearly going to take longer to recover, but I am encouraged by the potential for border openings and the recommencement of a large number of domestic flights. The rest of our commercial businesses have largely held up well, and I congratulate both the national and state governments for not only protecting people by containing the spread of COVID-19 but by also ensuring that many parts of the economy have been able to continue. Of course, I also recognize that many businesses, including ours, have been heavily impacted and that there remains a long road ahead of us to full recovery. The refining sector, in particular, faces a very challenging period, and while we have decided to continue with most of the major maintenance program this year, I expect the global demand will take some time to recover and that this will continue to weigh on refining margins throughout 2020 and 2021. We have always believed that refining is important for our business and the country. We have invested more than $450 million in Geelong over the last 5 years, and we have an exciting vision for the business, which we are eager to pursue. It will not be easy, but with the support of our employees, community and our governments, we believe that the site can have a great future. We will share some of this with you this morning. But for now let me hand over to Jevan, who will take you through the first half 2020 guidance.

Thanks, Scott. Let me start by sharing some highlights from our May results on Slide 5. Our Alliance sales volumes increased from a low of 38 million liters per week in April to 45 million liters per week in May as COVID-19 restrictions started to be relaxed. Over the first few weeks in June, we've seen volumes increase further, and we look forward to sustained recovery in the weeks and months ahead. Aviation sales volumes continue to be down around 75% over the same period last year, and as Scott mentioned, we expect sales to begin increasing as domestic flights resume. The rest of the commercial portfolio has continued to be relatively unaffected by COVID-19, which clearly demonstrates the strength and diversity of our business. As previously announced, we successfully shut down the RCCU and our smaller crude distillation unit at the end of April. This has enabled the refinery to continue operating despite significant reductions in demand for both petrol and jet, and we expect to be able to continue operating in this manner for some time. Global refining margins continue to be impacted by significant reductions in demand as a result of COVID-19. Our Geelong Refining Margin for the month of May was USD 3.50 a barrel with the May year-to-date GRM of USD 3.10 a barrel. This compares with our breakeven margin of approximately $4.50 to $5 per barrel. Turning to Slide 6. I'll cover our first half guidance. For 1H 2020, we expect total sales volumes to be approximately 6.1 billion to 6.2 billion liters. This is down approximately 14% from first half 2019 with the volume loss largely a result of COVID-19 impacts on retail and aviation fuel volumes. We estimate the underlying retail EBITDA on an RC basis to be approximately $325 million to $335 million for 1H 2020. Prior to COVID-19, the business had achieved strong sales growth in Alliance volumes for January to mid-March with several weeks above 70 million liters per week. The restrictions imposed to manage the spread of COVID-19 meant average sales volumes fell below 40 million liters per week in April but have since recovered and climbed to 45 million liters per week in May. Improved retail fuel margins have offset the impact of these volume declines. However, recently rising oil prices have compressed retail margins as you would normally expect. For Commercial, we estimate the underlying EBITDA RC to be approximately $130 million to $135 million for 1H 2020. Our Commercial sales volumes, exclusive of aviation, are broadly in line with the same period last year. The resources, transport and specialties businesses remain relatively unaffected by COVID-19, and we enjoyed a strong summer cruise season prior to restrictions taking effect. We've worked closely with our customers to manage credit exposure and avoid any material loss while continuing to support customers through these challenging times. And I'm really proud of the work our team have done in this space. We expect the underlying Supply, Corporate and Overhead RC to be approximately minus $155 million to $150 million for 1H 2020. This is a decrease relative to 2019, largely due to lower sales volumes and associated supply costs, the deferral of nonessential expenditure, and several cost-saving initiatives. It also takes account of some one-off expenses incurred in 2019 that did not repeat in relation to the acquisition of Liberty Wholesale and the extension of the Alliance agreement. In terms of refining, we expect underlying refining EBITDA RC to be approximately minus $42.5 million to $32.5 million for 1H 2020. This assumes refining intake of 2.5 million barrels and an actual GRM of USD 4 per barrel for the month of June. The actual GRM for the 5 months ending 30 May 2020 was USD 3.10 per barrel with crude intake of 16 million barrels. Comparatively, the GRM for the same period last year was USD 5.40 per barrel with crude intake of 17.8 million barrels. At the group level, we expect underlying EBITDA on a replacement cost basis to be approximately $257.5 million to $287.5 million. The underlying net profit after tax on a replacement cost basis is expected to be approximately $20 million to $50 million. And the accounting gains associated with the Viva Energy REIT divestment will be treated as significant items. While it's been a very challenging first half, this result represents a really positive outcome for the company given the circumstances and highlights the diversity of sectors in which we operate. It's taken several months since we announced a delay to the on-market and off-market buyback program. As it currently stands, our balance sheet is in an excellent position, and we're seeing positive signs of a recovery from COVID-19 impacts. This is providing greater certainty, and these factors give us confidence to commence returning the proceeds from the disposal of our shareholding in Viva Energy REIT. I'm pleased to announce that we will start this process with an initial on-market buyback targeting up to $50 million of securities. I'll now hand over to Thys, who joins us today in his new capacity as COO, to talk through the COVID-19 impacts and provide an update on the major maintenance at Geelong refinery.

Thanks, Jevan. Scott and Jevan have both discussed the sales impacts to the business during the first half of 2020, and you will see this clearly in the chart on the left of Slide 8. Both jet and petrol are well down, but diesel sales have been far more resilient, which reflects the level of commercial activity that has continued alongside the various restrictions that have been put in place. From a refinery production perspective, we took immediate steps to reduce the amount of jet produced and reduced processing rates as far as possible to balance total production with demand. Crude intake fell accordingly, and at the end of April, we shut down the residue catalytic cracking unit and the smaller of our distillation units. We are now operating in what we call hydroskimming mode, and this is how we will continue to operate until the major maintenance program is completed at the end of October. Refining margins were impacted in the first quarter by higher light sweet crude premiums and lower-than-expected diesel refining cracks, following the worldwide transition to low-sulfur marine fuels. We adjusted our crude diet accordingly. And whilst refining margins have improved in April and May over the first quarter 2020, they are still low and remain volatile as a result of global impacts from COVID-19. Turning to Slide 9. Let me talk about the turnaround review and the decision we've taken. This year, we originally planned to complete the major maintenance of our residue catalytic cracking unit and the hydrofluoric acid alkylation unit over 55 days from the end of August to the end of October. This would have resulted in an additional 700-plus contractors relocating to Geelong from around the country, which would have made it very difficult to manage the COVID-19 risks. We have explored a number of alternatives and determined that the best option is to defer the maintenance of the alkylation unit until next year and undertake the major maintenance of the RCCU over a longer period of time commencing in July. This will allow us to minimize the spend this year and keep the refinery operational to maximize future optionality. It also allows us to significantly reduce the number of additional contractors that are required and deploy a largely local workforce rather than bringing in workers from interstate. Given that the units are already shut down, we will start the maintenance in July and aim to be ready for all units to be restarted in November as originally planned. It is anticipated that this will reduce the capital required this year by between $25 million and $40 million. During this time, the refinery will continue to operate in hydroskimming mode. This minimizes gasoline production and reduces the overall exposure to the currently weak gasoline margins but at the same time, retains flexibility to restart our smaller distillation unit to increase production if demand and margin support. We think this optionality is quite valuable given the current volatility. As you can see on Slide 10, the total capital cost for major maintenance in 2020 is now expected to be between $85 million and $100 million, down from the previous range of $110 million to $140 million. At the group level, our total capital expenditure is expected to be between approximately $145 million to $180 million for financial year 2020. This is -- it is important to note that all asset integrity and safety-related capital expenditure has been retained, and the capital cost for the alkylation unit has been deferred until 2021. I'll now hand over to Scott, who will talk to Geelong Refinery's outlook and our broader vision for the site.

Thanks, Thys. Over the last few years, Geelong Refinery has continued to make significant strides in operational improvements, such as improving reliability and availability. Last year, the refinery achieved a record intake of 42 million barrels and increased diesel output to 39%. As Thys mentioned earlier, we have also done extremely well to adapt to the challenges that have arisen from COVID-19. Over the last 5 years, Geelong Refinery has made significant contributions to our company cash flow at times with an average contribution after CapEx of approximately $100 million per annum over the cycle. In recent years, the contribution from Geelong Refinery has been impacted by a poorer operational performance in 2018, weakening gasoline margins during 2019, the transition to lower-sulfur marine fuels at the beginning of this year and now COVID-19. Refining is naturally volatile, and so it is important to look at the performance over the long term. Slide 13 shows what's been happening with diesel, jet and gasoline cracks and how this has determined the Geelong Refining Margin. Margins for gasoline, in particular, have been quite weak, and this is why Geelong has worked hard to increase the production of diesel during 2019. While we were beginning to see some recovery in regional margins prior to the impacts of COVID-19, crude premiums were unusually high and offset much of the benefit to Geelong. Looking forward, how global demand recovers for both gasoline and jet fuel will no doubt be a key driver of refining profitability over the next year or 2. While this presents a potentially challenging outlook, it's important to remember that Geelong Refinery has a number of strategic advantages, which typically provide an uplift above Singapore refining margins, and these are set out on Slide 14. All refineries benefit from the difference in costs between shipping refined product versus crude. Refineries purchase crude and sell refined products benefiting from this clean dirty spread, which has remained relatively consistent over a long period of time. Geelong Refinery is also uniquely positioned to purchase and process local crudes from Victoria and South Australia, averaging around 30% of our overall crude diet. These crudes increase flexibility and typically have a cost advantage compared with imported crudes. They also help maintain a level of self-sufficiency for the country. And of course, Geelong Refinery is the only refinery in Australia capable of producing specialty products such as bitumen, solvents, Avgas and other niche grades of fuels. Whilst production of these products is relatively low, they typically contribute around 8% of the Geelong Refining Margin. Notwithstanding these important strategic advantages, the last 2 years have been difficult for refining, and as mentioned earlier, we expect that regional refinery margins may take some time to recover as we emerge from COVID-19. Given this uncertainty, it was a relatively difficult decision to continue with the major maintenance investment this year, but we do this with a set of strategies in mind, which together have the potential to improve our competitiveness and leverage our capabilities. Let me discuss these on Slide 15. Firstly, we'll continue to develop our business improvement programs, which are well advanced and largely within our control. These are multiyear programs, which are funded from normal capital programs, and in many cases, are already delivering benefits to the site. The increases in production in diesel make good examples of how we have improved our operation in recent times. Secondly, we see many important opportunities to broaden our operations and leverage our capability. We have a large site with access to an efficient working port, proximity to one of the country's largest and fastest growing markets and a skilled workforce, which has capability to develop and operate a diverse range of energy projects. It makes sense to build on these strengths and by doing so, enhance the utilization of the site, reinforcing our refining operations and build new revenue streams for the company. As a consequence, we see the potential for Geelong to become a significant energy hub, which supports the broader energy needs of Victoria and creates an exciting range of employment and development opportunities for the city. Let me turn to Slide 17 to explain. As you know, Geelong Refinery produces approximately 50% of the state's liquid fuel requirements. This represents about 20% of Victoria's total energy needs with demand for diesel and jet, in particular, enjoying strong growth for many years. We are fortunate to be located in one of the largest and fastest growing markets in the country and expect demand for energy in the state to continue to rise in line with population growth and economic activity. We see many opportunities to participate in this. Natural gas, in particular, is an important source of energy for Victoria with significant residential and commercial demand for manufacturers like ourselves. We believe it is also an important fuel that can support the transition from coal to renewables by providing on-demand baseload generation capability and has been called out by the federal government's National COVID Coordination Commission as a critical input to reinvigorating Australian manufacturing post COVID-19. Slide 18 sets out AEMO's most recent supply and demand forecast for natural gas in the Southern East Coast of Australia. This shows a projected shortfall of gas supply from 2024 unless more southern supply sources are developed or pipeline capacity limitations are addressed. Although the onshore gas ban will be lifted in Victoria from the 1st of July 2021, we see a risk that new supply will not be established in time. And without this, we can expect shortfalls or increases in gas prices. A number of proponents have determined that LNG import is a sensible cost-effective method to bridge the shortfall and bring gas to the East Coast markets. We agree with this view and believe that our refinery at Geelong presents the most sensible and suitable location for such a facility to be established. Unlike other projects, Geelong Refinery is an existing industrial facility with good access to port and jetty infrastructure to support a floating storage and regasification vessel. We have sufficient land to support the establishment of onshore facilities to support the process of regasification and other associated opportunities such as gas power generation and introducing LNG for transport applications. The new Spirit of Tasmania vessels, for example, will be dual LNG powered and will now be located right next door in the port of Geelong. And of course, we have the existing skills and capability to operate such a facility and provide behind-the-meter demand, which will provide benefits to the refining operations. There are some synergies in gas and water management, which will help to minimize the environmental impact, and we naturally have excellent existing access to both major gas and power infrastructure. We've already made significant progress on the pre-FEED assessment of this project and intend to launch an expression of interest process over the coming weeks to invite potential partners to participate. We prefer to link this project with domestic gas supply so that this very much becomes a virtual pipeline connecting domestic gasfields to the major markets in the East Coast, but we will also look for current suppliers seeking additional capacity to service their markets. Pending approvals, we expect the project could be complete and supplying gas by 2024. In addition to oil products and gas supply, we also see an opportunity for Viva Energy to play an important role in establishing strategic oil reserves at Geelong and our other major East Coast facilities as shown on Slide 20. We have significant positions with room for expansion to accommodate additional commercial and strategic storage, which would improve utilization and provide benefits to our broader operations. We have been working closely with the federal government on a review of Australia's refining sector and welcome the RFI process that the government announced yesterday, which would particularly support our refinery operations. Additional crude storage would allow the government to store both local and international crudes for later processing at Geelong when this is required. The increased capacity would likely improve shipping economics and crude diversity for the refinery and generally help support longer-term viability. We are excited about this opportunity and expect to participate in the federal government's RFI process in due course. Beyond these energy projects, we also see opportunities for Geelong to participate in the broader energy transition through direct and indirect involvement in renewables and lower-carbon energies. We have identified a number of projects set out in Slide 21 that we will continue to evaluate over the coming year, including establishment of a solar farm and battery for behind-the-meter electricity supply, hydrogen manufacture from gas or renewable electricity to support the assessment of the sector in Victoria, gas power generation, and LNG for transport as mentioned earlier. These are all potentially exciting opportunities, which together help Geelong -- help develop Geelong into a major energy hub for the state. Slide 22 sets out how this vision would be managed at the site and our unique capabilities to deliver on this. While we imagine that projects will be progressed with a range of partners that share the risks and bring additional capability, we expect Viva Energy to be the lead and drive the overall development. Of course, we will consult widely on our vision and work with governments, the community and partners to develop the full potential of the energy hub. There are some clear next steps on Slide 23, and we look forward to keeping you updated as the early phase projects progress over the rest of 2020. Thanks very much for your time today. And I'm happy to open the line up now for questions.

[Operator Instructions] Your first question comes from Shaun Cousins from JPMorgan.

Well, just a question in regards to your guidance. Can you just talk a little bit about the quantum of the revaluation gains on FX and all derivatives that you enjoyed in the first half and maybe if it's easier, just maybe comparing it to the first half '19?

Yes, sure. I can take that one, Shaun. We've commented a little bit in the context of our underlying NPAT results and the announcement that that's been supported a little bit beyond the performance and underlying EBITDA by some of those revaluation gains on FX and oil derivatives. And I think it's safe to assume in a falling FX environment, there'll no doubt be an impact on inventory loss, but there will also be some positive effect on those revaluation gains on FX and oil derivatives. And I think it's safe to assume that we've benefited from that a little bit in the first half. I think in the context of past periods and the FX movements that we have seen, that will give you a little bit of a guide in the context of how material that could be, but obviously, more information on that when we put the full result out in mid-August for the first half.

Great. And maybe just a little bit more about sort of CapEx. Can you just talk a little bit about the, I guess, the quantum of CapEx you're looking at for fiscal '20 in terms of some -- for fiscal '21. Some CapEx is deferred to fiscal '21. And then you've also got the crude distillation unit, which I think was previously planned to come through in fiscal '21. Can you just talk a little bit about how much of this lower CapEx, which has been a real positive theme, that you've seen how much of that's going to come through to next year over the other line? And then how much are you still on track to do the crude distillation unit in fiscal '21, please?

Yes, sure. I can cover the part on the CapEx guidance, Shaun. I think you're right. We've tried really hard to look at measures to improve the result both from an earnings and the cash perspective this year, and a big part of that has been looking at the CapEx program and trying to manage that the lowest point possible. I think it's fair to say that we have not cut into safety, critical and asset integrity work that's required across the network. And that's what you see in the context of the guidance range we've put out, $60 million to $80 million in terms of underlying business CapEx and then the range of $85 million to $100 million on the maintenance work at Geelong. We have talked to the fact that some of the CapEx reductions have been deferral of nonessential works, and I think deferral means that it will come at some point. At the same time, we haven't given guidance for 2021, and I would say that there's a natural capacity on just how much work the company can undertake at one particular time. And so it's probably not necessarily the case of looking at anything that's deferred and just adding it on to a future CapEx number. That's something we'll have to manage as we get closer to next year and through the course of next year. In the context of future work at Geelong, and you referred to the crude distillation unit, where the major maintenance is on a 6-year cycle, and in the context of that, that's still the case. There'll be a decision point when that comes around. And as you rightly point out, the 6-year cycle would indicate sometime towards the end of next year.

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

It's been 2 years, I think, guys, and I think it's the first time we can actually say that today's an actual upgrade to earnings. So that word upgrade hasn't been used in the last couple of years, but well done. It's nice to see. That's the positive. I don't want to talk on a dampener now. I'm just trying to work out what to factor into our numbers, and unfortunately, it's got to get back to what the next 6 months is going to look like from a refining perspective. I think, Scott, you mentioned you spent $450 million in Geelong in the last 3 or 4 years. In the first half, you lost EBITDA, $45 million. You're obviously taking some pretty strong remedial action here by delaying and closing units and whatnot. But can you give us a bit of help as to what we can expect for the cash burn in terms of how much cash is going to cost you in sustained refining for the next 6, maybe 12 months. In other words, can you give us an idea as to what your breakeven will be in the next 6 months based upon what your actions are and your production will be? I mean obviously, I don't expect you to predict what margins in the region will be. But can you give us an idea of what your breakeven will be, what positive you'll get from your GRM from producing less gasoline and jet and so long as we can have a relative degree of predictability with regards to what refining is going to do to your cash burn in the next 6 to 12 months?

Yes. Well, it's very difficult to answer that question without forecasting refining margins but...

Well, no. Talk about what's in your control? I mean your cost breakeven's in your control, so -- and what production you're going to do. We can work at that. But what's in your control that's going to help ease the cash burn?

I think what would be helpful, David, and to help with the question is probably I could get Thys to talk about what hydroskimming mode means in terms of how we reduce our exposure to petrol and increase our exposure to diesel, which in the current environment, we think, is the right decision without trying to give estimates of what's going to happen for the next 6 months. But...

Yes. So when we talk about hydroskimming mode, it basically means that the refinery is still making its full range of products all the way from LPG down to the marine fuel oils. We do make significantly less gasoline, though, because the residue that would normally be upgraded in the cat cracker, we're selling into the fuel oil market. And with the advent of IMO2020, that fuel oil market is also pricing relative to diesel. And so we've got a substantial portion of our margin exposure linked to diesel going forward. And since that has been and we -- and generally commentators would expect diesel to continue to be robust, that just helps our margin exposure going forward.

And David, the other -- I think the other thing to factor into our operations as well is that we've -- at the -- [ what's ] at the moment, we have our smaller distillation unit shutdown. We're continuing to refine through the next 4 or 5 months as we do the turnaround. We have the option to restart that unit as demand increases and margin -- [ ramp ] margin support. So that provides some opportunity to lift the performance of the site if the conditions are favorable. So that's kind of the background to the decision that we've taken to, a, continue operating and b, operate in the mode that we're in over the next period of time. And as always, it depends on the forward refining margin environment, which is always difficult to predict, of course, and it's extremely volatile at the moment just simply because of the situation that we're in. But on balance, we do feel that having a greater exposure to diesel, which is the one product that has held up pretty well not just in Australia but globally through this demand crisis is the right thing to be doing. And time will tell whether that proves to be the case of course.

But does the breakeven cost come down, Scott or Thys? Does it come down like $4.50 to $5, is what you mentioned. Is that going to come down in the next 6 months? And to what level?

Yes. I think just on that, David, while we will see some reduced intake on the back of the style of operating that we're in at the moment, and if you look at the May result and what we forecast for June, around 2.5 million barrels a month of intake relative to the 3.5 million a month plus we've seen in the past. We have done quite a lot of work on cost, and we're working very hard on keeping those cost numbers low over the course of this year given the environment. And if we're able to do that successfully, we expect the breakeven to remain roughly in line with the breakeven that we've maintained in the past. And I think I mentioned when I talked through the slides, so it was in the range of a USD 4.50 to USD 5 a barrel. So hoping to maintain that through this period and as Scott and Thys described, potentially retain some optionality and some upside if diesel margins improve.

Okay. And second question I've got, my back-of-the-envelope calculation suggests that the retail fuel margin has probably improved about $0.08 a liter. Is that roughly what you'll -- in the first half relative to first half last year, is that roughly in line with what you're thinking and seeing? And obviously, I don't -- it'd be lovely if this continues, but it seems to be more rational market out there that's supporting this and it seems to be my observation is the cycle has certainly got longer. And the price doesn't -- it takes a lot longer for the price to come down and a lot quicker to go back up, which is a competitive dynamic. It's just not lower crude oil prices, it's more rational competition. Is that your sight -- line of sight and your observation? And can you give us a bit of a comment around whether that is what's happening out there? Or is there something a little bit more that you'd like to add to?

There's a few factors at play, David. I think, first of all, most importantly, I think we need to recognize that last year was a pretty challenging period for retail as you will remember. And we -- our earnings took a big step backwards in 2019 following the transition of retail pricing from Coles to ourselves. And that was -- if you recall, when we published our 2019 results, it was a combination of investment that we made in improving our price competitiveness and obviously, a real deterioration of market conditions that happened through the year as well. So I think the base -- the comparison year-on-year is obviously reflective of a very low performance last year. So that's partly -- obviously, it's good to see retail margins have improved since that time, and we saw that heading into the back end of last year, and that really has continued through this year. There's no doubt that retail margins have been supported as -- have benefited from a -- some sharp falls in oil prices that occurred through the first half of the year and just the natural delay or lag, I guess, and that ultimately being reflected in retail pump prices. And as Jevan pointed out, we're now seeing the reverse as oil prices increase and there's compression in retail margins as well. So that's just a normal dynamic of the retail market. But I think it's a rational market. I think, obviously, every player in the market has seen the sorts of volume declines that we've seen, and that has obviously been support -- in support of all competitors to be rational in terms of pricing because, obviously, there's significant costs that still need to be paid, such as leases and wages and so on across the business. So I think that's the other factor that's been in play through the course of this year.

Your next question comes from Mark Samter from MST.

I've actually got 4 questions if it's not stretching the friendship, but maybe just boot me off and I can come back on the end if I'm boring you with them. I might first start with the LNG channel, LNG hub, which obviously my personal views are very aligned with what you're trying to do here. I guess when we think about from a Viva perspective, these things can take -- I mean you're obviously very experienced at selling hydrocarbons, and you've got a major shareholder that obviously has a lot of trading capability and understands risk well. If you can do these kind of things in 1 or 2 ways, you could build it all on risk -- can take more risk on yourself or you could effectively hedge out all the risk by just uptaking -- finding uptake in all the capacity and completely derisk it. Have you thought about, I mean, a, kind of equity ownership? Does it -- will it be 100% Viva-owned team? But have you thought about how much risk Viva wants to take on?

Yes. I think that's part of the -- I guess what we're looking to learn through the expression of interest process that will kick off in a couple of weeks, Mark, is just to understand -- I mean we do have a reasonable understanding already of the interest in the facility. We've done quite some work on it already but start to formalize that. And I think the interest will come from a number of areas, but obviously, there'll be potential partners that have existing gas demand in Victoria and are looking to support that through our facility like ours. I think there's potentially also producers in Australia that are looking at ways to get their gas into market in Victoria, and it's another potential partnership and potentially also in the area of technical support as well. So those are sorts of players that we'll be talking to over the next -- a bit more formally through the EOI process. And I think the one thing throughout all this, this is -- the Geelong energy hub is very much a Viva Energy vision, but it's a vision for obviously the region and our site. And we intend to, as we did, they can -- to lead that and play a very strong role in developing the site, but we're also willing to and recognize that there'll be some benefit in bringing some partners onboard either to share risk or bring capability or demand that will be helpful in making these projects viable. So we're quite open, but certainly, it's our vision, and we'll certainly lead it and drive it hard.

Then next one, I guess I won't to ask about Australian refining companies and those kind of players because I suspect there's not much you can say about them at this stage. But in aviation, correct me if I'm wrong, is it's a pretty CapEx-heavy part of the business, and I guess it was the 1 part of the business that pretty gave that everyone thought would continue growing at 4%, 5% a year for the foreseeable future. But I guess, views on that have changed pretty dramatically. Is there some rationalization we could see in aviation be it through consolidation of infrastructure or just the broader cost that you probably thought you might have to spend that maybe comes a bit under the spotlight now?

I think it's too early days, Mark. I think it's yet to be seen how quickly or not demand recovers. And so -- and it's obviously evolving, and it's probably just, at this point in time, quite really speculation as to how long term the demand reductions will be. As I mentioned before, it's sort of pretty pleasing to see quite some material numbers of flights being rescheduled for July. And if that progresses, that will start to restore some of the domestic travel. It'll be interesting to see how the mix of business and holiday travel develops post COVID. No doubt will look very different, some sort of headwinds and tailwinds that will probably evolve from that. And then the big question, of course, is how does international travel resume. So we're really taking our time to evaluate that environment, and we don't want to take decisions too early. And we're sort of -- that's evident by the fact we've retained capability across all airports despite the fact that sales have declined because we want to give it time to play out and just see how it emerges. I think already 2 months -- or 2 or 3 months into COVID-19, we're starting to see recoveries in parts of the -- parts of our markets probably more quickly than any of us imagined we would do when we entered this crisis. So I think that's evidence that taking some time will be important.

Next one just -- unless I missed it, I don't know you guys have given a net debt number. I guess once you might have been building a bit of inventory in some products. Should we assume that between the fall in the oil price and obviously running your refinery at lower levels that you might have had a decent-sized working capital release and then combined with a great earnings outcome given the environment that you probably have seen a decent reduction in net debt through the whole.

Mark, yes, you're right. We haven't put the net debt number out there. I mean the end of 2019, we were at $137 million net debt, and obviously, we've had the REIT divestment through the period, which has delivered after-tax proceeds of about $680 million, so a pretty strong balance sheet and strong position to be in following that divestment. Again, normal operating basis in our company with a large decline in the oil price, you would expect an inventory loss, and that typically does result in working capital release that can offset that inventory loss but again, be more on that when we release the half year result mid-August. We might have to keep moving through as well just from a time perspective there, too.

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

I've got a couple of questions on the commercial business. Firstly, in the June half, a very good outcome, in my view, given what's happened in jet. It looks like there wasn't a lot of operating deleverage suggesting you could pull a lot of the operating costs out. Could you just talk us through that? And in particular, I'd be interested in how big a contributor JobKeeper was given that is, at the moment, looking like it's rolling off in September.

Yes. I think there's probably a couple of aspects on that. In the context of the Aviation business, I think it's worth remembering that our Aviation business is made up of a few different sectors within aviation. We're obviously supporting international carriers and international travel but also a large component of domestic and a large component of general aviation, which supports regional locations, fly-in, fly-out workers at mine sites. And while we've seen Aviation volumes down, particularly in the international space and, to a lesser extent, domestic, I think we mentioned in the release, down 75% versus previous early expectations of more like 80% to 90% volume declines and so I think from that perspective, has been a relative positive factor in supporting the Aviation business and still some areas of profitable supply in that space. So has been good to see. In the context of your question on JobKeeper, I think perhaps a way to think about that at a company level is that our total company employees were a little north of 1,000 people and so not necessarily overly material in the context of our results or company performance but certainly, really good to use that benefit to support workers in the aviation space, particularly aviation refuelers and continued operations at Geelong despite clearly a challenging environment where even after some support, we're still heavily loss making in that space.

Okay. No, that's really helpful. And then the second question I've got is on the marine business. I mean you guys have a great marine operation with a competitive advantage that the timing of COVID-19 was more fortunate than it could have otherwise been given how it coincided after the seasonal peak in cruise. How are you thinking about that going forward? And how material is marine earnings to the Commercial division? I know it's small in terms of volumes, but my understanding is it's very profitable.

Yes. So look, it's an important business for us. It's relatively material in the context of Commercial's earnings, and it's probably one of the -- beyond what Jevan said, it's probably one of the other factors in supporting the relatively strong performance of Commercial despite the significant declines in Aviation. As you say, we were sort of, in the end, quite fortunate in terms of timing because we'd largely got through the cruise season before COVID really hit. And obviously, cruise is for now pretty much nonexistent. And the big question will be what happens at the -- this upcoming season is probably -- if we are going to see some impact this year, it'll be at the back end of this year when -- depending on the recovery of that part, that sector. But of course, marine is not just about cruise. It's also about container shipping and the introduction of our very low-sulfur fuel oil at the beginning of this year or late last year to support the transition. The IMO transition has been very successful. We have generated some good business from -- new business from that, and that's also been reasonably a strong contributor to the marine results as well. And obviously, that business has -- that business continues throughout the year, and we have a sizable position, obviously, in Melbourne and particular in terms of supporting the container shipping industry.

Your next question comes from Grant Saligari from Crédit Suisse.

You've made sort of some quite big -- some quite bold statements this morning around the expansion potential and the strategic opportunities at Geelong. This is obviously a very practical question at the moment around the cash that's sitting on your balance sheet post the REIT sale. I'm wondering whether you can sort of give any color at all on the potential quantum of expenditure that could be envisaged as part of the strategy at Geelong. And it seemed to me that consideration into what to do with that cash would need to be undertaken in tandem with some decisions around that strategy. So I'm wondering if you can comment on that, please.

Yes, I can cover that, Grant. I think it's really exciting to get the vision for the Geelong energy hub out in the public domain today. And I think that gives us an opportunity to really work some of those different aspects of that strategy with a range of different stakeholders, and so quite excited about that. I think in the context of those individual projects, there's still obviously a way to go in the context of financial return and what that might look like for shareholders and I think something that we'll be very focused on. I would say that it's a fairly long-term strategy. It's probably a 3- to 5-year opportunity and something that we will work progressively over time. And so probably wouldn't result in a large need for cash in the near term. And in the context of the proceeds we have on the balance sheet from the divestment of Viva Energy REIT, we've mentioned today that we'll commence a very small return of that by way of the on-market buyback, and we'll obviously have the opportunity to continually consider that at a number of different touch points with the market going forward. But I think it's probably still early days in the context of any capital requirements for those projects.

That's very helpful. And just maybe just a follow-up on that on the buyback then. The decision to proceed in $50 million tranches, is that -- still [ then leave ] the optionality open to proceed with an off-market buyback at some point? Or is there just a natural cash conservatism that's driving that decision to proceed with the $50 million tranches?

I think there's a range of factors. Certainly, where we sit today, there's a lot more certainty in the economic outlook than there was a couple of months ago. And we're starting to see signs of a sustained recovery, which is all very positive. And I think that does give us confidence to commence with a small return. I think at the same time, it's still a pretty challenging environment, and we shouldn't forget that. And it's worth being conservative in that space and continuing to reassess that from period to period. And as I mentioned, we'll have a number of opportunities to touch base with the market on release of our full half year results and beyond, and so we'll be continuing to reconsider that at each point.

Your next question comes from Ben Gilbert from UBS.

Just a couple for me just on costs. I remember a little while ago when you [ poured ] some costs out in your corporate pace that there was some catch-up in the following half. I was just wondering if you can give us any feel for what you think sort of the underlying sort of ongoing rate of cost out is you've been able to sort of lock in [indiscernible] is there any sort of lumpy cost that we...

Yes, I can cover that. Thanks, Ben. Yes, in the context of the -- particularly the Supply, Corporate and Overhead costs, and we've mentioned a little bit in some of the releases leading up to today that we've taken a pretty strong focus on cost right across the business, and I think we took a decision early to go hard in that space knowing that it's always easier to put it back than it is to take it out later. And I think that's contributed to a pretty good cost performance right across the business in the first half results that we've guided to this morning. So I feel pretty good about that. I think in the context of the second half, we obviously haven't given guidance, but we'll have the opportunity to work hard from the same perspective we started with this half, noting that if we do see a continued recovery and things improve, then there may be an ability to put back some of the costs where it makes sense to do so, particularly if that supports growth in the business and continued recovery but something that we'll obviously have to continue to assess on a month-by-month basis.

Your next question comes from Daniel Butcher from CLSA.

I just wanted to firstly follow up on the LNG import proposal. You mentioned getting partners and so forth. I'm just curious whether you have some initial sort of costings, whether you're going to lease FSRU, that sort of thing and whether you think you'll very much lean towards tolling or a merchant type of operation.

I think those are all decisions that we've yet to take, Daniel. So we also have done a lot of work. We understand the size and scope of the project. But how we construct it and considerations that you've just laid out are still things -- are still decisions we need to take that will obviously materially impact the cost and formation of the project. We're not sort of -- we want to undertake this EOI process to help us really firm our views on our involvement in the project going forward, but as I said before, we do -- we'll go forward [ thus ] expecting to have a very heavy involvement in the project but recognize that having some partners onboard as well might be the right thing to do. And obviously, we need to understand what they bring to the exercise and what they would want to -- the involvement that they would want to have, and that will ultimately determine the structure and how we take it forward. So work in progress but too early to fully answer your question.

Okay. That's fine. The second one just around 2021, the refinery. Just wondering, in terms of impact on your quantity of crude put through and the time out. Did that relate to HFA being pushed back into '21? What sort of allowance would you make for that? And is the cost just about [ $25 million and $40 million ], the residual that's been deferred? Or is it different to that with some cost out?

Sure. Yes. So if -- in terms of the deferral of the alkylation unit, we will most likely defer it into the winter months, which is a time where the impact of taking that unit out will be minimized in terms of the rest of the site's production. And obviously, in terms of cost -- some of the reduction that we have talked about this morning is clearly associated with the deferral of the alkylation unit. And we will look to continue to optimize that cost, but I expect that much of what we expected to spend this year, we will probably continue to spend next year on the alkylation unit.

Okay. And one final quick one. Just on the Alliance volumes. You mentioned that they averaged 45 million in May. Just wondering what you can tell us what the exit run rate was in the last week of May and maybe what you assumed in your guidance for retail in June given that you gave us the assumption for the refining side. Wondering what you're seeing for June for volumes in Alliance.

Yes. Look, Dan, we haven't put those numbers out there. But obviously, the volumes were pretty low in April at below 40 million liters per week. It was good to see the recovery into May with an average of 45 million liters per week and a positive trajectory in the context of our steady recovery. And so I guess feeling pretty good about the direction that, that's moving in but more information on that when we put the full half year results out in August.

I'll now hand back to Mr. Wyatt for closing remarks.

Well, thanks again for joining this morning. I know we had a lot to cover in terms of our, obviously, first half performance, but -- and obviously, the decision of the turnaround was something that was expected. And hopefully, the vision that we've outlined -- laid for Geelong is exciting and makes a lot of sense. So I appreciate the time and the questions and look forward to sharing you -- with you more about our first half results when we come out in the second half and in obviously keeping you up to date with some of the key projects that we have in store for Geelong as we progress them. Thanks again.