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

Thank you for standing by, and welcome to the Viva Energy Australia 1H 2020 results announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Wyatt, Chief Executive Officer. Please go ahead.

Good morning, and welcome to the Viva Energy results presentation for the period ending 30th June 2020. My name is Scott Wyatt, Chief Executive of Viva Energy, and on the call with me today is Jevan Bouzo, our Chief Financial Officer. I've got a bit to cover this morning, including an update on the proposed capital management program that will see us return to shareholders the bulk of the proceeds from the Viva Energy REIT divestment. I will discuss this a little more later in the call. As you all will be aware, COVID-19 has presented challenging trading conditions across the Australian economy with impacts felt by all in the community. It has challenged us all, but I'm extremely proud of the way in which the people of Viva Energy and its partners have responded. Despite the extraordinary circumstances we find ourselves in, we have posted resilient results which reflect the strength and diversity of our business, and I look forward to discussing these with you this morning. Let me start with our sustainability performance as set out on Slide 5 of the presentation material. This year, we have maintained a strong, safety and environmental performance with a significant reduction in recordable injuries and loss of containments. We have successfully implemented robust health management protocols in the workplace to maintain physical distancing in our operational facilities, and more than half of our 1,200 employees are currently working productively from home. Last year, we launched our reconciliation action plan and despite the disruptions to our planned activities, I'm pleased with the progress we have made on delivering on our commitments in this area. I'm particularly pleased that we were re-awarded the contract for the manufacturer and supply of low aromatic fuel into Northern Australia. Research is showing that petrol sniffing rates have significantly declined in the communities that we support, and I'm really proud of the role our company plays in this important program. Turning to our operational performance on Slide 6. As previously reported, sales volumes fell as a result of the border closures and stay-at-home restrictions put in place to manage the spread of COVID-19. Sales of jet fuel have fallen 74% in the second quarter, and Alliance sales volumes declined to under 40 million liters per week at the peak of the restrictions. Over the last few months, retail sales have been showing steady improvements, averaging above 53 million liters per week in June and July. And while retail sales volumes are naturally impacted by Stage 3 and 4 restrictions now in place in Victoria, the rest of the country continues to show steady recovery. Despite these impacts, diesel sales have held remarkably well due to the continued economic activity and a relatively strong agricultural season. Premium fuel sales have also been comparatively strong, representing 29% of total petrol sales for the half. As previously announced, refining production was reduced to address falling demand for Jet and petrol, in particular, with crude intake for the half at 18.4 million barrels. Availability of operating units was strong at 98%, and our refining team did well to manage early shutdown of the cat cracker and bring forward the planned maintenance. This is progressing well and remains on plan for a start-up in late October. Regional refining margins continue to be heavily impacted by the fall in global oil demand. And although we've taken steps to minimize exposure to weak jet and gasoline refining cracks in particular, the Geelong refining margin for the first half was below our operational breakeven at USD 2.90 per barrel, and this has continued into July where we recorded a GRM of $2 per barrel. While operating in hydro-skimming mode with lower fuels production and residue disposal costs contributes to this lower margin outcome, we still believe this produces a superior outcome than a full shutdown, and remains appropriate -- retains appropriate flexibility to manage changes in local demand. Now turning to Slide 7. Let me address the financial outcomes. Given the significant sales impacts that we've seen across our retail and aviation businesses, I'm very pleased with the underlying performance of the business. Nonrefining EBITDA of $319 million is up 14% on the first half 2019, reflecting a strong sales performance in the nonaviation commercial sectors, and a much improved retail fuel margin compared with the first half 2019. Refining losses of $49.4 million reflect the very weak refining margin environment I mentioned earlier, together with lower production as a result of operating in hydro-skimming mode. Our group underlying EBITDA was within the June 2020 guidance range, and we have maintained a dividend payout ratio of 60% of distributable net profit after tax. Given the uncertain environment, we've taken steps to reduce supply chain costs and discretionary spend and have reduced our full year 2020 CapEx guidance to $145 million to $180 million, down from the previously guided $250 million to $300 million. We remain on track to deliver these reductions. The combination of these results and the strength of our balance sheet has the business well positioned to return all the proceeds of the Viva Energy REIT divestment to shareholders. We intend to return $630 million through a second tranche of capital management initiatives and complete the existing $50 million on market buyback program in due course. Slide 8 sets out the impact from COVID-19 on our half year 2020 earnings compared with the prior period. The direct impact to earnings from COVID-19 is estimated at approximately $41 million with sales declines in retail and aviation responsible for $22 million and $29 million, respectively. Lower fuels production and refining contributed to a further $27 million with reductions in corporate and supply chain costs contributing $23 million and $14 million, respectively. Prior to the impact of COVID-19, sales volume growth within the Alliance channel generated an uplift of approximately $5 million while the full acquisition of Liberty Wholesale last year has contributed a $37 million. The recovery of retail fuel margins compared with the first half 2019 contributed an additional $59 million of earnings, which were largely offset by weaker refining margins which negatively impacted our earnings by approximately $57 million. I'm turning to Slide 9. Let me provide some further insight into the refining margin environment. Geelong refining margins were initially impacted by higher crude premiums as we transitioned to low-sulfur fuel oil at the beginning of the year. While this unwound as oil prices fell, the substantial reduction in global demand for oil products has weighed heavily through April and May with negative Jet and Gasoline cracks for a period of time. There have been some periods of recovery, but the markets remain -- still remain very weak. The forward refining margin environment is very uncertain and likely to remain challenging in our view until global oil demand begins to materially recover. As a consequence, we are beginning to see some new refining projects deferred and permanent refinery closures, such -- announced, such as the Shell Tabangao facility in the Philippines. While these closures may help to rebalance production over time, new refineries are still expected to be commissioned, and the outlook in our region is particularly difficult to determine. Here in Australia, the federal government is undertaking a review of the refining sector and has initiated a request for information to consider the establishment of strategic oil reserves. Viva Energy is participating in these reviews, and while we believe they have the potential to improve the long-term sustainability of the refining business. We continue to monitor the situation closely to adapt our plans and continue to assess the short and long-term viability in this part of our business. Let me now hand over to Jevan to take you through the financial performance in a little bit more detail.

Thanks, Scott. Slide 11 summarizes our financial results for 1H 2020. Rather than talk to these slides, I'll go through each of the areas in a bit more detail, starting with retail on Slide 12. Retail underlying EBITDA RC for the half was up 17.5% at $332.9 million and within the guidance provided in June 2020. The largest impact on earnings during the period was retail fuel margins, which recovered from the very low levels we saw in 2019. This, combined with the consolidation of the Liberty business we acquired last year, and some cost savings offset the volume disruption from COVID-19. Prior to COVID-19, the business achieved strong sales growth in Alliance volumes from January to mid-March. With several weeks above 70 million liters per week. The COVID-19-related impacts to volume began from mid-March 2020 and were more of a feature during the second quarter, as Scott outlined earlier. Turning to Slide 13. Commercial underlying EBITDA RC for the half was down 14.3% at $135.7 million, slightly beating the guidance provided in June 2020. Commercial earnings for the period were primarily impacted by a reduction in aviation sales of approximately 38%. Despite the volume loss in Aviation, the remainder of the Commercial portfolio performed in line with the prior period. This demonstrates the high-quality customer portfolio we have and the sectors in which we operate. We've worked closely with our customers and have managed our credit exposure extremely well, avoiding any significant bad debt. We will continue to support our customers through these challenging times, and I'm really proud of the work our team have done in this space. Turning to Slide 14. The refining segment delivered underlying EBITDA RC of negative $49.4 million, below the guidance provided in June 2020, reflecting weaker regional refining margins than forecast for the month of June. Refining margins had the largest impact on earnings in the period with the Geelong refining margin averaging USD 2.90 per barrel compared with USD 5.10 per barrel in the prior period. As you know, in April this year, we shut down the RCCU in one of the smaller distillation units transitioning into hydro-skimming mode. While we're able to manage the risk of lower demand for both gasoline and Jet, intake was reduced to 18.4 million barrels, down from 21.4 million barrels in the prior period. The team were able to achieve some cost savings and are largely operating with a full workforce. Obviously, the financial result in this part of the business is extremely disappointing, and we're continuing to assess the short and long-term viability of the refinery. Turning to our Supply, Corporate and Overhead segments on Slide 15. We delivered an underlying EBITDA RC of negative $149.9 million. An improvement of $12.7 million on the prior period. As a result of the current environment, we've maintained a strong focus on costs, looking for opportunities to cut discretionary spend and defer nonessential items. Storage and handling costs benefited from reductions in nonessential maintenance and energy cost. Pipeline and supply costs were also lower as a result of the COVID-19 impacts to volume. We managed to deliver some cost savings with reductions in corporate site maintenance and contractor and procurement benefits. And across these 3 areas, the cost improvements totaled $17 million, and were partially offset by some net one-off benefits in the prior period. Slide 16 sets out the 1H 2020 cash flow bridge. The table in the middle of the slide, sets out the underlying free cash flow for the business. And after adjusting for items in the table, which are not part of ongoing business operations and the inventory loss of $301 million, the underlying free cash flow on a replacement cost basis was $97 million. This was a positive result considering the environment and is reflective of the work we've done on cost, both from an operating and capital expenditure perspective. It's important to remember, we report our financial performance on a replacement cost basis, which removes impacts of movements in the oil price on inventory. Due to the large decline in oil prices during the first half, we reported a significant inventory loss. Removing this volatility and the working capital benefit is important when establishing the underlying free cash flow for the business. Turning to the balance sheet on Slide 17. The chart on the right shows the change in net debt from $137 million at 31 December 2019, the net cash of $481 million at 30 June 2020. Cash generation from the business contributed approximately $97 million during the period and release of working capital added a further $140 million. As I mentioned, the volatility of oil prices during the period resulted in a $301 million impact. In addition to this, the divestment of our stake in Viva Energy REIT, now Waypoint REIT, delivered $729 million on a gross basis. Our working capital facility of USD 700 million remains in place and provides the company with significant flexibility. Slide 18 sets out our capital expenditure guidance for 2020. As previously announced, our total CapEx for the year was revised downwards to $145 million to $180 million from the previous guidance of $250 million to $300 million, and Scott talked to this earlier. In revising the guidance, we're focused on reducing capital projects and deferring nonessential spend while continuing asset integrity and safety-related activities. On Slide 19, we set out the reconciliation of NPAT to underlying NPAT (RC) and distributable NPAT (RC). The significant one-off item of $187.4 million relates to our sale of the 35.5% holding in Viva Energy REIT, now Waypoint REIT. We continue to adjust distributable NPAT (RC) for revaluation gains or losses on FX and oil derivatives and for the impact of AASB 16. We've announced an interim dividend for the first half of [ $0.008 ] per share fully franked, and this represents a 60% payout ratio of distributable NPAT (RC). It's consistent with all dividends paid to date. Our dividend policy to target 50% to 70% payout of distributable NPAT (RC) remains unchanged. I'll now move to the section on capital management, starting with Slide 21. In February 2020, we sold the company's noncore interest in Viva Energy REIT for $680 million in after-tax proceeds and announced the intention to return these proceeds to shareholders through a combination of off-market and on-market buyback programs. Shortly after, COVID-19 began to affect Australia with impacts to several parts of our business, creating uncertainty for the company. As a result, we deferred the proposed capital management program, commencing a smaller, $50 million on-market buyback in June 2020. Throughout this period, it remained our intention to return these proceeds to shareholders, in line with the original purpose of the transaction and associated announcements. We've continued to assess the most effective method of returning the proceeds to shareholders with the company's franking position, making it difficult to execute an effective off-market buyback. Today, we announced a cash return equal to $530 million to shareholders, which comprises a capital return of $415.1 million, and a special dividend of $114.9 million. The special dividend will be unfranked, reflecting the low level of franking credits available to the company at this time. The remainder of the previously announced $50 million on-market buyback will be completed following the cash return and the additional $100 million of proceeds will be returned in due course. As part of the cash return, an equal and proportionate share consolidation of 0.84 shares for every 1 share will be undertaken to adjust Viva Energy's number of shares for the quantum of the cash return. This means every 25 shares will become 21. Relevant shareholder approval will be sought at a special meeting shareholders on 30 September 2020. And if approved, the payment will be made on 13 October 2020. Our decision to announce the cash return reflects the company -- the fact that the company has a sufficient understanding of the COVID-19 impacts and expects to maintain a strong balance sheet after the return. Slide 22 sets out additional details of the cash return and share consolidation. This will comprise a return of capital of $0.2146 cents per share. And a special dividend of $0.594 cents per share unfranked. The share consolidation will reflect the entire cash return, as set out in the table, and is expected to be EPS accretive. Slide 23 sets out the key dates, including the special meeting of shareholders and the date of payments I mentioned earlier. I'll now hand back to Scott to wrap up before we move to questions.

Thanks, Jevan. Looking forward, Slide 25 sets out our key priorities for the second half. As mentioned earlier, we're seeing good recovery of retail sales in most states. And while this is encouraging. We are prepared for further setbacks, as we have seen in Victoria, and we'll continue to manage volume and margin mix appropriately. We expect aviation sales to remain heavily impacted until next year, but have taken steps to manage costs and prepare ourselves to take advantage of any earlier rebound. As mentioned earlier, we will maintain a strong focus on our refining business to ensure that we minimize risk of operational interruptions from COVID-19. And complete the major maintenance on time and be ready to start in November. We'll maintain a strong discipline on cost and capital management and progress with our plans to return the proceeds of our divestment from Viva Energy REIT over the coming months. Finally, we'll continue to drive the projects we announced as part of the Geelong energy hub, with a clear priority to move to feed stage for the LNG regasification facility by the end of this year. We're now open for questions.

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

I've got a couple of questions on the commercial business. So you've given us the drag from the aviation business. If I pull that out, it looks like your commercial earnings were up about 5% relative to the same time last year. And that was after a fairly difficult half in the second half of '19. Can you just talk us through what's improved so much there, please?

Michael, I think -- thanks for the question. I think as I said, the commercial business has been pretty resilient given the impacts in aviation. We were fortunate to get -- complete -- essentially complete the cruise season at the end of -- by the beginning of this year without major impacts, obviously, despite the significant impacts to the cruise sector. And so that was a -- that supported by our performance in the first half. And the other -- our other key sectors, like bitumen, more specialties businesses and resources have continued to perform pretty strongly because those are all supporting sort of economic sectors that have largely continued uninterrupted through COVID -- the various restrictions in place around the country. So I think in that sense, the government's done a good job in continuing to get a good balance between maintaining economic activity and obviously, protecting health and that's -- it has supported the Commercial business results quite a bit. So -- and look, within Aviation, Michael, I think there's obviously different sectors within there as well. Clearly, international and big Jet domestic has been significantly impacted. But regional aviation has -- whilst it has been impacted, still performed pretty strongly through the period. And our general aviation business has continued to be a contributor. And obviously, we've done -- taken some steps to reduce costs as well. So overall, I mean it's -- I think it just underscores the power of having a diverse commercial business. And as I've said many times before, different sectors perform in different ways through -- and that's been -- helped to insulate us a little bit through that half.

Yes. It's a very good outcome. And it looks like some of the margin compression that we saw in the second half '19 must have unwound in some of the other sectors outside of Jet?

Look, I mean, I think -- I mean -- yes, I mean -- so some of that is cyclical, Michael. So it's not necessarily competitive, and you do have a cyclical -- some factors that do reflect that in commercial. And so I wouldn't say it's all competitive. But yes, I think you're right. I mean, I think whilst it's clear commission is well down, it's still a very good result gap under the circumstances.

Yes. Okay. And then the second question from me. Just trying to I think about how we should look at the marine business, firstly, heading into the second half, but then more importantly, the first half of next year. How much money do you actually make out of the cruise sector? Because my understanding is most of your marine profitability will come from cruise. And the outlook's uncertain, but I think it's pretty fair to say that next year's season is going to be well bound on the one that you've just seen. So how should we think about the impact from that?

Yes. So yes, as we've said previously. I think Marine's 2 sectors, right? You've got container shipping and you've got cruise -- the cruise sector. We have taken the view that in consultation with our customers, of course, the cruise season this year is going to be very light. And it's going to be probably not recover really until the next year season. So on the back of that, we have taken steps to reduce our cost of service in that segment. So we've reduced the number of barges that we would normally retain to support the business through the next season. We can obviously refleet ahead of the season after that. So we're taking -- I think we've managed to mitigate a lot of the cost that would normally support that part of the business. And that obviously helps to mitigate the margin decline in that area. And the container shipping side, well, it has continued to perform very strongly. The work we did to transition to low-sulfur fuel oil has really supported that business and that product has been in very high demand. And obviously, we -- there's a benefit there in the sense that it's a product that we blend and make at Geelong and sell them to Melbourne and other markets, but most predominantly Melbourne. And that's really helped support earnings in the Marine sector as well. So I sort of -- it's yet to be seen, but I feel we're well set up to minimize the impact on the Marine business for the next sort of 12 months.

The next question comes from Grant Saligari with Crédit Suisse.

First question, just concerning the Alliance volumes. I think you called out 53 million liters per week average through June and July. That seems a little softer than some of the traffic figures that are published by Transurban, et cetera. But maybe you could give us a little more color on performance either by state or just help us understand that 53 million liters? Because it's down about 20% off the peak, 70 million liters earlier in the year.

Yes. Look, thanks for the question, Grant. It obviously, varies significantly from state and territory around the country. Because obviously, the restrictions are in different phases and you can see that in the traffic reports as well. We did put out an announcement a few weeks -- a couple of weeks ago around July sales and focusing on petrol. And in there, we indicated that petrol sales across the country, outside of Victoria, were down about 11% for July year-on-year. And -- but for Victoria, down 25%, which, of course, reflects the Stage 3 restrictions that we were under for that period of time. So I think the $53 million reflects a mix of states and territories that are recovering progressively back towards pre-COVID levels. And then and obviously, Victoria, which is some way behind that, just given the state of restrictions that we're in at the moment. So I think it's a long way from where the peak of the declines that we saw. We're down to 40 million liters a week, and there are some states and territories that are getting very close to pre covered levels. So obviously, that will continue to evolve over the next few months.

Is it too early for you to have formed any views on the sustainability of some sites or -- because presumably, they're widely varying impacts when you get down to a side-by-side basis. Is it just too early for that? Or are you starting to form some conclusions around that?

I think -- I mean, we take -- yes. I mean, clearly, there's some sites more affected than others, depending on which state they're in, whether they're metro site or a regional site. So I think generally, the regional network has held up more strongly than the metro locations just simply because the restrictions are different. And obviously, within that, there's quite a variability of impacts across site. And also impacts to -- different impacts across fuel and nonfuel as well, of course. So -- but I think, look, it's -- I mean, we'll take the view that it's all, at this stage, all part of COVID, and it will -- you wouldn't make -- you wouldn't form any long-term views about the performance of sites until we emerge from this and we have an understanding about what -- sort of more permanent impacts in terms of customer behavior have evolved through COVID-19. And obviously, that's some time down the track from where we are today.

Okay. And just finally, what scope is there for you or what ability is there for you to further reduce production at the refinery? Because you're paying -- I mean, realistically, but fairly bearish outlook, obviously, for margins. But if we do continue in an environment where margins are below breakeven for the refinery, well, what scope is there for you to further reduce costs and production temporarily there?

Yes. I mean, look, we took -- we obviously -- when we were faced with the need to bring down the cat cracker unit at the end of April, we took the decision shortly after that to continue to operate in what we call hydro-skimming mode, which is essentially operating without the kettle -- cat cracker and obviously bring forward the maintenance, and we took a decision to continue to operate because we felt that, that was ultimately going to deliver the best financial outcome relative to a full closure. And that's on the basis that we feel that there was -- whilst the margins are low, there was still sufficient margin to offset costs that would be unable to be offset if we went into a full shutdown mode. And we were also -- and so that was really the key driver of that decision. And despite the losses, we still believe that to be the case. It does provide us, by operating units, the ability to ramp up production if the environment -- if the demand was to improve and/or the margin environment was to improve. Now unfortunately, in Victoria obviously hasn't -- it hasn't progressed that way for now because we've obviously gone into a series of more severe restrictions, but that was part of the thinking around maintaining production. And that still exists for us over the next few months as we complete the turnaround and we come out -- hopefully come out of stage 4 restrictions. So we felt that optionality and flexibility was quite valuable to us, and we still believe that to be the case. But from a cost perspective, we continue to operate the site. We're undertaking major maintenance there. So our ability to take further costs out is quite low. It really -- the outcome for the refinery really depends on obviously, local demand, we believe, to run the refinery in the optimal way and regional refining margins.

The next question comes from Adam Martin with Morgan Stanley.

Just on balance sheet capacity you've historically talked about. So that $1 billion debt capacity level, does that change at all with this sort of weaker refining margin outlook?

Thanks for the question. It's a good opportunity for me to hand on over to Jevan.

Thanks, Scott. And thanks for your question, Adam. Yes. I mean, I think the way we've talked about balance sheet capacity in the past has been now on a through-the-cycle EBITDA basis. When you think about our facility that we have in place now, it's a USD 700 million facility, so around that AUD 1 billion mark. In the context of gearing and balance sheet capacity, as I mentioned, we tend to think about through-the-cycle EBITDA and certainly peaks and troughs. And I think it's fair to say we're in a fair trough at the moment with refining. And so obviously, we try to look through that when we think about long-term earnings of the business, but also take that into account now in the context of decisions we might make in the short term around gearing.

Okay. Okay. And just a second question. Just on Geelong Energy Hub. I think you've previously disclosed that Vitol was helping you with some of the gas work, understanding the market. Is there any sort of update here around business model that you're thinking, sort of interest from other third parties, et cetera? Can you just talk about that, please?

Yes, not at this stage, Adam. We're obviously in the expressions of interest process at the moment. That's closed, we're obviously assessing the responses that we've got. So we're not in a position to share more information than what we previously shared at the last announcement.

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

I don't know what type of question you've got, Scott, but what's the end game for refining? I mean, I think, Jevan mentioned there's short-term viability versus long-term viability. Obviously, short-term viability is -- it's not flash at the minute. But can you talk about what sort of considerations you talk about when you sit around on your Board table? Obviously, I don't want the intricacies on that, but I'd be very interested to hear what are the considerations that you need to look at in terms of long-term viability. Because this flows into the decision today, to return $500 million of capital. Because I imagine if the refinery doesn't have long-term viability, that causes a lot of challenges going forward. But if you can answer that first question, and then we talk about the second thing, the decision to escalate or speed up the decision to return capital?

Yes. No, sure. That's a good question. Thank you, David. I think I'll start by saying, just to remind everyone, that the refining business has been a very significant contributor in the past and a very important part of our business and remains an important part. And then it's a largely stand-alone business. There are a lot of synergies between the refinery and our downstream marketing businesses as well, particularly commercial. So -- yes, and just on the back of that, that we've made a significant investment in Geelong over the last 4 or 5 years. So -- and it's nice for being a big supporter of it and have invested heavily. It is a cyclical business, however, and we have been going through a down cycle over the last year or so for different reasons. And obviously, COVID has been -- had put an awful lot of pressure on the refining sector, not just in Australia, but globally as well, as it deals with unprecedented decline in global oil demand. So we're at a very deep trough in the cycle as a result, which is clearly going to transform it quite a bit. We've seen a number of refinery closures around the world, as I spoke about before, and that's just an outcome of the environment that we're in at this point in time. So we took -- we obviously, took a review of the decision to continue with the turnaround earlier this year, and concluded that it was in the best interest to continue to operate the site for the reasons I mentioned before and complete the turnaround. But obviously, regional refining margins continue to be quite challenging, and that's reflected in our first half results. And as we acknowledge, they're not results that we can sustain for a long time or want to sustain for a long time. And so as a result, we need to continue to review the sort of the viability of the refinery. I think in terms of your question, David, the things that we do think about and we need to think about as part of the future is, well, how do we think about the regional and global refining margin environment? How long will -- how long will it take for global demand to begin to recover sufficiently to lift margins to at least a breakeven level. And that's a combination of global oil demand recovery, the sorts of changes that are happening at rank capacity in terms of closures and new refineries. So that's -- obviously, that's always a key macro factor for us. In the short-term at Geelong, we've also -- it's about our ability to restart the cat cracker unit at the end of October when those -- the work has been completed and because the mode we're in at the moment is not the best way to run a refinery. And that's reflected a bit in the margin results that we're seeing. So the sooner we can get to operating all our units and have sufficient local demand in Victoria to sustain that operation will, obviously, be a help as well in terms of our local refining margin. And in the third area is really just the outcome of the sort of broader work that the government is doing in terms of reviewing the sector. And we are encouraged by that work. I think it's good to see the government taking an active role in thinking about the role that refineries have in providing broader energy security. And obviously, that's leading to some potential initiatives, such as the establishment of strategic oil storage in Australia. So those developments, potentially, have -- will help improve the long-term sustainability of the refining sector as well. But obviously, the outcomes of that are not known at this point in time. And -- but that's also part of the consideration that we would make in terms of the long-term future of the Geelong refinery.

The second point of the question is really, you must have confidence, though, because the escalation of -- that's probably not the right word, the acceleration, I suppose, of returning the capital to shareholders is -- you're returning the vast majority. You must have confidence that it's going to come back because the potential is if you decide to exit refining, I'm assuming that that's going to take a bit of the capital cost?

Yes. I think we have confidence that we can handle either outcome, David, I think is the way to think about it. So obviously, if we -- as the environment continues to evolve, if we get more confident that this is a shorter rather than longer-term issue and there's some recovery in margin either through getting our operations back to full capacity or improvement -- and/or an improvement in global margins, then, obviously, we can sustain that for a period of time. We wouldn't sustain it forever, though, and that's obviously -- there's a limit to that. But conversely, if we are faced with the very -- the choice we don't want to have to make, but if we do have to close the refinery, that we've also feel that we can manage that as well within our balance sheet capacity. So we've considered both outcomes and are comfortable that those are both manageable. And in the context of that, we're able to proceed with the return of the proceeds direct to investors.

If I could just sneak one quick one. The $300 million, I mean it's a very administrative-type question, the inventory loss -- if this has -- treat that as just -- that's cash out, that's just inventory loss. Is that just expected to bounce back? I know it's a silly question because that -- it's a historical cost, not a replacement cost, but it is cash out the door at the moment, isn't it? It's probably Jevan.

It's a very good question. But it's definitely one for Jevan. I'll hand over to him.

Thanks again, Scott. And thanks, David, for your question. Yes. I mean, the way to think about the inventory loss and in some periods, gain, that we did record, been the difference between replacement costs and historical cost is really the one-off impact of the way oil prices have moved during that particular period. With a significant fall in the oil price, which was really sort of March onwards, we have seen that significant inventory loss. And you're right, it does affect the cash flow statement. I guess, there's been -- with that fall, a fairly substantial release in working capital. That's partially offset that. And we've seen the oil price move further up post year end. And so you can assume that over time, that will bounce around both up and down. But doesn't reflect the underlying earnings of the business within a particular period.

The next question comes from Shaun Cousins with JPMorgan.

Just a question on retail fuel margins. Just talk a little bit about your confidence in the sustainability of the higher margins that we've seen so far in calendar '20? And what have been the real changes to see margins remain -- while they're not as high as they were earlier this calendar year, they still remain in recent months, fairly healthy. So maybe just how you're thinking about that in the medium term, please?

I think probably -- thanks for the question, Shaun. But I think it's really consistent with what we said all the way along since we took control of retail pricing, I suppose. And that is that the retail fuel and convenience sector across all participants has a certain margin need. And so that ultimately, whilst it remains a very competitive segment, that margin need is relatively consistent and ultimately drives the sort of volume margin outcome that you would expect to see from the sector. And I think we've just been through -- I think we always talked about what happens if fuel volumes sort of continue to decline over time, how does the sector respond to that? Well, we've just been through the most massive period of fuel decline that you probably could imagine, and that's been a pretty rational sector as a result because we are all faced with lease costs and wages and the overall just general costs of running a retail business. And that has to be recovered from a mix of fuel and convenience, of course. And I think that's how it's behaved. But within that, it's always going to have to -- it's always going to be -- it still remains a very competitive segment, and that's always going to be the case. But I think long term, I still remain fairly confident that the -- that margin need will be covered.

Got it. Okay. No, that's helpful. And maybe just one for Jevan. Just on CapEx, you've been able to find a significant amount of CapEx savings -- and we've sort of spoken about this before, but I was curious around what impact this has on future growth that won't be able to be achieved? And if it's just being more prudent, maybe why weren't you being as prudent as this before? I'm just curious around how you think about fiscal '21 CapEx and what kind of is the very good work you've done in '20, how that turns out into future years, both on an earnings availability that's there or not, but then also where the catch-up CapEx exists.

Thanks, Shaun. And yes, I mean, I think there's a couple of parts to your question. In the context of the work we've done this year on CapEx, we've certainly deferred certain projects that were nonessential during the period. And we've also taken, I guess, reductions in others as a result of the changing environment. There's certainly CapEx -- to give you an example in Aviation business, which result -- it relates to capacity improvements that obviously put on hold for a period of time, while we see how that industry shakes out. There's other CapEx that we're proceeding with, but for the bulk of 2020, it relates to asset integrity and safety-related projects. And I think in that context, it's probably fair to say it would be difficult for the business to sustain the low level of CapEx that we'll record this year on an ongoing basis, and we'll have to continue to look at that as we come into 2021. I don't think you should necessarily assume that everything that's deferred just gets stacked on top of another year, though, because there's obviously, a certain amount of capacity that the business has to undertake work in material projects at a particular time. And so something that we'll continue to look at as we move closer into next year. But definitely, with the current economic outlook, we'll be pretty focused on minimizing the CapEx and operating expenditure where we can and where it makes sense for the business going forward.

Okay. Fine. That's great. And just finally, I'm not sure -- I haven't seen anything in your presentation materials there, but has Vitol indicated that they are looking to vote in favor of the capital management program, some -- their shareholder approval? I'm just curious if you've highlighted that Vitol has -- will approve this or not?

We haven't called it out in the presentation, Shaun. No, not at this stage.

The next question comes from Mark Samter with MST Marquee.

Yes. Just a bit of a kind of bigger-picture question, if I can. There's obviously been a lot of talk and focus on the future of the refinery. I'm just wondering if there's any ongoing thoughts about some of the assets. And I guess, in particular, I think about Gore Bay. But certainly, real estate seems to be the only asset cost in the world that can really never go down. And I guess, it may be changes in longer-term volume outlooks potentially around Jets, and there's obviously third-party access you could use if you did something with Gore Bay. Is there any other consideration around other assets? Or is it very much just a refinery debate internally at the moment?

Thanks for the question. Mark. I might get Jevan to answer that?

Yes, sure. Yes. I mean, I think at the moment, in the context of our capital capacity, I mean we've talked about the flexibility that we have with the balance sheet and the focus that, that gives us in the context of our ability to undertake transactions or activity going forward. I think in that regards, yes, we've been pretty focused on, obviously, the key projects that we've announced already, the energy hub, the opportunity with the Geelong Refining sites, in association with the refining business that's there. Beyond that and the transaction to realize value from the investment in Viva Energy REIT, I think we're pretty focused on the next sort of 6 to 12 months and how the business tracks during this period and the CapEx profile, and we probably won't necessarily comment any further on realization of infrastructure or other assets at this stage.

[Operator Instructions] The next question comes from Daniel Butcher with CLSA.

I just wanted to clarify actually more from your July announcements where you spoke about, obviously, petrol being down 25% Victoria. But flattish overall, which implies that diesel and commercial was up quite a bit. Can you maybe break out how much of that year-on-year increase in the nonpetrol side in Victoria was due to M&A? From your picking up further stakes in Liberty and so forth? And how much was increased market share or winning contracts and so forth?

No, I think it was -- I mean don't forget last year. So the Liberty business, whilst we've now got 100% of it, of course, the fuel sales to Liberty would have been included last year as well as this year. So on a like-for-like basis, there's no change there. But I think, the back end of the first half was a particularly strong agricultural season. And so we benefited from that through our Liberty business but also through our other regional wholesale relationships that we have. And that continued into July as well. So I think, as I mentioned before, the sort of the impact from COVID is a bit different regional -- regionally versus metro, and the region has held up somewhat better. And yes, in terms of the year-on-year comparison, I think it's been -- also benefited heavily from the agricultural season that we've just -- that we had towards the back end of the first half. I don't think it's any more complicated than that.

Right. It doesn't look a huge amount. Okay. And just finally, just on the capital return. I mean, just before you withdrew your rating, you were downgraded to subinvestment-grade. So I guess I'm like wondering, what makes you think it's an appropriate capital structure to return all that cash when you still got COVID payment as an issue? I know you've mentioned you've got your $700 million debt facility in place, but presumably, but the sort of underlying credit rating would be subinvestment-grade. You don't think it's worthwhile getting a bit more cash on the balance sheet for a rainy day?

Jevan, you want...

I might take that one.

Yes, take that one.

Yes. I might take that one. Thanks. Yes, I guess in the context of the transaction to sell down our investment in Viva Energy REIT, we released about $680 million in after-tax proceeds. And what we've announced today is a cash return of $530 million. The $50 million buyback that we announced previously, we expect to continue. And then there's another $100 million, which we've retained at this stage. And while the overall intention is still to return all of the proceeds, we'll have some flexibility with respect to that $100 million. So there is some cash on the balance sheet. I think, Daniel, when you look at the capital structure, we're pretty heavily net cash at the moment. And even after returning the proceeds, we'll have very little net debt, almost none, and it's USD 700 million facility in place. So quite a lot of flexibility in the balance sheet. And I think having a fairly good understanding of the current environment and the different scenarios that could play out, feel comfortable at this time to return those proceeds. I think, too, when you talk about the decision that the credit rating agency made, there's obviously a number of factors that go into that, consideration of our leases, the way you think about the Alliance model. And also the fact that from an efficiency perspective, we've got a very low net debt. And so a combination of all those things and the way we think about those. And in terms of our capital structure, give us confidence to return the proceeds at this time. Noting, particularly that the alternative use they're not -- the cash not earning a lot of money at the moment, sitting in the bank, and interest rates is obviously pretty low, as you know.

There are no further telephone questions at this time. I'll now hand back to Mr. Wyatt.

Well, thanks again for joining us this morning. Obviously, the results were largely in line with what we preguided in June, with the exception of refining. But I think reflecting back on the first half, given the uncertainty in the challenging environment. Our total -- our overall business has performed really well, particularly, obviously, our nonrefining businesses. So as we've discussed, some really great resilience within Commercial, which I think continue to reflect -- demonstrate the real value that's in our -- in the diversity of that business. And obviously, yes, having now full control over our retail pricing in our Retail business has really helped us to manage the overall volume margin mix through the first half, which has redemonstrated the benefit and the strength of that strategic decision we took the year before. So very happy with that. We've clearly got some challenges in refining. We're obviously not alone on that front. And it's an area that we're monitoring really closely and assessing the sort of the factors I mentioned before on the call to determine the right way forward. But we're very -- we've invested heavily in refining. We're very committed to it, and we will work hard to find -- to get confident about the way forward. But at the same time, obviously, the losses in the first half are significant and we can't support those for a long time, so we need to continue to monitor and take action as appropriate. But we'll continue to keep you informed on that as we have done. We'll keep the updates on refining performance happening each month. And keep you abreast of developments in that area because it's obviously quite a fluid and changing environment. But otherwise, overall, very pleased with performance. And very pleased to be in a position now to have the confidence to be able to return the proceeds from the sale of Viva Energy REIT to investors as well. And obviously, we'll progress that over the next couple of months. So thanks again. Thanks to all of you, and I look forward to talking to you all again in the future.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.