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

Ladies and gentlemen, good morning. Welcome to this extraordinary General Meeting of Viva Energy called to consider resolutions to return capital to shareholders and to consolidate our ordinary share capital. Robert Hill is my name. I'm Chairman of Viva Energy. And it's now just after 11:00 a.m. Australian Eastern Standard Time. We have a quorum present, and I declare this general meeting of Viva Energy Group Limited open. Thank you for joining us today at this virtual meeting, which has been conducted entirely online. We made a decision to hold the event in this way due to the continuing restrictions on gatherings and travel as a result of the COVID-19 pandemic. I'd like to begin by acknowledging the traditional custodians of country throughout Australia, and I pay my respects to the elders past and present. Also, we should take a few minutes to run through some procedural matters. If we experience technical issues today that result in a number of members being unable to reasonably participate, the meeting will be adjourned and we'll reconvene at 3:00 p.m. Australian Eastern Standard Time today. If the technical issues are isolated to my Adelaide location, then I nominate Scott Wyatt, who's present in Melbourne, to assume the chair and adjourn the meeting. In the event that we take steps to adjourn the meeting, we'll make an announcement to the ASX with all necessary details. Voting on all items of business today will be carried out by way of a poll. Shareholders had the option of casting their vote before the meeting or appointing a proxy to do so on their behalf. If you haven't done so, you can vote at today's meeting online. You can do so at any time during the meeting starting from now as the polls are now open for voting. Voting will close shortly after the end of the meeting. [Operator Instructions] As I mentioned, I'm coming to you from Adelaide. We have joining us virtually from around Australia and Singapore the rest of your directors; our CFO, Jevan Bouzo; and Julia Kagan, our Company Secretary. I'll quickly introduce your Board of Directors: Scott Wyatt, Chief Executive Officer and Managing Director; Jane McAloon, an independent Nonexecutive Director and Chair of our Sustainability Committee; Sarah Ryan, an independent Nonexecutive Director and Chair of our Audit and Risk Committee; Arnoud De Meyer, an independent Nonexecutive Director and Chair of the Investment Committee; and Dat Duong, Nonexecutive Director. Dat is Head of Investments at Vitol in Asia Pacific. And we have joining us from Singapore, Hui Meng Kho, Nonexecutive Director. As we announced yesterday, Hui Meng will step down as a director, and his last day with us as a member of the Board will be today. Hui Meng has made a tremendous contribution to our business and to our Board these last 6 years since the Vitol Investment Partnership acquired Shell's downstream business in 2014 and started our journey to where we are today: a leading energy company listed on the Australian Stock Exchange. On behalf of the Board, I thank Hui Meng for his contribution and counsel and wish him every success in his future endeavors. We also announced that Mike Muller will join our Board when Hui Meng departs. Mike has extensive experience in the oil and gas industry as a former Shell executive, and we know that Mike will make a strong contribution to our Board. I will now move to my remarks on the business. Earlier this year, we completed a strategic review of our investment in Waypoint REIT, which at the time was called Viva Energy REIT. The Board determined that an equity interest in a real estate trust was not a core asset for us, and this holding did not form part of the company's long-term strategy. We determined that it would be in the best interest of our shareholders to sell our 35.5% interest and return the proceeds to shareholders. We subsequently sold the holding in February 2020 at a good price for a total of $734 million, and we realized net after-tax proceeds of $680 million. At the time of the divestment, we announced our intention to return all $680 million of the net after-tax proceeds to shareholders. Though we are no longer an investor in the REIT, the vehicle owns a substantial portion of our retail service station network, and we continue to enjoy a strong relationship with the REIT as their key tenant. Shortly after divesting our interest in the REIT, the impacts of the COVID-19 pandemic and the measures taken by governments to manage the health crisis began to escalate in Australia. The fast and evolving pandemic environment created unprecedented uncertainty for the broader economy and for our business. We considered it an appropriate precaution at the time to defer the return of the divestment proceeds until the scope of the impacts of the pandemic and our ability to respond appropriately were made clear to us. Since that time, we have taken steps to manage the crisis, including reducing our capital expenditure programs this year, restructuring our major maintenance program at the refinery and taking appropriate operational steps at the refinery and in our aviation business to respond to the new demand environment. Our balance sheet remains strong. And we have delivered very strong performance through the COVID-19 crisis in our non-refining businesses. Our refining business remains challenging, and Scott will talk to you more about that shortly. With the passing of time, we have a better understanding of the scope and impact of the pandemic that it can have on our business and our own ability to respond appropriately. This gave us confidence to progress the return of the divestment proceeds, albeit cautiously. In June of this year, we commenced an on-market buyback program with an initial tranche targeting up to $50 million. We purchased approximately $18 million in June and early July under that program before we paused the buyback temporarily in the lead-up to our half year results. We expect to resume our on-market buyback after the capital management initiative that we have here to discuss today is implemented. In August 2020, this year, we announced that we will return $530 million to shareholders through a capital return of approximately $415 million and a special dividend of approximately $115 million. This amounts to a capital return of $0.2146 per share and a special dividend of $0.0594 per share. We also announced that as part of this capital management initiative, we're proposing to undertake an equal and proportionate share consolidation of 0.84 shares for every 1 share currently held. This means that every 25 shares currently on issue will convert to 21 shares. The capital return and special dividend are due to be paid on October 13 of this year, and our shares are due to start trading on a consolidated basis on 8th of October 2020. We're here today to seek the approval of shareholders to the capital return component of the announced capital management program and the share consolidation. The special dividend does not require shareholder approval. With $580 million of the divestment proceeds now proposed to be distributed through the announced on-market buyback, capital return and special dividend, there is $100 million remaining to be returned in due course. We're considering the most appropriate timing and method of returning this last portion of the proceeds, and we will inform the market about this when we have made a decision. I'll now ask Scott to say a few words on the company's performance.

Thank you, Robert. As Robert has mentioned, we've taken steps to make our business more resilient to the impacts of the pandemic, and most parts of our business have performed very well through this time. I am particularly proud of the way in which our employees have responded to the challenge with continued strong safety and operational performance and a willingness to meet the challenges head on while continuing to deliver secure fuel supply to the country. For the first half of this year, we announced a very strong performance in our non-refining business. The non-refining underlying EBITDA on a replacement cost basis was up 14% on the same period last year at $319 million. This result reflects robust sales performance in non-aviation commercial sectors and improved retail fuel margins compared to the same period last year. We are also seeing some positive signs of recovery in our Alliance channel, with volumes averaging above 50 million liters per week since June 2020. We have spoken publicly about the challenges in our refining business, which has been significantly impacted in 2020 by weaker regional refining margins and operational changes needed to respond to the lower demand environment in the current crisis. More broadly, refining in Australia has been under pressure with an oversupply of production from large-scale Asian refineries and lower fuel demand growth, each of which have significantly impacted Australian refining margins. The impacts of COVID-19 this year have further worsened conditions, and there is a risk that refining margins are slow to recover given the extent of fuel demand reductions and broader impacts on global economies. Geelong Refinery has not been immune to these impacts. The federal government's recent announcements acknowledge the importance of the refining sector to Australia's energy security. The range of reforms, whilst still requiring significant detail to be confirmed, could provide important long-term support for the refining sector. The timing and detail of such reforms are important, and we will continue to work with the federal government on this proposed package. Notwithstanding, we will continue to assess the viability of the Geelong refining operations and expect to provide an update on these matters in our September 2020 quarter market update due to be released in October. Despite the challenges presented at the refinery, for the reasons that Robert outlined today, we believe that it remains the appropriate time to return the divestment proceeds to our shareholders through the various mechanisms that Robert talked about. Our decision to return the cash reflects that we have a very good understanding of the COVID-19 impacts to the business, and our balance sheet is strong and will remain robust after the return of the proceeds. I thank you for your continued support and hand back to Robert who will take us through the formal business of the meeting.

Thank you, Scott. I'll now proceed with the formal business of the meeting. I'll step through the resolutions before the meeting today. We will then address your questions, both the questions received in the lead-up to today's meeting as well as the questions submitted online during the course of the meeting. During the meeting, we will display the proxy votes and the direct votes received in advance of the meeting. Where I, as Chairman of the meeting, have been nominated as a shareholder's proxy, I intend to vote all undirected and available proxies in favor of each resolution. I remind you that the polls are now open for voting. You can submit your vote at any time, and you will have some time after the question-and-answer session of our meeting to complete your voting. The outcome of today's meeting, including the final vote numbers, will be released on the ASX after the conclusion of today's meeting. The company is proposing to return capital to shareholders through a cash payment of $0.2146 per share as an equal reduction in capital. This will distribute an aggregate amount of approximately $415.1 million to shareholders. As required by Section 256C(1) of the Corporations Act and the company's constitution, shareholders' approval is being sought today to return capital as contemplated by resolution 1. In connection with the capital return, the company is proposing to consolidate Viva Energy's share capital by converting every share into a 0.8 -- into 0.84 shares. This will reduce the overall issued share capital from approximately 1.9 billion shares to 1.6 billion shares. As required by Section 254H of the Corporations Act and the company's constitution, shareholder approval is being sought today to consolidate share capital as contemplated by resolution 2. The proposed share consolidation will only be undertaken if resolution 1 is passed. The Notice of Meeting distributed to shareholders contains the information that shareholders require to make a decision on these 2 resolutions.

Turning now to questions. As the items of business are related, we will take questions on both items of business now. In the lead-up to the meeting, we received a comment from a [ Grant Walker Appleton ]. Mr. [ Appleton ] said, "I am voting against this proposal because the effective share price that relates to the capital return is not a share price which I consider fair value for my Viva shares which are still well below the float price which I bought them at." Mr. [ Appleton ], thank you. In response to your comment, under this proposal, we're returning shareholders the proceeds of the sale of our stake in Waypoint REIT. We're returning those proceeds, as I said, through a combination of a capital return, special dividend, on-market buyback, and there will be a portion to be returned at a later point of time. The price of Viva shares -- energy shares underlies the consolidation factor. However, the share price does not drive the amount of the capital return that we are seeking to make to shareholders. The amount of the capital return is simply reflective of the net after-tax proceeds of the REIT divestment. For the reasons discussed today and outlined in the Notice of Meeting, the Board considers that it is in the best interest of shareholders to return the proceeds. We otherwise continue to address the challenge of improving profitability of the company and ultimately the market -- the value of market shares -- the market value of shares. In relation to online questions that have come in during the course of today's meeting, Julia, are you going to help us with this? I think we've received 2 from Mr. John Whittington.

Thank you, Chairman. Yes, I'll just read out the question. The first question is from John Whittington. Good morning, Mr. Chairman. My name is John Whittington, and I'm a volunteer company monitor for the Australian Shareholders' Association. I have just 2 questions on this item. Firstly, why was a capital return like this not the first option considered once you had received the proceeds of the REIT sale?

So perhaps -- well, the reason was set out in the notice of the meeting. But perhaps I'll ask Jevan Bouzo to reflect on this question.

Thank you, Robert. So when we first announced the intention to return the proceeds to shareholders, our intention was to do so by way of a combination of on-market and off-market buyback program. In the intervening periods and with the finalization of our results for the first half, it became apparent that we won't have sufficient excess available franking credits to be able to undertake an effective off-market buyback for the size and quantum of the return that we're seeking to do. And in looking to optimize the method of returning proceeds to shareholders, the combination of capital return and special dividends with the proportions agreed with the ATO is effectively the next best method of returning proceeds to shareholders.

And the second question, Julia?

Thank you, Chairman. This is again a question from John Whittington. I have noted that a few companies have taken this approach of consolidation following return of capital. However, I'm still at a loss as to the value of all the administration involved for both the company and the shareholders just to make the share prices stay about the same. It seems like a job creation scheme. Could you please outline why it is really necessary in simple terms that a simple retail shareholder such as myself can understand?

Jevan, do you want to have a go at that?

Sure.