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

Thank you for standing by, and welcome to the Viva Energy Australia FY 2020 Unaudited Financial Guidance. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Wyatt, CEO. Please go ahead.

Good morning, and thank you all for joining us today to discuss our FY 2020 unaudited financial guidance. My name is Scott Wyatt, Chief Executive Officer of Viva Energy. And on the call with me today is Jevan Bouzo, our Chief Financial Officer. I know this is the last Friday before the holiday season, so I'll try and keep my opening remarks as brief as possible and get to your questions. Given the significant disruptions to our business from the response to COVID-19, I'm very pleased with how the business has performed this year and in the way our people have responded to the challenges we faced. The results we've got today reflect the strength and diversity of our various businesses as well as the decisions that we've taken through the year. While both the retail and commercial businesses were naturally impacted by the state home and border restrictions that were in place to varying degrees through the year, we've delivered some exceptional results in these parts of our businesses with earnings from our nonrefining business is expected to grow by around 14% over 2019. This is a notable result given the circumstances we faced driven by an improvement in retail fuel margins, strong performances in our nonaviation commercial businesses and swift action to reduce operating costs and exposures. Our diesel sales, in particular, are up approximately 2% on last year, reflecting a particularly strong agricultural sector and continued commercial activity across the country despite the impacts of the pandemic. Our specialty businesses, including marine, bitumen and chemicals have also all performed well. With Australia entering a more COVID normal period, our focus is now very much on recovery. Our retail business is recovering quickly following the relaxation of state home restrictions across the country. With our retail Alliance channel reaching 61.9 million liters per week in November. Aviation sales demand is also expected to begin recovering as domestic travel resumes. And while international sales will naturally take longer, our business is well positioned to service this market as growth returns in the year ahead. The refining sector, of course, has been heavily impacted by weakness in both domestic and global demand for oil products, and we have operated for a large part of the year with units under maintenance as part of our response to weak market demand. We're very pleased to have completed this work and begin returning to normal production over recent weeks. As we return to normal operations, the Geelong refining margin has lifted to around USD 5 a barrel in November, and we welcome the commencement of the federal government's interim refining production payment, which was announced earlier this week. This payment provides critical and immediate support next year, while we progress the discussions with the federal government on the design and implementation of a long-term fuel security package that we expect will support the recovery and improve the long-term viability of this part of our business. Let me now hand over to Jevan, who will discuss our key financials in more detail.

Thanks, Scott. For the full year 2020, we expect total sales volumes to be approximately 12.25 billion to 13 -- to 12.35 billion liters. It is down approximately 11.5% from 2019, with the majority of the volume loss a result of COVID-19 impacts on retail and aviation volumes. We expect the underlying retail EBITDA RC to be approximately $660 million to $670 million from 2020. At the start of this year, prior to COVID-19, the business had achieved strong sales growth in our key Alliance channel with several weeks above 70 million liters. At the height of travel and state home restrictions across Australia, we saw Alliance volumes fall below 40 million liters per week back in April, and volumes have steadily recovered with Alliance volumes in October and November achieving 54.9 million and 61.7 million liters per week. We've seen strong industry retail fuel margins during the year, which helped to offset the volume loss and recover from a challenging 2019. For commercial, we estimate the underlying EBITDA RC to be approximately $235.5 million to $240.5 million for 2020. Commercial sales volumes, excluding aviation, have remained fairly resilient and are down approximately 3% compared with the same period last year. The largest impact to our commercial business has been decline in aviation sales following COVID-19, and our marine business has performed well in 2020 despite the temporary suspension of the cruise season in Australia, which typically runs from around November to March. Our resource, transport and specialties businesses have continued to deliver despite some weaker demand from the coal sector in the third quarter this year, and we've worked closely with our customers to manage credit exposure and experienced minimal bad debts during the year. We expect the underlying supply, corporate and overheads EBITDA RC to be approximately minus $302.5 million to minus $297.5 million for 2020. The decrease relative to 2019 is largely due to lower sales volumes and improvements in demurrage and ocean freight costs. It also reflects lower corporate costs and an early focus on costs across all parts of our business to help mitigate impacts of COVID-19. The underlying refining EBITDA RC is expected to be approximately minus $99 million to minus $89 million for 2020. The expected EBITDA for refining assumes an intake of 3.4 million barrels and an actual GRM of USD 4.80 per barrel for December 2020. The actual GRM for November year-to-date was USD 2.90 per barrel with crude intake of 31.6 million barrels. At the group level, we expect underlying EBITDA RC to be approximately $492 million to $522 million. And the underlying NPAT on a replacement cost basis is expected to be approximately minus $47 million to minus $17 million. The NPAT result is expected to be impacted by unfavorable movements in FX and oil derivatives, which are typically noncash in nature. Our capital expenditure has been a big part of our strong cost focus this year, and we expect it to be approximately $160 million to $165 million, including Geelong's manager maintenance CapEx. This is well below the initial guidance range of $250 million to $300 million at the start of the year. Despite a challenging year, we completed the sell-down of Viva Energy rates and I'm pleased that we were able to return the majority of proceeds to shareholders. This year, we've returned $591.6 million to shareholders through a mix of capital return, dividends and on-market buyback. And we're committed to returning the remaining $100 million of proceeds. I'll now hand back to Scott to wrap up before we move to questions.

Thanks, Jevan. As mentioned earlier, I believe the company has performed well this year under some very difficult circumstances. And in the face of declining sales, we have achieved material earnings growth in our nonrefining segments, completed the major maintenance event at Geelong at lower cost to preserve capital and maintained a strong focus on capital management, which as Jevan just mentioned, has allowed us to return the majority of the proceeds of our stake in Viva Energy REIT to our investors. Our balance sheet remains strong, and we're very well placed to benefit from recoveries that we're beginning to see in the retail and commercial markets. Refining remains a challenge, but we are pleased with the commitments that the government has made to provide both interim and long-term support to the sector. Looking forward, we have made some good progress on the development of our energy hub, and we're excited about moving forward with the LNG regasification project as the first priority. The partners we announced last week are high quality and will bring considerable experience and capability to this and other projects. Overall, we finished the year in good shape, and we're very much looking forward to the year ahead. Let me now hand over to questions.

[Operator Instructions] Your first question comes from David Errington with Bank of America.

Scott, I'm going to lead off a couple of questions on refining. Basically trying to understand your standpoint here. Clearly, BP have exited. Ampol's giving signals that they're not as committed. You seem to be getting more of a commitment that you are working closely with the government. First question, what happens if you are the last man standing in refining? Is that an advantage or is that a disadvantage? And can you give us an indication, probably, Jevan, this is a question for you. For the next 3 to 4 years, what the capital requirements will be facing Geelong, so as that we can get an idea of what the cash commitment will be if you commit to refining? What cash outlays will you be required to commit to, excluding government packages, for CapEx to stay in business, please? That's the first part of the question.

Thanks, David. Thanks for the quick -- Thanks for the questions. Look, I think in terms of refining, I mean I think we've been pretty consistent all the way through that there are clearly always 2 options for refining, and one is to, obviously, continue on and refine, and the other one is to convert to a terminal. I think both of them are viable outcomes for our business and the road to either scenario's robust. But given the contribution that refining can and has made historically, and obviously, the costs associated with the conversion, if we're able to find -- see a pathway and see a future where the refining business is robust and is able to generate a minimum of -- generate a minimum return and cash -- be cash positive, including the ongoing investments that required, then that was always our preference to do that. And that provides the opportunity to, obviously, in a segment of the sort of more -- a top of the cycle, part of the refining cycle for refining to be a material contributor to the business. And so the main objective was to make sure it's not a material drain to the business going forward. And so that's connected to all the discussions that we've been having with government about the future of the sector. And I guess what we've said this week is that the interim payment is good. I think it needs to be remembered it is just an interim payment, the first 6 months, but it provides immediate support to us for next year, which obviously, in addition to returning the refinery to full production gives us more space to continue the conversations with government and land the design and implementation of the long-term package. And I think based on how that's progressing and the public commitments that the government has made in the way it's shaping up from a design perspective, we do feel somewhat optimistic that, that ultimately provide a framework for us to get confident about the long-term viability of the sector and obviously head down that pathway. So that's probably a bit why we are relatively positive about retaining refining, and it is largely about returning that optionality for it to be a significant contributor in the future. So hope that answers your question, David.

Well, yes and no, because sort of like, there are so many variables. Let's hit off with the CapEx required -- the government requirements because you've done a good job delaying CapEx this year. But what CapEx could the company be committed to for the next 3 to 4 years to stay with what you say is a normal production profile? What CapEx would you be required to make? Because your EBITDA at the moment, you're losing $100 million, but you probably, at breakeven if -- at what, $5 or $6. What CapEx would you have to be required to? So I'm trying to work out what your cash flow is going to look like in refining and what level of government assistance will you need just to breakeven?

So maybe give you an idea of the CapEx profile. David, I'll do it by talking a little bit more to the historical CapEx and the sort of time frames of the major maintenance events. And typically, if you look at the past few years, our underlying CapEx for running the plant has been in the range of $50 million to $60 million a year and 2 major maintenance events, which occur over and above that. The first is the RCCU, the unit that we undertook work on this year. And if you think about our original guidance at the start of the year, we guided to $110 million to $140 million. And that's the typical cost of that sort of event and it would occur on a 4-year cycle. And maybe -- we've completed that would be due again in 2024. And we did that in a different way this year, given the challenges, and we moved a little bit of the scope into next year. And if you recall from previous announcements, that was the HFA, and it was around $35 million worth of that scope. The other item is our crude distillation unit, which will last in 2015. It's on a 6-, 7-year cycle. So on that math, you'd be thinking around 2022. And historically, that's cost around $75 million.

So you've got $75 million for every 6 years, and say $140 million for every 4. So you're talking roughly on a sustainable basis. You're talking, on a sustainable basis, $100 million of CapEx every year. Every year on a through-the-cycle type CapEx year, $100 million. And at the moment, you're losing money. I just don't see even a government -- and then you've got your sulphur facility. I just don't see how refining can be seen to be a viable shareholder value-accretive proposition there irrespective -- unless the government is prepared to hand out $100 million, $150 million cash to you.

Yes. I think -- I mean, that's obviously -- that's the question that we have to ask ourselves as we assess how we look to the future, David. And the future is a combination of how we see refining margins tracking, how we see the Geelong performing through that time. And obviously, the capital requirements we've got over the next few years as well, which Jevan just set out. And we would not continue refining unless we could become confident that we see the future where the earnings from refining, together with the package that we -- that the government provides is sufficient to cover all of that cash and generate cash positive cash contribution to the business. And I guess what I mean is we have some confidence based on those factors and how things are tracking that we can see a way that we can see the future where that can be delivered. Otherwise, clearly, it makes no sense. Now we will always have -- we'll always come back and review this every time we face up to a significant capital investment, as we always have done. And obviously, the next big material one will be the major maintenance event we did this year, which will next fall in 2024. And so certainly, we'll be looking at that investment when we come to it. And at that point, we'll also obviously have to potentially make the investment around the low sulfur gasoline as well. So those terms still have to be funded. And that, I'm absolutely sure, will continue to be a conversation with government over the next few years as well once we get past this initial long-term support package.

But you didn't answer -- I'm sorry to take one more, but this is -- you didn't answer, if you were the last man standing, is that an advantage or disadvantage? And sorry, that's my last question even. I just wanted to make -- if you -- because BP is closing Perth. Will you need to beef up the infrastructure in Perth to protect that market? Or if you had swaps of arrangements?

Yes, look. I mean closures of refineries naturally changes the various supply arrangements that we have around the country, potentially. They may well continue as they are today as well, but potentially it changes. And so as it evolves, we'll continue to assess that. I mean those -- the potential for refinery closure is not new. That's something that we have -- we always take into consideration as we develop our supply chain. So I feel like that's well in hand, David. And we don't see any risk to being unable to continue to supply our customers in Perth or in any market, to be perfectly honest.

Your next question is from Shaun Cousins with JPMorgan.

Just a question in regards to JobKeeper payments. I think, in the first half, you received around $8.8 million. Did you receive the second -- a similar amount in the second half? Is that how we should think about it? Or does your guidance actually incorporate a greater amount just in that you qualified for JobKeeper too, so to speak, in terms of the quarter end in December, please?

Thanks, Shaun. I'll take that one. Yes, you're right, we did qualify for some JobKeeper through the period, and that was certainly some welcome support, and we've used that to support the refinery given the challenges that we've had this year primarily. The $8.8 million we received in the first half is similar to the amount that we'll receive in the second half given the program and the major part of the program largely straddles the middle of the year. There's probably a little bit of timing of qualification of different entities within the program. That means for the second half, it might be a little bit higher, but roughly in the same ballpark.

Got you. And then maybe just on Jet, can you sort of indicate what proportion of your jet volumes are domestic and what is international just as you think about how you place for a recovery? I think Ampol made the point that was 75% international. Maybe sort of how do you think around how do you compare there, please?

Yes. I think, Shaun, we've been a little bit more balanced to domestic and international and certainly well placed, I think, to benefit from some recovery in domestic travel. And I think the other part of our aviation business is the regional aviation business, which has performed pretty well through this period, and that's certainly helped customers handle the impacts that we've seen over the course of the year.

Great. And just sort of finally, if you think about sort of the Coles Express sort of Alliance volumes, just how should we think about moderating, I guess, for the commercial activity in the back end of December? What would it boost from driving holidays and generally sort of increased mobility? Should we anticipate that the volumes in the month of December could actually be a little higher than where you are in November? Or the reduction in that commercial sort of business activity just to sort of moderate volumes there seems don't get as much of a kick, please?

I think it's a possibility, Shaun. Clearly, it's -- this is an unchartered territory for us. So we'll have to wait -- obviously, we'll have to wait and see. But as you would imagine, we've got a lot more domestic travel having -- would normally be the case pre-COVID. So we expect it would probably potentially provide an uplift to retail. I mean I know it is outside the ag season, but the ag season has generally been very strong this year as well. It still continues. Today, there's another uplift. And I think [indiscernible] holidays arrives. So yes, I think we potentially see -- we continue to see a strong sales in December and again with border closures, which is obviously a topic at the moment. But in aviation, domestic travel is strong through December 30, end of the year and early next year.

Your next question comes from Michael Simotas with Jefferies.

The first question for me is on the Coles Alliance volumes. Obviously, December is a bit of an unknown, but October, 61.7 million liters, it's improving nicely, but it's still 12% down on the 70 million pre-COVID peak. Looking at the industry data, it doesn't look like the industry is down as much as that, and you had some pretty good market share momentum pre-COVID. Can you just sort of talk to how you think of bearing relative to the market? And maybe you can touch on your Melbourne metro exposure because that may have been a bit of a disadvantage for you as well.

Yes. I mean I think that's -- I mean I actually think the retail business, collectively, is not just the Alliance, but certainly, the Alliance is a good read. It has actually recovered and responded very quickly as restrictions are relaxed, and we're seeing that around the country, and we certainly saw that in Victoria. And -- but as you say, Michael, we have a high weighting to Victoria just because of our network, and that's where investment has been made over the years. So the restrictions in Victoria have impacted our retail business probably more than the rest of the market for that reason, so -- and then the recovery is not immediate. It does take time, but it has recovered -- has responded and recovered well in Victoria. And -- but yes, that's it. So we're pleased with how that's traveling. You've still got to remember, there is an impact -- border closures does have an impact on retail demand. Obviously, that's improving as they come down, and there's still a lot of people in the major cities that are not traveling to and from the office. Now that -- it's not all cars because that's obviously public transport as well, but that's another factor that's sitting behind the retail volume. So overall, the way sales is about to recover and recovering back towards pre-COVID levels, I think it's been very pleasing. And obviously, behind that is a continuing strong retail margin environment as well, which has been very supportive of the earnings and continues to be the case.

Yes. Okay. So are you pretty confident that you can get back to that pre-COVID peak when the market does fully recover, which hopefully will be soon?

Yes. I mean when you get -- I don't think we've lost any ground at all through this year, through COVID, Michael. In fact, I think, if anything, our networks performed very well. You can see that in the convenience store sales that Coles have released to the market during their releases. I think it really -- the network has actually been very resilient as well. So -- and we've continued to progress -- maintain our pricing positioning in market, continue to progress our broader marketing strategies. And I think we've held ground pretty well. And once the market returns to whatever COVID normal looks like, we should be able to pick up where we left off at the beginning of this -- beginning of the year.

Okay. The second question from me is on marine. So 2020 has ended up -- well, haven't got finished, but it looks like it'll end up being a pretty good outcome given what's happened with the crude sector at the back end of the year. You had very good cruise season early in 2020. How should we think about marine heading into 2021? How material is cruise for your earnings? Because, presumably, the cruise part of the business is going to be well down in first half '21 versus first half '20.

Yes, sure. I mean, you see those impacts in our 2020 results already, Michael. And well, cruise, I think, it's a nice part of our business, and it's an area that we certainly like to operate in. It's not overly material in the context of our total commercial business. And the impacts that we've seen through 2020 have been largely aviation-driven. While there's been a little bit of impact from the lack of cruise business, other areas in commercial, I think, have almost made up for that in different ways. And so we'll see how that plays out, obviously, through the first half of 2021. We're not expecting a cruise season but towards the end of the year, there's still a possibility that the cruising will return. And we'll be well placed to take advantage of that when it does come back.

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

Sort of my first question was on the hedging losses in FX and oil. Can you maybe just explain a bit more about your policy there, where -- if it's normal this year due to COVID and all the disruption in the oil market, and how it sort of translates through the cash losses as well, please?

Yes, sure. I can cover that, Dan. I think, we saw in the first half -- and maybe to talk to those numbers because you have a full P&L picture there, an inventory loss and partially offsetting FX and oil derivative gain. I would say, too, that those inventory losses and gains in FX didn't necessarily flow through to have an overly material impact on cash, and something that we've done pretty actively as a business over time is manage our working capital position in the context of payables, stock levels, inventory valuation and also receivables to ensure that, on a net basis, we're driving a pretty sensible borrowings and net debt position. And so the NPAT in this half with the run-up in FX rates, the Aussie and U.S. dollar has driven a loss relative to the gain in the first half, and that impacts the underlying NPAT result on the way we report. It's not necessarily an impact to cash, and there'll be some, no doubt, offsets in inventory gains and losses in working capital, and we'll be working to manage to a sensible net debt position at the end of the year.

Okay. A bit of work there, but it sounds good. And I was wondering maybe you might be a bit ambitious, but the refining, something else on the papers reported, initially as longer term, being $1.15 a liter, and interim was $0.01. Just curious in the first part of the question, whether you can elaborate on why that $0.01 was chosen and whether that's a read-through to what it might be in the future for the more permanent production payment? And secondly, are there any other alternative structures being considered by the government sort of fixed or variable amount, top ups, that sort of thing? And third part of the question will be, is it going to be an import tariff or at the pump?

Yes. I think all good questions. Daniel, I think I said earlier on, I think it is really important to remember that what's been put in place is an interim refining production payment. It's designed to provide some immediate support to the sector, while the actual design implementation, the long-term package is completed. So I think it's important to wait until all that's in place. And obviously, there's been a number of different models that could be considered. And remember also, there's -- the payment's only one part of it. The way it gets implemented in terms of how the funding arrangements are in place can also have a material impact on the benefit for refineries and the application of the compulsory stockholding obligations also is a part to play as well. So I think once that's -- those are the elements that are being worked on, and how they all come together and how they work will ultimately determine what value we ascribe to the fuel security package. And obviously, that's a material part of the long-term viability of the sector and one of the considerations that we need to make. But -- and as I said earlier, we're pleased with how -- the announcements that they made to date. The commitment from the Minister of the Morrison government is very clear to the sector and obviously, getting some immediate relief is really help -- very, very helpful to obviously improve the outlook in the short term, but also give us some time to land and finalize all those design principles.

Okay. You don't want to give specifics then on where it might go. But can you maybe just confirm that there's a lot more things on the table than just a straight $1.15 a liter subsidy? Is there other things being considered too?

Yes. I mean as I said, all those elements are quite complex in their own way. And so -- and obviously, it's not -- we're not -- it's not in our control. Unless, it's been designed by the department, and we're providing input to that. So it's hard for us to be definitive on what -- where we think this is going to end up other than what I can say is that the engagement is solid. It's quality. And I think there's a genuine commitment to find a solution that genuinely supports the long-term viability of the sector. And that drives, I guess, relatively confident position that we've taken in the market today, along with our own views around how Geelong long is likely to perform and the refining margin outlook for Geelong as well.

And then interim subsidy is to be shed amongst the remaining refineries. So one shuts down in interim, you get more?

I think that's -- as we understand, it's a part of -- that's one of the design principles on the interim production payment and obviously -- but obviously, at this point in time, no one's made any indications that they're going to shut during that period.

Sure, sure. Okay. You indicated you're going to keep the -- sorry to press the point, but even keep interim subsidy and you need to stay open and indicate your statement until 30th of June to get it. So you probably can't announce that you want it to open before the 30th of June, correct, even though you're trying to give the market a bit of guidance on that -- in the first half?

Yes. I think we've said -- yes, that was, I guess, a natural condition of receiving the payment. We're confident enough in the first half of next year. And in terms of being able to make that commitment based on how we're having -- obviously having a refinery bucket for production is helpful. That has driven some improvement in refining margins, which takes -- helps to significantly minimize the losses that we've experienced this year. We've managed capital next year. We, obviously -- this year was a heavy capital period for the refinery with the major maintenance event. And that's behind us now and we're managing capital in an appropriate way next year to give us the best opportunity to stay cash positive in refining while we work through the rest of the detail. So we feel fairly -- we did feel very confident about the next 6 months. And I said before, relatively confident around how the discussions are going about the longer-term outlook as well. So...

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

Thanks again for joining us today. I might just -- I said before in my closing remarks and introduction, I do believe the company has performed well. This year has been obviously a very difficult year, not just for us, but a lot of businesses, and having a significant decline in sales is obviously quite a challenge. But that aside, as you can see in the results of our nonrefining business, we've performed extremely well. It's quite an achievement, I think, to deliver year-on-year earnings improvement in our core marketing businesses and continue to grow those. And that obviously sets us up really well as we head into 2021 to continue to build on that. Yes, refining has clearly been a significant drag on the results, and obviously, something that absolutely has to get arrested and corrected. We've worked hard on that. As I've said through the call and answered the questions, it's been, I think, a tremendous way to finish the year having demand back in Victoria and having a refinery back to a more normal operating mode that has had a material improvement in the performance of the refinery. And we take, as I have said quite comfort -- from the discussions that we're having with the government, that still has -- obviously still has to play out, but we genuinely feel it's heading in the right direction. So we'll continue to keep you informed. Thank you for joining us. Again, thank you for all your support through the year. I wish you and your families a very safe and happy festive season and look forward to talking to you all when we release our final results in February.

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