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

Thank you for standing by, and welcome to the Viva Energy to acquire OTR Group Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Wyatt, CEO. Please go ahead.

Yes. Hello. Good morning, everybody, and thank you for joining us today to discuss the very exciting announcement. My name is Scott Wyatt, Chief Executive Officer of Viva Energy. And on the call with me today is Carolyn Pedic, Chief Financial Officer; and Jevan Bouzo, our Chief Executive of Convenience and Mobility. Before we begin, I would like to acknowledge the traditional owners of the lands on which we are collectively gathered for this call and pay my respects to their elders past, present and emerging. Now let me begin first on Page 3 of the investor presentation. Today, I'm really pleased to announce that Viva Energy has reached an agreement with Peregrine Corporation to acquire the OTR Group. As you all know, OTR is the leading convenience retailer in South Australia and in my view, is the best convenience retailer in the country and possibly 1 of the best in the world. Over many years, they have built a sophisticated and highly successful convenience software and operating model, which provides the potential to extract considerable earnings from convenience, which are independent and materially greater than the income from fuels. They are genuinely a convenience retailer, which happens to sell fuel rather than a fuel retailer, which happens to sell convenience. This is exactly the vision that we have for our retail fuel and convenience business. Following the acquisition of Coles Express, this will be a transformative acquisition that will accelerate our progress to becoming the leading convenience retailer in the country. It is strategically important, value accretive to our shareholders and will generate significant value and long-term growth. Turning to Slide 4. Over more than 2 decades, Peregrine Corporation owned by the Shahin family has developed OTR to become the leading convenience retailer in South Australia. The business generates over $3 billion of revenue and employ 6,500 people. By innovating and learning from convenience retailers overseas, OTR has developed a convenience offering that has disrupted the fuels business and diversified the fuel and convenience value chain. Today, OTR has become a life hack for Adelaidians and it is the clear industry leader in convenience with more than 2/3 of total earnings coming from convenience sales and a proven platform to grow through further extension into new markets and offers. On average, OTR generated $3.9 million of convenience sales to the store. This is more than double the typical Coles Express, which generally reflects the industry average in this sector. It really does transform the way we think about the fuel and convenience sector and the potential growth that can be achieved if we get the offer and operating model right. OTR truly optimizes convenience. Its always open network offers a range of successful home brands in key categories with an effective and intuitive product layout in store. It is a leader in food, the #1 category in convenience through regular product innovation and testing at its head office in Adelaide. Modern designs and building, formats and fixtures create a welcoming environment, making customers want to stay longer. This will be a critical success factor to attract customers seeking to recharge their electric vehicles in the future. Many stores also contain quick service restaurant operations, which are operated by OTR staff behind the same counter. This brings substantial sales and efficiency benefits. All of these strategic partnerships, wholesale arrangements and franchisee arrangements will transfer to Viva Energy on completion. The OTR acquisition is another really important fit in our strategy to become a leading convenience and mobility business, which we set out on Slide 5. If you recall at our Investor Day in 2021, we detailed our ambition to transform our retail business to a leading convenience and mobility business. The acquisition of the Coles Express convenience business was the first important step in this strategy, taking control of the whole retail business and acquiring the store and retail capability that we need to grow. Today's acquisition is a very critical next step, acquiring proven capability to extend our committed software, moving to quick service restaurants and accelerate our growth plans. Following the completion of this transaction, we intend to extend the OTR offer across the Coles Express network at new stores and begin the transformation of our fuel and convenience business. Now there is a fourth step, which aims to extend the OTR offer even further to support electric vehicle recharging and other new convenience offers. Doing so will create even more reasons for customers to visit us so that we make full use of the potential of our highly valuable retail network. Let me now hand over to Jevan to talk about the transaction in more detail and indeed our strategic rationale.

Thanks, Scott, and thanks, everyone, for joining. It's a fantastic opportunity to talk to you about this acquisition today. I'll talk to some of the metrics on Slide 6, and then I'll move through some of the rest of the pack before handing over to Carolyn. So as you know, we will acquire the OTR Group from Peregrine Corporation for total consideration of $1.15 billion, and it will be funded through a mix of debt and capital issued to the sellers. They were keen to see this happen, and it's fantastic to see that they will have strong alignment with us in the success of the transition and the extension of the offer to our broader network over time. On completion, we'll instantly become the leading convenience and mobility retailer in the country with a clear pathway to grow our convenience business across more than 1,000 stores nationwide. At the outset, it will mean that we grow our convenience earnings from around 30% of gross profit to 50% of gross profit. And I'll talk more about this as we move through some of the slides ahead. By extending the OTR operating model to our network, we'll transform our offer through proven brands, IP, advanced technology platforms and an established back-office capability. Without OTR, we would have had to build these from ground up ourselves with more risk and uncertainty. We'll also create substantial benefits in scale, and I'll talk more of those as we get -- talk more about those as we get to the synergy slides. The acquisition will be EPS accretive on completion, and we've set out a couple of metrics here, around 6% relative to our extraordinary results last year as if we had had Coles Express through that period and around 26% relative to FY '21. And Carolyn will talk more to you about the financial implications shortly. I'll now turn to Slide 7, which sets out in a little bit more detail what we're actually acquiring. The OTR Group includes the OTR retail network of more than 200 stores, the Giftbox and Smokemart network of more than 250 stores and the Mogas and Reliable Petroleum wholesale fuel businesses that are largely based in South Australia. The 2 wholesale fuels businesses, largely supply fuels and lubricants to agricultural customers and on completion will be incorporated into the Liberty Rural division of our commercial business. The Giftbox and Smokemart network of tobacco and vaping products as well as gifts and homewares, unlike OTR, this network has an advanced technology offering with a modern online platform with opportunities to extend into a broader product offer. Once we can please, Yasser, who is the current OTR CEO will stay on to run the existing OTR Group for a period of time and support me in bringing the businesses together. I've known Yasser for some time now. He is the best retailer in the country, and I'm really looking forward to what we'll be able to achieve together. Slide 8 summarizes the strategic rationale. And each of the following slides goes through this in a little more detail, so I'll cover it on a slide-by-slide basis. I'll start by saying there's fantastic cultural alignment across the 2 organizations, the way in which Coles has run the Express business and developed the operating model and practices and focus on customer service over the past 20 years, aligns really well with the mantra and operating focus of the OTR business. Their focus on customer and service and treating their customers like guests when they enter stores gives me a lot of confidence that there'll be strong cultural alignment across the 2 businesses, and we'll really pave a pathway to transition them together successfully. Starting on Slide 9 and the first element of the strategic rationale. Like I mentioned earlier, this transaction will provide a pathway to grow our network to more than 1,000 stores over the next 3 years, backed by a market-leading convenience and mobility offer. In addition to the 700 Coles Express stores and 200 OTR stores, there's a growth pipeline of another 90, which will deliver over the coming years in conjunction with the OTR team. With a large store footprint and a strong growth pipeline, we'll be able to optimize the network, having the best stores in the best locations across the country and with the best convenience offer. Turning to Slide 10. And more importantly, this acquisition really accelerates the extension of our existing Coles Express offer into broader convenience and mobility markets with considerable potential for long-term growth. As I already highlighted, it increases our proportion of non-fuel income from 30% to 50%. And the reason it moves so much is because it generates today the OTR business, more than 70% of gross profit from non-fuel sales with a gross margin of almost 40% of its fuel and convenience network, well in excess of the Coles Express metrics. It's achieved this by diversifying its convenience offer. In South Australia, OTR has become the destination of choice for not only fuel and convenience, but customer missions like coffee, quick meals and groceries. It creates the opportunity for us to grow non-fuel sales across a much larger market set where we currently only have a small position and will create many more reasons for customers to visit our sites. In the bar chart on the right, you can see a range of sectors in which our Coles Express offer doesn't really serve us today. And when we have the opportunity to roll out the broader OTR offer, including the quick service restaurants and a much greater focus on food, it will open up a segment of the market -- many segments of the market that we don't have access to at the moment. Turning to Slide 11. There's a significant opportunity to extend the offer, the technology platforms and the branding suitable to Coles Express stores over the next 5 years. With the OTR model, we'll be beginning to run and operate quick service restaurants across our existing network. And like OTR's current operating model, they'll be fully integrated into the stores and operated by our teams and I can already see a number of opportunities to do that on our Coles Express network today. Together with the largest company owned and controlled network in the country, having a high-quality convenience and QSR offer, we will build a defendable position as demand for traditional fuels declines over time. A welcoming store environment and a wide range of products will also encourage customers to spend more time in our stores. For customers needing to fast charge their EVs, a comfortable store layout will be critical. Not every Coles Express site will be capable of supporting the OTR offer and flagship brand. And so a second store brand will still be required for express format stores in smaller format locations, and we'll continue to work with the team on what this looks like. On Slide 12, I want to cover some of the opportunity we'll capture from this transaction. When we talk about the uplift in earnings we'll be able to achieve, it's important to remember that we'll be bringing 3 businesses together, OTR, Coles Express and Viva Energy's existing retail operations under 1 single operation, taking the most advantaged arrangements from each of the businesses, using procurement scale and consolidating functional support we will deliver considerable savings and efficiencies and these should be thought about in the context of the earnings pre-overheads and the considerable size of overheads that sit within the 3 organizations today. Further, the OTR acquisition avoids the cost of transitional risk of establishing back-office infrastructure to replace the transitional service arrangements that we have in place with Coles Group today. As you may recall, these will run for a couple of years post completion of the Coles Express business and will take considerable time, cost and effort to set up replacement functions, which we'll no longer need to do as we'll be able to transition directly to the OTR store support center. They have proven capability and rather than build a new ERP system for financial transactions, for example, we can utilize their existing ERP system, which is new, fit for purpose and scalable for a large network of this nature. There's also a significant benefit in securing the fuel supply short that comes with the business. And of course, none of this includes the uplift we will see once we roll out the wider OTR model across our Coles Express network, which no doubt will be substantial in time. On Slide 13, I'll talk a little bit to digital and loyalty. We'll be in a strong position to consolidate a wide range of digital and loyalty offers once we bring the businesses together. This will not only support the best digital experience for our customers, but it will also support improvements in sales through cross-selling convenience and fuel products. Through OTR, we can deliver advanced digital experiences more quickly by their leading technology. This includes digital stores, a payments platform and customer feedback tools. By purchasing fuel through the OTR digital platform today, customers receive discounts on fuel and convenience products, including the chance to win a free tank of petrol. Of course, the existing Coles Express and Viva Energy Network also brings a strong set of partnerships and the Shell fleet card offering for commercial customers. I'll now hand over to Carolyn who will explore the financial impact of the transaction in a little more detail.

Thanks, Jevan. So taking up from Jevan I'll turn to Slide 14 and we'll talk through the key financial implications of the transaction. So just to begin, the acquisition will be funded by a new stand-alone term debt facility of AUD 600 million and also capacity in our existing facilities, which are largely undrawn at this point. So ultimately, we'll put longer-term debt facilities in place. So as Jevan has already said, the equity component of the $150 million will be issued to the Shahin family and will be escrowed over a 24-month period. But in order to demonstrate the potential of the acquisition, we've shown the pro forma impacts of the OTR Group sales and earnings for its 12 months period to the 30th of June 2023. So this is based on 6 months of normalized results to the end of calendar '22 and a 6-month forecast to June this year. So on this basis, the OTR Group would add $4.2 billion in sales revenues comprising $2.4 billion in non-fuel sales. Once readily achievable synergies are realized that Jevan touched on already, the OTR Group would add approximately $165 million of EBITDA of which we expect between $15 million and $20 million will go to the commercial and industrial business. This translates into EPS accretion of 6% relative to our record FY '22 results, as Jevan has already highlighted, and we've pro forma-ed the impact of the Coles Express into the base earnings of that calculation. So EPS accretion of 11% assumes an average historical refining contribution on the ground that we have made an extraordinary contribution during the FY '22 year and met a record high refining margin environment. And finally, EPS accretion of 26% is based off our pro forma FY 2021 period, again, including Coles Express as well. Now turning to the balance sheet. In addition to debt and equity, we recognized right-of-use assets and lease liabilities currently estimated at approximately $950 million in relation to the OTR Group. And the full in completion of the acquisition, we expect to remain below our target gearing range of 1 to 1.5x net debt to EBITDA, which I'll explore further on the next slide. Lastly, we expect stamp duty and advisor costs to be in the range of $15 million to $20 million in compliance with the balance of transaction and integration costs to be absorbed in the previously announced transaction and integration costs with the Coles Express acquisition. So this includes removing the Coles Express brand from our existing network. Now turning to Slide 15. As I mentioned, we expect the OTR Group to contribute $165 million in EBITDA on a post-synergy basis. And we anticipate that this will be achieved over a 3-year period. So the table on this slide provides the pro forma profile of the OTR Group against our retail fuels and marketing division. And whilst the vast majority of OTR's earnings will be in the convenience and mobility business, a small compoundable growth in commercial and industrial, as mentioned. The group pro forma profile after synergies is shown on the far right column of this table. For OTR's contribution, it seems approximately $60 million of synergies, largely from marketing, operational and supply chain benefits. And as Jevan highlighted through his discussion before, we think this is a conservative estimate. In the medium to long term, we expect much further upside from earnings, as Jevan has already mentioned as well, from extending the OTR model out to set Coles Express stores, purchasing benefits from our scale is 1 of the largest convenience and mobility retailers and also the development pipeline of new OTR stores of 90 in the pipeline. So the OTR acquisition takes our gearing ratio to between 0.6 and 0.8x net debt to EBITDA, which is below our targeted range. And as always, we remain focused on maintaining capacity for further capital management and acquisition opportunities. Just note, our working capital facility is not included in this target range. So moving to Slide 16 on our investment requirements over the next few years to begin fulfilling our vision. So we expect an additional $10 million to $15 million in annual maintenance CapEx once we take ownership of the OTR stores. So together with Coles Express, this will leave total maintenance CapEx for the convenience and mobility business to approximately $80 million per year. We also expect that the development of the growth pipeline and the extension of the OTR offer to the Coles Express network will in time add $50 million of growth CapEx per year. However, this will, of course, be subject to achieving satisfactory returns. We'll regularly monitor and report on the performance of this rollout. And now with that, I'll hand back to Scott to conclude the presentation.

Thanks, Carolyn. As I began the beginning of this presentation, the acquisition of OTR is a truly transformational step toward our vision to become a convenience retailer that sells fuel rather than fuel retailer with a convenience offering. The acquisition of Coles Express gives us full control over our existing retail network and a highly successful express format offering. The further acquisition of OTR will really help us grow convenience sales across a much larger market, deliver earnings growth and further diversify our earnings base. We are bringing together the best of the Coles Express and OTR businesses to establish a leading convenience retailer in Australia and accelerate our plans to grow in a really attractive convenience market. It's an incredibly exciting time for our business. And on that light, let me open for questions.

[Operator Instructions] Your first question comes from Mark Wiseman with Macquarie.

Congratulations on the deal. I just had a couple of questions. Firstly, are you able to give an indication of how many of the existing Coles Express sites are going to be suitable for the OTR offer. Is there any rough split you're able to provide?

Yes. Thanks for the question, Mark. Look, that's work that we are still to do. We anticipate this a large proportion of sites that are ready, and we'll obviously form the first part wave of sites that will transition across to OTR. Other sites may require redevelopment of stores to provide the right level of foreplay to actually support the broader OTR offer. That will be a bit later. And -- but the other part of this transaction, which is important to draw out is that we -- OTR Group has a pipeline of 90 development sites already secured and I'm very excited about development alongside the Coles Express network we'll see new stores being developed in the OTR format. So it will be -- it will obviously be a multiyear program. There'll be some aspects of network we can get on with quite quickly. And the reason a large portion that gives us confidence about capturing not only the synergies that we touched on, but the broader convenience uplift in our network, and we'll aim to progress that as quickly as we can. But thanks for the question, Mark.

The next question comes from Mark Samter with MST Marquee.

A couple of questions, if I can. The first one, I'll ask this as a negative. I think it's a massive positive probably. I mean, I guess, yes, it's probably embarrassed the whole industry with how much more profitable OTR has been in South Australia than the competitions. To ask it as a negative, what do you think are the challenges of the limitations of rolling out what's been such a successful strategy in South Australia in other states?

Look, I think we have a lot of confidence about the opportunity this presents. And I say that because we're acquiring an enormous amount of capability in terms of running the current offer with Coles Express team that comes across sale, that's not far away that transition. The team here in Adelaide and [indiscernible] I'm here today is an outstanding organization that, as you say, with Yasser's leadership has built up an amazing business. And anyone that's been here will have seen this in action. I mean, it really is a leading offer in Australia. And as I said, I think, in the world. So what we have to get right, obviously, as harnessing that capability across both organizations and extending this in a sensible way across the rest of the network. And let me just address the team here with Yasser, I mean they are so excited about the opportunity to take the OTR brand and offer across the country that I have no doubt that, that synergy will deliver our success. So I can only see upside from here, Mark.

Just to be -- so we're crystal clear about the $60 million of synergies does not assume any benefits of the existing parts from what OTR [indiscernible].

That's all the synergies they expect us to be able to get bringing together 3 retail organizations, capturing the best of all of those in terms of procurement, marketing, operating spend, saving, obviously, a lot of investment is going to be required in setting up convenience or back-office platform to support the Coles Express business. I mean that it's a lot of operational synergies that will come by bringing the businesses together. And beyond that, as you've just pointed out, there's all the uplift that will come from rolling out this convenience offer and achieving the sales uplift that we have clearly -- has really been demonstrated here in South Australia over a long period of time. So we're now going forward not with something that we think is a good idea. We -- something's absolutely proven that we know can deliver result.

I'm not going to surprise you with a question about the balance sheet. Now we've got a CFO, that's not allergic to debt anymore. Clearly, you'd have to argue this is a much more leverageable business and so much more of post Coles Express, post OTR, so much more than the earnings are coming from the really pretty defensive, stable free cash flow generative business. Have we have thoughts about what the right level of the gearing should be post completion of both of the deals?

[indiscernible].

Sorry, Yes, yes, absolutely. I thought you were just making a statement there for a minute, Mark and I was going [indiscernible].

That was the question. What's the right level? And I was joking [indiscernible].

No. Look, I mean at this point, we've got our spatial gearing ratio, and that -- that's where we're at. Obviously, as we move through time, we'll revisit as we look to sort of refinance and reconsider but at this point, we're comfortable with the gearing range with where it's at.

And 1 really quick last question, if I can. Just -- I mean, it certainly looks like Peregrine Corporation is keeping all of the sites. Can we just talk about the duration of the leases that have been signed and how that looks?

I could probably give you a bit of context on that, Mark. They're long-term leases, so somewhat similar to the terms that you would have seen on the initial rate leases of sort of 15 years and beyond with multiple option periods. So a lot of tenure at the sites, and I'm quite confident that we'll be able to have them for a long time to come. I think I would add to some of the comments that Scott made earlier that there's also a number of sites outside of SA that already operate today. And so I don't feel that we're taking a lot of risk on taking an SA model and rolling it out nationally. I think we've already got examples where the sites and the offer and the model is working really effectively in other states. And so it's really just accelerating that and ramping it up in a sensible way.

Awesome. Congrats on the deal.

The next question comes from Daniel Butcher with CLSA.

I just want to follow a little bit on those questions, if I could. First l just want to know how many sites are currently outside in the OTR portfolio. And I just want to sort of ask you -- would they work in Queensland and WA where you have a bigger land format, land is cheaper. They're pretty huge stores with car washes and massive QSR and so forth. Were they working in South Wales and Victoria as well? I believe there was a couple of shadow stations I was having a look at in Lane Cove in Sydney and elsewhere, if I was not mistaken. And I'm just sort of curious how they went there trialing their format in the bigger cities where lands were expensive.

Yes, [indiscernible].

Jevan, do you want to get that?

Yes, happy to talk to that. Thanks. Thanks for the question, Dan. I think it's really interesting, like you comment on the larger format stores in WA and Queensland and other locations. And OTR already has some sites on the ground in WA. I've been around and looked at a lot of our Coles Express sites already. And it's quite interesting that given the historical arrangements with Coles, there's a lot of surplus land at those sites. There's actually a lot of vacant sub tenancies at the moment that lend themselves to either car, automotive workshops or QSR type offers that are vacant, empty and haven't been filled and some quite large formats that I think will really lend themselves to the OTR offer immediately. So I'm quite keen to get the offer in some of the QSR operations into those sites quickly, and there's a lot in that category. When you think about some of the sites on the East Coast to Victoria and New South Wales, there's already a number of OTR sites operating in Victoria and some of the other locations. In total, there's probably about 15 or 20 outside of SA running today and obviously, the pipeline to come and some of the ones you mentioned are right. I think the offer applies equally. When you look at a lot of our sites in Victoria and New South Wales, just given the fact that Shell acquired most of those land locations between 1905 and 1980, the size of land and location, the size of building the ancillary operations that are there today and in many cases, empty or on short-term leases, really do lend themselves to more of a metro format. OTR, like you see in CBD -- in and around CBD Adelaide. And so I think we'll have a really good opportunity to roll that out more actively in big New South Wales, where we've got the largest concentration of metro sites. And we'll see some fantastic uplift from that over time in addition to the earnings that we've touched on today.

All right. Great. As a follow-up on that one. Maybe how much profit doing OTR gets from trading hours in Adelaide, given a little bit of a free kick for half-hours trading versus other states and the sort of factors you're thinking at all?

Yes. All the OTR stores at 24 hours. It's interesting over 1/3 of our Coles Express network is already 24-hour operations and a lot are 18 hours a day, 7 days a week. And so there isn't really a significant gap between trading hours. I guess that supermarkets and other offers tend to close earlier in SA, and they have become known as a bit of a convenience destination. I think that's not due to the trading hours, but due to the style of their offer and the way they serve their customers. Ultimately, they haven't made the locations convenient, then people won't visit them. And I think over time, as we build that brand presence and convenience focus in the rest of the country, people will start to know nationally, the OTR name is synonymous with convenience and making life easy and we'll see that sort of halo effect, I think, on a national scale.

And I could sneak 1 last follow-up just on ACCC issues or approvals. I mean it looks like you've got 33 cocoa stores in Adelaide from my quick Google. Is that right? And do you see any overlap there that might need to be addressed?

There's 43 -- okay, Scott.

No, you go ahead, Jevan.

I was just going to say there's 43 Coles Express operated stores in South Australia and obviously, a smaller number in Metro Adelaide. I expect that there will be a process with the competition regulators to get approval and we'll work through that. But at this stage, I don't expect that to be significant in any way.

Next question comes from Tom Allen with UBS.

Congratulations on the deal. I might start just by following up the last question for Dan. Just on perhaps asking in a different way, if you could share some insight managing those competition concerns with the ACCC. Perhaps considering what you've learned from Ampol's attempted acquisition of the [indiscernible] Petrol business in 2017.

Yes. Look, I mean, I think we -- obviously, there's a process to go through -- has been other processes in the past, everyone's -- every process is a little bit different. This is obviously a business that's predominantly South Australian based. So that's where we expect the focus to be and as Jevan pointed out, it's relatively small network that we have in South Australia that will be part of the focus, and we're pretty confident in the transaction and our ability to progress it. So that's all a bit for the future to be frank that we were feeling like we're in a pretty good place with the deal and to progress it through that process.

Sure, sure. Okay. Maybe just if I can sneak a second one, if you can just -- you mentioned some of the synergies that are out there that you haven't quantified in the numbers today. So there's the earnings uplift per store on OTR compared to Coles Express. How should we think about things like benefits from who buys better in convenience between Coles Express or OTR?

Yes, I can touch on that. Thanks for the question. I think it will be interesting to understand that across the network, no doubt the benefit of the arrangements that we have with Coles Express mean that we've got access to the broader buying power of the Coles Group. And we've got some really good alignment with Coles around growing that wholesale relationship with them. I think we'll have opportunity to look at all businesses. Obviously, Viva from the fuel side, both Coles and OTR from a shop side and bring together the best of all arrangements that each party has. And when you think about the store buying opportunity, I'm sure that Coles have some of the greatest scale and capability in the country. And so being able to leverage that on the buying side, which our arrangements allow for when we start to bring the quality of the customer offering OTR together means that I'm pretty confident we'll be able to deliver significant value across these businesses and hopefully well in excess of what we've talked about today.

Congratulations again.

Your next question comes from Dale Koenders with Barrenjoey.

Firstly, I was hoping you could provide a little bit of help in understanding the $165 million of EBITDA, you obviously called out the synergies that are in that, but how does the remaining $105 million breakdown between, I guess, the larger buckets of fuel shops, Smokemart, cope up net corporate costs, leases, et cetera, just helping us with model, I guess.

Sure. To give you a little bit of context on the high-level numbers. I mean what we've talked about, Dale, is that about 70% of the underlying earnings of the business today come from the OTR petrol and convenience software. We've talked about the number that will move into the commercial business, the $15 million to $20 million of wholesale EBITDA and obviously, the balance of sort of less than 15% or approximately 10% comes from the Giftbox and Smokemart business. So the bulk of our earnings contribution will come from the OTR petrol and convenience business and save for the fuel supply benefits that we should see, the bulk of the earnings uplift that we'll extract from bringing the 3 businesses together will be attributed to the petrol and convenience business. So we'll effectively sit in retail.

And what's sort of the operating cost base that you're inheriting in the depreciation and the lease cost?

So maybe I'll just touch on the sort of operating platform across the businesses, and then Carolyn can give a little bit more context on the other numbers. But when you look at the operating costs platform across OTR, Coles Express and our lever Energy Retail business, it's quite interesting that over the past couple of years, given the growth trajectory that OTR Group has been on, they've invested heavily in their overhead platform. They've got a store support center in Adelaide, which consists of over 550 employees above store. And so quite a considerable head office that has been built on the basis of scaling to a national network of the size and scale that we're talking about building and creating today. And so I think there's a lot in there already that will help us. There's quite a lot in the Coles Express business given the reliance on the broader Coles Group and the transitional services arrangements and there's obviously a level of overhead in our Viva Energy business today. So we haven't given actual figures on that, but I can tell you that those are quite substantial costs. And I'm very confident that we'll be able to avoid standing up a lot of corporate and overhead functions to replace the transitional services costs that we have with Coles by moving a lot of things on to the OTR back office and platform.

Okay. Sorry, with the -- other numbers there?

Can you just remind me what -- which were the other parts of your question?

If you can provide any more clarity on the step-up in operating costs, depreciation and lease costs.

Yes. So I mean, I guess, broadly, operating costs, we won't provide like a full breakdown of that. But just imagine the post synergies, a reasonable level of increase in operating costs, I think you can factor that in.

Yes. To the extent that operating costs go up as a result of running stores under their model and their platform. You'll see that in a measured way as we refit stores and you'll also no doubt see the sales uplift that comes with the broader offer and a broader set of QSR operations. So if you're talking store operating costs, I'm pretty comfortable that, that will wash its face with earnings uplift over time. And outside of that, it's probably rationalization of corporate and overhead costs that will come down.

Yes.

I mean obviously, [ G&A ] and other.

Yes. So I mean G&A, you sort of see broadly, broadly in line with CapEx over time. And I guess from a lease cost perspective, you can probably get a bit of a feel from the estimate that we've put in the proforma balance sheet in the financial statements and the extent of the lives of the leases that Jevan shared earlier.

All that's factored into...

So they're consistent with our earnings, Dale. So it's sort of post lease like you would normally see the Viva Energy underlying EBITDA.

That just trying to help model this? And then also on modeling the CapEx, the growth CapEx stepping up to [ $50 million ]. I assume that's rebranding and refurbishment program to effectively run OTR across the network? And if so, how many years did it run for? And how long it could take to ramp up to that rate?

Yes. The cost of removing the Coles Express brand in the first instance. So meeting our transitional brand obligations under the Coles Express deal is incorporated in the transition costs of $120 million to $140 million that we previously published and reaffirmed. The $50 million a year is really about rolling out the broader convenience offer. And no doubt, those 2 programs will work hand in hand and where there are some sites that lend themselves to the OTR offer immediately will obviously complete the de-branding of Coles Express and a full store refit and implementation of the OTR offer, and that will cross a little bit between the $50 million of CapEx on a per annum basis and the transition and rebrand costs. When you think about the plan to roll out their offer nationally, I think there's a few ways we can fund that. There's obviously opportunities to work with landlords on lease arrangements to fund major refits or refurbs of stores. There's obviously some CapEx which will have the benefit of spending in that $50 million per annum, and we'll monitor that on a case-by-case basis as we start to refit stores and see returns, I think if returns are materially higher than the base case, then there's obviously a compelling cash to continue that rollout and accelerate it, and we'll just track that over time.

Next question is from Naveed Fazal Bawa with Jefferies.

This transaction would increase your exposure to tobacco, including its materially. How comfortable are you operating a stand-alone tobacco business from a social and long-term earnings sustainability perspective?

I'm just going to kick off and try to -- I was just going to say it's a pretty small proportion of earnings. So when you think about the earnings split I touched on before, it's approximately 10% of the underlying business that, that is derived from that business and there's obviously a broader Giftbox, Giftwares and Homewares business in there as well that contributes to its earnings. So from an overall contribution perspective, I don't feel like it's totally material on a company basis. And probably over to you, Scott to make your comments.

Yes. I mean I think having taken back the Coles Express business, it's already a segment that we have obviously taken on as well because tobacco is a reasonably important part of the overall convenience business as it stands today. Acquiring OTR is pretty consistent with that and as part of what we now need to do in terms of running convenience going forward. I think the way I look at it from an ESG point of view, from a social point of view is that it is a product that has consumer demand is a [indiscernible] part of the business. It's really critical that we manage it in a socially responsible way. And certainly, that's how we approach everything that we do in our business and how we will also do with tobacco. And so I think in our hands, it's in a good place, and we'll able to manage it that way and work with regulators on any change that occurs in that industry over time. So we feel very comfortable with it.

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

I was wondering if you could just comment around the terms of Yasser's retention, what's the duration, I guess, is the most important factor to me. And then associated with that, with respect to the rent paid to Peregrine on an ongoing basis, Jevan talked about the duration of the contracts, but can you just talk to the structure of the terms? Are they pretty typical of your other lease contracts with the REIT structures that you put in place, no ramp-ups that are beyond inflation or anything else that we would have seen already?

Yes. Let me talk to Yasser and then I hand over to Carolyn and Jevan to talk about the leases. I mean, I think 1 of the great things about the transaction is that Yasser will stay on board and work with us for the next 2 years and support Jevan in the transition of the business, but also the extension of the OTR offer into the broader Coles Express business. Yasser has always had a vision about taking the business here in South Australia nationally. He's already started on that journey, as we've touched on with a number of new sites in other markets and a growth pipeline to take it nationally. The acquisition of the Coles Express network has really provided a fantastic opportunity and platform to accelerate that, and that helps us what has led to this transaction. So in many ways, we are fulfilling a vision that Yasser had for his business, and he's absolutely keen to stay involved with us and help us be successful in that journey because obviously, he's got an enormous amount -- enormous legacy invested in this and really keen for us to do it well. So I think it's a great -- in addition to the equity component and this great alignment, I think you wouldn't want it any other way, and it will be real asset to our business over the next couple of years.

Yes. Thanks, Scott, and I'll just take the leases question. So in terms of adding on to what Jevan talked about earlier, the arrangements got in place reflects market rent. The usual things you would have seen with the rate, 3.5% increase, which is standard triple net basis, nothing unusual to call out.

Okay. Great. And then, Scott, you mentioned a couple of times actually during your prepared remarks, once on Slide 5 and then there was 1 other time about the importance of a good convenience offer for electric vehicle charging. So over the next couple of years as you implement change to your convenience network, are you -- are we hearing that your more open to EV charging than perhaps what you have been to date?

I think we've always -- I would say we've always been open to EV charging and acknowledging it's going to be an important ingredient in a convenience software. I guess what we've never tried to set out to do is trying to replace fuel income with the income from electric vehicle recharging. We just don't think that's realistic, that a better way -- a better focus is to create our offer at our sites that encourages customers to visit us as regularly as possible. And what I mean by that is like at the moment, your typical -- you're driving a typical combustion engine vehicle, you probably visit our stores once every couple of weeks to fill up your car. If you're going to visit us to recharge your electric vehicle, it may well be that it's a much more regular pattern because, obviously, the capacity for recharging is less, but you need to have fast charging, and you need to have a broader offer that makes us welcoming and enticing for people to spend time there because it's so much -- just a different experience than refilling and having a terrific convenience software and bring new stores in places to set. I think it's going to be an important ingredient to make our sites of destination for EV recharging. But beyond that, we want to create as many reasons for people to visit us as possible, whether it's coming from a daily coffee fix, calling in to get lunch on the run, through the evening -- just an occasion. I mean, those are -- that's what convenience is all about and that we can get customers in every day, then we are going to have an income earning opportunity that will certainly be more than resilient to any decline that may happen in the future around fuel. So that's where our focus and EVs will be part of that mix, but it's not like the only thing we're focusing on.

Next question comes from [ Andrew Horch with ACC. ]

I had a couple of questions. One was just on the non-fuel shop sales. Jevan, you said that roughly [ 10% ] of the earnings is tobacco. Can you talk about how much that is from revenue? Because from the ASIC accounts, it looks like roughly about $1 billion is probably of the revenue is not related to actual retail? And then the second question is just on kind of building on what Daniel said before about South Australian legislation. Has you guys seen much of a change? Or has the business been much of a change since the new legislation passed in October of last year in terms of sales?

Yes, I can cover those. Thanks, Andrew, for the question. In terms of revenue basis, given the size and scale of Viva Energy, it will be similarly immaterial from a total group perspective for us. Tobacco earnings are a small contributor at an EBITDA level when you think about that in the context of the Giftbox and Smokemart business. And so I'm comfortable that it's a relatively small proportion for the total company. When you think about some of the legislation in South Australia, that business has been performing really well over the past 6 months or so and seeing some really strong sales performance. So there hasn't really been any impact. And I'm pretty confident that the offer will work really well nationally.

Is the numbers that he has -- that Yasser has done for his stores outside of South Australia comparable to what they've done in South Australia where they've had a legislative advantage?

Yes, from an uplift perspective, when they're acquired stores and refurbished or refitted them, they've seen the sort of sales uplift that they've typically enjoyed historically within SA, and I'm pretty confident we'll continue to see those.

Next question comes from Tony Waters with QVG.

Just want to circle back on Dale's question earlier. I just don't understand why you can't provide the actual lease cost in the pro forma numbers. I mean you would have had to disclose it as an EBITDA number, it was pre-AASB 16 anyway. So just simply what is the lease cost in that below the EBITDA line.

So the overall lease cost in that business is around the sort of $70 million to $80 million mark. I mean we haven't disclosed it in detail in the release. It's no secret. The EBITDA numbers that we publish, it's important to remember are not pre-leases. So the EBITDA numbers in our release incorporate the lease expense on a pre-AASB 16 basis. So effectively, the old standard, where the EBITDA approximates cash. And so consistent with the way we report Viva Energy results at a group level, you don't need to deduct lease expenses from that EBITDA number. It's already fully incorporated.

Okay. All right. That's great. And then just what's -- just adding up the gap in the $4.2 billion pro forma revenue, if you add non-fuel sales and fuel volumes comes to about $3.4 billion. So there's still about $800 million to $900 million gap there. Can you just describe what that gap is?

Do you want to just walk me through those numbers 1 more time?

Will pro forma revenue is $4.22 billion. You look at the numbers below 2.4, in round numbers, $2.4 billion for non-fuel shop sales and close to being the fuel volumes that gets you to about $3.4 billion. So there's still a gap there of about [indiscernible].

The gap is just in fuel price. The fuel revenue is the difference. So 985 million liters. It's probably a little [indiscernible] there. Translates to a much bigger number in terms of revenue, approximately $1.8 billion.

Yes. No, understood. And then just a couple of quick questions. Can you describe the margin dip in -- from FY '21 to FY '22 and given you would have had half year of the FY '23 forecast, is there any second half skew in those numbers? Or is first half approximately about half that number?

Yes. First, you can take first half is [indiscernible] approximately the second half. That's a reasonable assumption, absolutely.

Yes, it's pretty balanced in the forecast. And I think there's probably potential for upside if you think about growth in sites maturing as they've come into the network over time. So we haven't been aggressive in that forecast at all. In terms of the historical dip in performance, that's been pretty consistent across the industry. And I think there's a footnote which sets out our performance across that period. There were some impacts as a result of oil price on fuel margins and COVID lockdowns and other factors that meant that was a pretty soft period across the whole country and the whole industry and probably not representative of the potential of those businesses going forward. Of course, broader weighting to convenience over time will start to soften some of that fuel margin volatility that you've seen when oil price moves up and down because we'll have a much greater proportion of earnings from the shop. So another positive in that space, too.

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

Look, thanks, everybody, for joining us this morning and for your great questions, we at Viva Energy are extremely excited about today's acquisition as you can imagine, and the opportunities it represents for our business, OTR and the Coles Express teams. We really look forward to sharing more about this development over the coming months. But today, thank you very much for your support, and have a great day.