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

Thank you for standing by. Welcome to the Viva Energy Australia First Half 2023 Results Call. [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 Viva Energy's half year 2023 results. My name is Scott Wyatt. I'm the Chief Executive Officer of Viva Energy. And on the call with me today is Carolyn Pedic, our Chief Financial Officer; and Jevan Bouzo, our CEO of Convenience and Mobility. I'll begin this morning by acknowledging 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. As always, I'd like to begin with some comments on our safety and environmental performance as set out on Slide 5. Personal safety performance has continued to improve this year with a steady reduction in the injury frequency rate, fewer loss of primary containment events and 0 process safety events. I think these are particularly good results, given that we had more than 700 additional workers join the team at Geelong Refinery to carry out major maintenance works during the second quarter, which was subsequently extended as a result of the contractor crane failure we announced in June. This was a significant incident. But I'm really pleased that our procedures were followed and no one was in harm's way when this occurred. Turning to Slide 6. Let me first touch on changes that we have made to the way we report our results. From this period, we will segment and report our financial results across 3 distinct business units: Convenience & Mobility, Commercial & Industrial and Energy & Infrastructure. Each of these businesses operate in very different markets with different customers, competitors, economic drivers and strategies to reflect the opportunities that we see. The acquisition of Coles Express and OTR Group are good examples of how we are uniquely developing our Convenience & Mobility business. Carolyn will discuss the implications for our financial statements a little bit later in the presentation. Now turning to the first half highlights. Group EBITDA for the period was AUD 362 million, in line with our previously announced unaudited results. At a segment level, our Convenience & Mobility and Commercial & Industrial businesses continued to perform very well with strong sales performances and earnings lifting approximately 40% over the same period last year. Our Energy & Infrastructure business was, of course, impacted by both planned and unplanned major maintenance in the second quarter as well as lower regional refining margins compared with the exceptional margin environment we saw last year during the commencement of the conflict in Ukraine. From a strategic perspective, we completed the acquisition and transition of Coles Express in May and announced the acquisition of the OTR Group, which is currently progressing through the regulatory approval process. Together, these acquisitions will see us become one of the leading convenience retailers in the country. On the back of these strong performances, we had determined to pay dividends at the top end of the range in respect of the non-refining earnings, representing AUD 0.085 per share. Our balance sheet remains strong ending the period with net debt of just AUD 274 million. Now let me turn to slides 7 and 8 to discuss our sales performance in a bit more detail. Fuel sales are up 11% to 7.6 billion liters for the half, a record for the company as a listed entity and lifting our market share to around 26%. Convenience & Mobility sales volumes increased by 4% led by growth in our company-controlled network previously Coles Express and by the continued growth of the Liberty Convenience network, which now stands at 95 stores. The commercial business achieved sales growth of 15%, led by the continued recovery in International Aviation and robust demand from wholesale and other segments. This particularly strong sales growth should be considered in light of the general market conditions, which do remain relatively subdued. As you can see on Slide 8, petrol demand remains around 7% below pre-COVID levels due to sustained changes in mobility patterns and more recently, cost of living pressures. While diesel demand has been more resilient, reflective of the broader economic conditions, which remain favorable and supportive of our Commercial & Industrial performance. Jet demand continues to recover with more recent growth stemming from the recovery we're seeing in international travel. Turning now to refining. Our regional margins, as set out in Slide 9, remains strong relative to historical levels, notwithstanding the elevated margins we experienced during the weeks following the invasion of Ukraine last year. Reductions in refining capacity, outages associated with aging plant and generally tight oil supply continued to be supportive of stronger margins with Chinese demand and export quotas continuing to influence our regional environment. Geelong was naturally impacted by the planned major maintenance in the second quarter, which was subsequently extended to allow for repairs to the hydrogen compressor. Crude intake was 16.2 million barrels with a GRM of USD 10.80 per barrel for the period, which reflects both a reduced crude intake as well as lower production of diesel. On a unit rate basis, fixed operating costs were also elevated through the period as a result of this lower intake and production. We remain on track to return to full production in September, and we are well placed to take advantage of the currently healthy refining margin environment that we see. Let me now hand over to Carolyn Pedic, who will talk in more detail about our financial performance.

Thanks, Scott, and good morning, everyone. So let's start on Slide 11. So as Scott has touched on, we have formally changed the way in which our business results are reported. So our financial statements no longer report the business as the 2 segments of Retail, Fuels & Marketing and Refining. So Convenience & Mobility and Commercial & Industrial are now reported under their own segments, while Refining will report under the new heading of Energy & Infrastructure, and this also captures the evolving Geelong Energy Hub investments. Now the first half results demonstrate the valuable diversity of the group. So EBITDA for each of the Convenience & Mobility and Commercial & Industrial businesses grew by approximately 40%, and that supports a group EBITDA of AUD 362 million. As we see refining was down significantly on the same period last year as we cycle through the exceptional margins that existed at that time and also reflecting the major maintenance activity at Geelong during the second quarter that Scott talked to. The Convenience & Mobility business, we'll start with that, delivered its best first half performance in recent years as shown on Slide 12. So EBITDA increased by 40% to AUD 123.7 million and this result was driven by ongoing sales growth and improved conditions compared to the first -- with the first half of 2022, which is impacted by rising oil prices and changes in excise. Now these improved margins more than compensate for the increases in lease costs and operating expenses. Now turning to Slide 13. The Commercial & Industrial business delivered a record AUD 231.2 million of EBITDA in the first 6 months of the year. And this performance was supported by sales growth, which was led by the recovery in international aviation and continued robust demand from existing customers in other segments. Our margins have improved as higher supply costs are passed through customer contracts, and we continue to focus on growing higher value segments such as our specialties business. Non-refining, as I mentioned previously, refining was significantly impacted by the major maintenance turnaround, which is extended due to the compressor incident in the second quarter. EBITDA was AUD 22.9 million, a significantly lower result compared to the record period last year. The compressor incident delayed the restart of processing units and extended the outage of the platform and associated units. And this impacted production of higher-margin fuels, including premium gasoline and diesel. We also had to replace crude oil with additional imports of refined products, which significantly affected shipping costs and also impacted the GRM. So outside of direct impacts from the turnaround and the incident, operating costs declined period-on-period. We have lower energy costs, which more than offset the increase to manufacturing costs from general labor and primary materials. And we expect to see improvements as the refinery turns to full production and maintenance activity reduces for the remainder of the year. Now as set out on Slide 15, net cash flow was negative AUD 88 million during what was an unusual period. So we continue to manage the cash position exceptionally well with the release of working capital more than offsetting the net inventory loss. And this is important as we manage the disruption from the extended turnaround, higher capital expenditure and the AUD 300 million cash payment for the Coles Express business. So despite lower refining margins and the extended turnaround, underlying free cash flow was strong at nearly AUD 120 million. This is before borrowings, dividends and investments. And it also excludes the CapEx for multiyear projects as part of the fuel security package. And now turning to CapEx on Slide 16. We remain on track to meet the full year guidance we provided at our FY 2022 results. We invested AUD 207 million in the business in the first half net of government contributions and expect to invest approximately a similar amount in the second half. Although we confirm full year 2023 guidance, you'll see that the mix has changed somewhat. So another AUD 25 million is required for the major maintenance turnaround due to lost productivity that's associated with the compressor incident and the larger scope of work. This is offset by a slightly lower anticipated spend in the base business. Management and the Board remain highly focused on return on capital in the current environment, and we'll have more to say on this in our Investor Day in the end of the year. Moving to Slide 17, which shows our balance sheet position. After starting 2023 at net cash of AUD 290 million, we moved to net debt of AUD 274 million at the end of June. So during the period, we paid shareholders a record dividend following an outstanding result in 2022 and completed the remainder of our previously announced buyback. The cash consideration for the Coles Express business was AUD 300 million, but the net impact was only AUD 140 million. And as a reminder, the difference reflects working capital benefits of approximately AUD 60 million post completion and also the settlement of a payable of AUD 100 million that was previously recorded on Viva Energy's balance sheet. So the disciplined management of our balance sheet has put us in a good position to fund the acquisition of the OTR Group and maintain flexibility for further opportunities. And we confirm that we continue to target long-term gearing between 1 to 1.5x based on term debt to underlying EBITDA. Now Slide 18 provides the breakdown of the dividend announced today. At AUD 0.085 per share, the interim dividend represents a 70% payout ratio of net profit from the Convenience & Mobility and Commercial & Industrial segments, and that's at the top end of our dividend policy range. At a group level, this equates to a 75% payout ratio. Now the decision to pay out at the top end of the range reflects the continued strong and relatively stable performance of our Convenience & Mobility and Commercial & Industrial businesses with excellent cash conversion. This dividend will be payable to registered shareholders on a record date of the 6th of September 2023 with a payment date of the 20th of September 2023. So I'd like now to hand back to Scott to cover our strategic update and outlook.

Thanks, Carolyn. On that, before I do turn to the outlook for the remainder of '23, I would like to revisit the long-term strategy for each of our 3 businesses. While we'll delve into these in much more detail at our Investor Day later this year, we have summarized the pathways to growth on Slide 20. Within Convenience & Mobility, clearly, the acquisitions of Coles Express and OTR are transformational steps towards our vision to become a convenience retailer that sells energy rather than a fuel retailer that happens to sell convenience. To achieve this, 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 what we see as a very attractive market. Within Commercial & Industrial, we expect our specialties businesses to continue to grow as a proportion of the overall earnings base. And we continue to look for opportunities to scale the specialty offering through acquisitions of adjacent businesses. Lastly, we seek to optimize our Energy & Infrastructure assets. We see significant opportunities for our refinery and broader infrastructure assets as the energy transition takes place. We are well underway with building 90 million liters of new strategic diesel storage and upgrading the refinery to produce ultra-low-sulfur gasoline and expect to begin construction of our green hydrogen station late this year. We've also more recently announced plans to begin coprocessing bio waste and waste plastic feedstocks, which we expect to commence in the second half of 2024. As I mentioned earlier, the transformation of our Convenience & Mobility business is progressing well, and we set the key milestones on Slide 21. We've now completed the acquisition and transition of the Coles Express business with around 6,000 Coles Express team members joining the company and transition services arrangement successfully implemented with Coles. Coles Express convenience store sales were AUD 549 million in the first half at a small decline of 0.9% on the same time last year. Excluding the lower-margin tobacco sales, convenience sales actually grew almost 9% as the business saw continued growth from categories including food-to-go, snacks and beverages. We also announced the acquisition of the OTR Group during the period and are currently progressing the regulatory approval process with the ACCC. We have proposed to sell 23 Coles Express sites in Adelaide to expediate the approval process and remain hopeful of completing the acquisition by the end of this year. As I mentioned earlier, we're well on the way to upgrading the refinery to produce ultra-low sulfur gasoline. We now expect to complete the project in the second half of 2025 due to delays in sourcing critical components from suppliers with high levels of demand for their services. We are planning to submit a waiver request with the federal government for the intervening period. Overall, we expect a total combined investment of approximately AUD 350 million for this project and further anticipate changes to fuel specifications, particularly aromatics. In addition to the AUD 125 million of government funding for the ultra-low sulfur gasoline project, AUD 26 million of government funding is expected to be available to offset additional capital spend associated with further fuel specification changes. In May, we announced plans to build infrastructure, which will enable our refinery at Geelong to receive and process feedstocks such as used cooking oil, animal fats and synthetic crude made from waste plastics. These feedstocks will be blended with crude oil to reduce the energy intensity of the fuels that are produced at Geelong Refinery and recycled waste plastics through the polypropylene plant, which was acquired by the company last year. This will lead to the first commercial production in Australia of recycled plastic from waste soft plastics, which will be a key step towards solving one of the most difficult recycling challenges. It's estimated in Australia, more than 2 million tonnes of plastic go into landfill every year. This is a really exciting initiative for us that will reduce the carbon intensity of the fuels and refined products that are produced to Geelong, support customers with their own emissions reduction strategies and develop experience and capability to support larger scale investments in the future. Turning now to the outlook for the second half of this year on Slide 23. Despite cost of living pressures, we do expect the robust economic conditions to continue driving demand for diesel and the broader commercial industrial businesses, but with some moderation compared with the first half. Fuel demand in the mobility and convenience business is likely to seasonally lift in the fourth quarter, but remain subdued due to the changes in mobility and higher fuel prices that are persisting at the current time. Our refining business is expected to return to full production in early September, and we are well positioned to take advantage of currently strong regional margins. There is no change to our estimate on the earnings impact from the incident in July and August. On that, let me now open up for questions.

[Operator Instructions] Your first question comes from Dale Koenders with Barrenjoey.

I was just wondering if you could provide a little bit more color on how the Coles acquisition has gone so far. 2 months of contributions in earnings. Was there anything kind of dollar million basis that's come in? And also, where are the Alliance volumes tracking at the moment in August?

Yes, thanks for the question. I think a good opportunity for Jevan to say a few words about how things are traveling in Convenience & Mobility.

Yes. Thanks, Scott, and thanks for the question, Dale. It's gone really well. It's been a really smooth transition, I think. Thanks to our friends at Coles and the team that's come across with a lot of hard work over the last few months to deliver a smooth transition. It's really only a couple of months' contribution into the half year. So not a lot to talk about in terms of financial performance or contribution. And as we start to deliver some of the transition initiatives over the coming 12 months or so, [ no doubt ] to start to see a little bit more earnings contribution, which will be positive. Market is performing pretty well. It is a little soft out there as we commented in the outlook statement in the context of cost of revenue pressures and a little lower mobility activity, which is driving a bit of a subdued market. But transition has gone really well, and we've had no impact to store operations or customers. Stores are trading in a really positive way. And you see from the sales growth in the stores ex tobacco continuing to outperform a lot of our peers and should see us go pretty well over the next sort of 12 to 18 months as we embark on the OTR acquisition, too.

At the time of the Coles acquisition, I think this time has said sort of at 56 megaliters per week. The acquisition was pretty much earnings neutral. Is that really what we should be assuming at the moment that we're not going to see material earnings contribution in the second half from the asset?

Look, there's a range of opportunities to add value through the acquisition. And as we progress through some of the transition initiatives, we should see a few different areas where we can start to add value. If you recall, the original announcement where we talked about the earnings contribution didn't contemplate any real synergy or opportunity from bringing the 2 businesses together other than just consistent trading performance and some flex in volumes to try and give some context as to the sort of contribution we thought it could deliver over time. So obviously, depend on market conditions in the second half and how we track on some of the transition initiatives, but feel pretty positive on a post-integration basis, that we'll be able to deliver what we set out to.

Okay. It's just very peculiar to spend AUD 300 million on an asset and not give an update. Just think it's too soon and you'll give that maybe at your Investor Day?

Yes, I think that's right. I mean it's really only a couple of months. We just got the case. There's transitional services underway. We've transitioned 6,000 people. Move to the team is really positive. Stores are trading really well. Continuing to see good sales growth in all the key lines that are driving overall margin improvement. So I feel really good about where it's at. But, yes, good to have a little bit more water under the bridge before we start to talk about how it's tracking and how the future is going.

Your next question comes from Tom Allen with UBS.

You've announced a material delay to the low sulfur upgrade projects and now expected second half '25. Just recognizing that current government compliance obligations require that new standard to be met by, I think, it's mid-December '24. Can you share some color on what the potential implications are for missing that compliance timeline if the government doesn't fully accept the waiver request that Viva is lodging?

Yes. Look, thanks for the question. It's obviously a very big project. It's actually the largest upgrade to processing capacity at Geelong for over 20 years. So it's not insignificant. We're probably doing it at one of the more challenging periods with -- coming out of a pandemic and supporting various suppliers that we would rely on for this being somewhat impacted by that and a bit in turn obviously recovering. So it's taking longer than we obviously hoped for. We've been obviously working in keeping government well informed of that through the departments. And part of that obviously is anticipating how we would manage the fact that we're just not going to be ready at the currently regulated date. So the waiver request is the process that's available to us. We've obviously got good reasons for why we are facing a delay and still remain committed to delivering the project and getting new fields to the market as soon as we possibly can. And obviously, there's still a way to go between now and then. So things can change and maybe we'll find opportunities to improve on that. But right now, we're sort of being realistic and facing into a longer project than we were hoping for. So I'm fairly confident that we'll be -- that we'll receive the waiver. There's really no choice in respect of our capability in any case and we play a critical role and obviously supply the fuel to the market and are doing everything we can to move it as quickly as possible.

Scott, are you aware of there being a possible fine or some other financial penalties for missing the deadline?

No. I think [indiscernible] disappointment, obviously, not being able to fully comply in that time as everyone is in our organization. But as I said we've been working closely with the department on this, and so it's well understood.

Okay. And then just on commercial, you reported on the strong half. Any additional color you can share on the outlook for commercial in terms of volume or margin? As Viva continues to pursue additional share in that segment, if you can protect that margin above that AUD 0.08 a liter going forward?

Yes. Look, I mean, the broader economy in Australia is still doing well and a lot of the markets that we service into are still performing well and that puts a good demand profile on our organization. So you can see that in the sales uplift that we've seen in commercial, 15% year-on-year. And, obviously, last year was a good year as well. So it's a bit partly due to the just general economic conditions that are out there, but also partly to obviously, the work that we have done to build our commercial business across all the different segments continue to diversify, and that diversification is massively important in helping us to sustain earnings through different sector cycles that we're facing too. So it's proven beneficial in the past. And obviously, we're at a point where most of the sectors are in an upswing, which is -- you can see that in the results. What we're sort of saying is that it's unusual for all sectors to be in an upswing in the way that we're seeing it. There's probably going to be some moderation. Certainly, we called out a couple of areas where we see that that occurring. But I think looking through that, we're at a different place now with commercial, really is one of our high-performing businesses. A lot of the earnings that exist in that business are quite sustainable over the long run. I think our strategy is working both in terms of our target segments, but also our approach to market and the relationships that we have with our customers, leveraging the strengths of our supply chains. And all of that comes together, I guess, in the results that you see, but just with a bit of tempering around the expectations in the short term as we go into the second half.

Our next question comes from Mark Wiseman with Macquarie.

Thanks, Scott and team for the update today. I just had a couple of questions. Firstly, on the gearing targets. Could you maybe just discuss where you anticipate being post the OTR acquisition? Will that take you to the upper end of that 1 to 1.5x range? Or can you tolerate being above that range for a period of time?

Carolyn, do you like to address that?

Yes. Thanks, Scott and thanks for the question as well. So when we talked about the acquisition earlier this year, we talked a little bit about where we've been in the range, and we anticipate that we'd be more like the bottom of the range, particularly because -- as we've shared the definition is related to the term debt EBITDA and our EBITDA is going quite well, which pushes us more to the bottom end of that range. So I expect that's where we'll be.

Okay. That's fantastic.

Yes.

Great. And just on the C&I EBITDA bridge as well, I mean another really strong performance from C&I. I'm just wondering for the [ 23.6 ], that first bar of growth. Are you able to maybe reference how much of that is new contract wins? And are there any contracts that you may potentially lose in the foreseeable future that may offset that?

Yes. Look, I mean, it's a mix of wins and just strong demand -- stronger demand from our existing portfolio of customers. The resources sector is performing very strongly at the moment, strong demand for the products that we sell as a country. Obviously, recovery in aviation, construction activity around the country is strong, particularly recovering from weather events and so on. So it's across the board. I think the majority of it really probably does come from existing accounts and existing relationships that we have. [indiscernible] strength in the commercial portfolio is the quality of the customer base that we have. If you're supplying when is in their segment, then obviously, you enjoy the growth that they enjoy. And new accounts will take time to deliver earnings growth, and that was probably more for the future. We obviously -- we don't typically call out our wins and losses as a general rule, but we did call out the Australian Defense Force when this year, simply from our point of view of being a really strategic -- example of a really strategic account that we worked a long time to build towards that win. And this obviously has very complex needs, but it suits the sorts of business and strengths that we have within commercial. And it's a great opportunity for us to support them in their endeavors and grow with them as well and obviously that will be for the future, but it's a sort of an example of the types of quality accounts that we focus on.

Great. Congrats on the result.

Your next question comes from Michael Simotas from Jefferies.

First one from me is on the C&I business. So I just want to clarify your comment where you talk about earnings moderating in the second half. I presume that refers to a comparison to the first half sequentially, not year-on-year. Is that correct?

First half sequentially. Yes, that's right, Michael.

Yes, great. And just following on from that, if we sort of think about how the various moving parts flow through into the second half. There is a bit of seasonality in the business. You've called out AUD 8 million from purchasing and supply, the AUD 6 million on uncontracted spot sales, so we'll make some assumptions around that. Is there anything else we need to sort of think about on an underlying basis that business transitioning from the first half to the second half? And in particular, I think some of the specialty earnings streams are pretty strong in the first half.

Yes. It's just more. I think the other piece, Michael, is just what I was still referring to before about just the general economic outlook. I mean I think it's been the real strength of the Australian economy that we continue to perform very well in what is otherwise a difficult global economy. And there are headwinds there, and that may well start to affect some of the customers and sectors that we are selling into, and obviously, that will then get reflected into demand at some point. So that's just a general comment, but I think we've been in another unique period where all the sectors that we're selling into was almost without exception are doing extremely well right now, and that's an unusual place to be. I don't think you can bank on that continuing at all times. Does that make sense?

Yes, it does. And just the last one from me. The Vitol procurement fee being weighed for 2 years, can you just sort of talk about -- give us any more color on that, what the quantity of that or the quantum of that is and what the motivation for Vitol waiving the fee is?

Yes. Look, it was obviously weighed for the first 5 years. It's a sort of standard industry fee to cover the procurement task that they have performed for us is typically, it's not a material impact regardless. But because we had called out previously that everything weighed for 5 years, and we've had an extension for another 2 years. It's important for us just to update the market in that regard. And so I mean the reason for it is, obviously the relationship that we have with Vitol as our key supplier for crude and feedstocks into market is a strong one. We work very closely with them and that just reflects the commitments they have to seeing us be successful. I think that's probably how I would read into it. But if at some point the fee does apply at, we'll obviously update the market, but it's a relatively immaterial number in this respect of our overall supply requirements.

Next question comes from David Errington with Bank of America.

This is probably a question to Jevan. I noticed, Jevan, look, the future of the company or not the future, but a big chunk of the future is obviously, you're moving into convenience retail, particularly the convenience side of things. I noticed though your petrol isn't going that well at the moment. I mean you lost market share, which I raised my eyebrows at. And this is just petrol and probably premium petrol. Your market share is only 20%, and you're losing share. And I think your Coles, your alliance sales, you're still only around 58 million liters a week or whatever it is. Do you need a stronger petrol offer or I suppose the first question is, why is petrol offer still languishing given the brand strength of the Shell brand? And do you need a stronger petrol offer to leverage into a stronger convenience offer. And although on the flip side to that, I noticed that your ex-tobacco sales were up 8.7%, and Ampol is only 5.6%. So you're winning share in the shop, but you're losing share at petrol. So I'm trying to work out what's going on there? And do you need a stronger petrol offer to leverage your way into a stronger convenience retail offer.

I mean I think I agree. We're continuing to outperform in the store, which is fantastic. And that's with the existing Coles Express offer before, and we've got the opportunity to roll out things like on the run and a more sophisticated convenience offer. So certainly heading in the right direction. On the petrol side, the fuel market performance that we set out on Slide 8 refers to total volume across the business by grade. So when you look at our total petrol share, for example, that includes a little bit of wholesale and other volume that occurs across the business. And what I would say is that from a stand-alone retail perspective, we're holding share, which is good. And within that Slide 8 probably sets out the impact of a little bit of movement in wholesale and the dealer channel. I'm pretty comfortable with where the core retail network is at. And while we're seeing a little bit of softer mobility activity, we've continued to hold share through first half this year relative to first half of last year and growing volumes by a few percentage points in that retail network as well. So still early days on that journey. I think we're in a pretty good position. Focus now is really on trying to run the stores as a more integrated offer. In the past, it's been challenging where the company really operated fuel independent of Shop and obviously, Coles operated the Shop in many ways independent of fuel. So I think we've got a real opportunity to continue to make decisions to market and drive promotional activity across the forecourt and the store going forward. But I'm hopeful that we'll start to see a little bit of benefit from that flow through over-time.

But I'll ask the same question but a different way, Jevan. You're only, whatever the market share is -- are you still running around 58 million liters per week. Now the question is, do you need that to go higher to really leverage into and launch into what is going to be more than a coffee, more than a toilet paper and water offer, you're going to launch into a full convenience offer. Do you need that leverage to go up the 58 million liters, do you need that to get back to where it should be, which is around 65 million liters to launch into that or do you still think that the convenience offer will stand on its own, irrespective of the petrol offer?

I think it will stand on time. So in short, I don't think we need it. I mean I certainly like to say it, and we're focused on driving some of the promotional activity to get back to the fuel volumes that we think the network is certainly capable of and we know the network is taking a while from past performance. But I don't think it's a necessary precursor to delivering the value and convenience. And it is interesting having the full data set, the correlation between fuel volumes and Shop is not quite as strong as one might think. Typically, emissions are fairly separate. And I think we're seeing continued growth and strong performance in the stores. And I think we're in a reasonable place on fuel, and we'll keep driving that in the right way.

David, the way I think about it is that if you look at the underlying business, the average fuel sales per site is not that different than our Coles Express, what was the Coles Express network, their store sales are more than double. So that just shows that it's a driver of customers visiting, it's not the only reason customers because there's many customers that come clearly not to buy fuel to buy other things. And that will be the case as EVs roll out as well, it will be another reason for customers to come to our sites, but you don't want it to be the only reason, you've got to have a much richer offer to encourage customers to join come and visit and buy.

I think the market share has actually been -- maybe I really call out for the retail business because the retail market grew for fuel by 2.8% year-on-year, which given the mobility challenges and the cost of living challenge is probably actually a pretty reasonable result. The alliance was up 3%, which is to Jevan's point that we've held share within the alliance. But our total retail is up 4%, which reflects all the growth that we're achieving through the Liberty convenience channel. So which obviously, at some point, we will take 100% of. So I think overall, our sort of strategies and channel mix has been working quite well for us in what's been a really reasonably difficult market since the pandemic.

It's going to be an interesting time going forward, really exciting time for the company in retail. The second quick question. It's a very just an elaboration I suppose, to previous questions. I'm not that bright, as you know, and stating the obvious. But the performance in commercial industrial is a terrific performance. That chart on Slide 13 is just wonderful. But I'm trying to work out what you're trying to say so as simpletons can understand, how much of that uplift is actually from one-off factors that potentially is at risk going forward or how much is it that you just have to work a little bit harder to keep. I'm trying to work out what your message is in that business because on the one hand, you're saying it's a great performance, but there's other things that you're saying are probably one-off such as these purchasing arrangements and all that. So can you just sort of like say how much would be at risk if you could go down to that detail or is that too commercially sensitive to divulge?

I mean, we have a view, but it's also a little bit obviously, for the future. I mean, we flagged this challenge at the end of last year as well, and then we're back to that with another really strong results.

Exactly. That's what I was going with. You talked me down and you beat me again in the first half, exactly where I was going.

So got that run wrong in the right direction.

The promise over-delivered, Scott. You've learned beautifully.

Maybe that's the case. But look, I do think it's the point I was making with Michael is that it's just -- it's great it's so good for Australia and for our business that the economic environment is doing so well across such a wide range of sectors. But I think given where we're at, the cost of pressures some of the headwinds that our customers are genuinely facing that things will slow and it's a bit hard to pick which exactly which sectors are most at risk, but at some point that will soften some of the high earnings that we're seeing, a high demand that we're seeing, which translates to earnings, obviously, that we're seeing in our commercial business. But that said, fundamentally, the strength is there in the different segments and diversity that we have with the customers that we have. So I think we're at a new level for commercial that is a result of a hell of a lot of hard work, but we're in a good place, and I think it provides enormous opportunities for us to now take it to the next level, which is going to be some sort of acquisition or extension of that business in some new segments, but we can do that now from a very strong platform.

It's just the one-off that you flagged that would unwind and they don't seem to have been unwinding. That's the key thing. They seem to be sticky.

I agree. As if you take the bars from the supply chain benefits across, maybe that's where you want to focus on because those are the one-offs that we have been calling out that we do particularly expect to unwind at some point.

Under-promise, over-deliver Scott, you're doing beautifully.

Next question comes from Gordon Ramsay with RBC Capital Markets.

Just your comments about the application for a waiver with respect to the Ultra-Low Sulfur project. I just want to confirm a couple of things. This has not affected at all, your timing of this project has not been affected at all by the Geelong Refinery hydrogen compressor incident? And secondly, why would you get a waiver if you can possibly import product that meets the standard to Vitol or other suppliers. And if you were to do that, what would be the added costs?

I guess on the first point, no, the major maintenance event and the issues we have an impact of this project. It's also a completely different team that is working on that and different, obviously, suppliers that are involved, both international and domestic suppliers, I might add, given obviously the size of the project, so it's complex. And the waiver that we will put through is a waiver simply for what we make at Geelong. Elsewhere, where we import or buy from others, as you pointed out, we won't need a waiver because we'll be able to procure that internationally. So it's a very specific waiver for the refinery that we'll be seeking. There is a process to go through. So I think there's a process where the way it gets considered, so that's a bit ahead of us. But it's a process that we have accessed previously when we've had other fuel spec changes. So we do understand it. And as I mentioned before, it is something we've been keeping the government and the department well abreast of as well. So that process will kick-off pretty quickly.

And just a second question, just on OTR completion is expected second half this year. What are the critical path items? And can you kind of give us an update on where you are with the ACCC in the whole process?

We're working through a process with the ACCC at the moment. And we've noted in the release that they intend to release their views on September 21, and they typically undertake a process where they engage market participants for feedback, they engage us and obviously have collected a lot of information about the transaction. We are working through that at the moment and forming their views and they're working pretty closely with them on that at the moment. So looking forward now, it's really the September 21 when we'll get some more information from them in the public domain. And that could be as wonderful as an approval or it could be a statement of issues, and obviously we'll continue working through the process with them in respect of that. Once the ACCC approval is obtained, there's a few more procedural matters, and then we'll be pretty close to completion after that. So continuing to work through in a positive way and hope to get that concluded this year.

The next question comes from Adam Martin with E&P Financial.

Just back on the fuel volumes, particularly around Alliance, I know you're going to rename it. But you've historically talked about AUD 70 million, AUD 75 million liter target, doesn't look like you're going to get there. I suppose I'm sort of wondering how does that then impact the synergies in that business? You've talked about AUD 45 million to AUD 70 million there depending on what fuel volumes come through. Now clearly, probably margins more important. And obviously, you could offset it with better Shop performance. But perhaps Jevan, you can make some comments there.

When we talked about Coles Express acquisition in the release and the earnings uplift, we expect it to deliver. We didn't set out any synergy or improvement as a result of transition activity in bringing the 2 businesses together. The way that we guided to the earnings uplift was to say assuming the current performance of the business at a higher volume level, this is what the contribution would have driven. I still think it's a reasonable contribution to assume from an acquisition of that nature and pretty confident that we'll be able to deliver that sort of level of performance. Volumes are also obviously important, but they are only one part of the story. The other, as you say, is the Shop, that's how we bring the 2 businesses together and in time, how we and run promotions across store and forecourt to drive performance and performance will be fuel and stores. So I think the fuel volumes are important, but certainly not critical to deliver the outcomes that we talked to in the release.

And then second question, I presume you're in contact with the owners of OTR. I mean any sort of observations on how that business is trading last 2, 3 months versus sort of Coles alliances. Obviously you've talked about cost of living pressures in that. Just any sort of observations there.

Yes, continuing to perform well. I think it's a good business, and the really positive thing about the focus on convenience is a resilience across a range of different environments. Pure volumes and the performance in the fuel space, I know you're all relatively familiar with it, but the strength of having a convenience business and the ratability of earnings that, that brings over-time is a really important part of the transaction. We continue to see that both in our business, but in theirs as well.

Your next question comes from Rob Koh with Morgan Stanley.

Can I ask my first question in relation to retail. I noticed that 7-Eleven Stores is working with the company called Grab & Go. I was just wondering if within your retail operations, you have any kind of comparable pay-and-go and/or click-and-collect type technology. And then maybe if you can comment on how you think those kind of technologies impact on shrinkage?

Yes, sure. I probably won't get too much into the shrinkage piece. That's interesting new technology. I mean we've explored in recent times a range of different opportunities whether it's the sort of just walk out technology, the self-checkouts or others. And I think they're all interesting. There's not a lot of evidence yet to show that they drive incremental sales or a real uplift relative to market. And so you have to make fairly significant investment in technology depending on the sort of option that you choose. At this stage, we've got partnerships in place with the likes of DoorDash and so there is some level of home delivery service available from Coles Express stores. It's certainly something that we're doing more work on. And now that we're not necessarily limited by the partnerships at the Coles Group level, we have a little bit more flexibility to drive opportunities that are more fit for purpose for the convenience store network. In the context of OTR, while we obviously don't have that acquisition completed yet. They've got a very sophisticated digital app offering and have a very high proportion of sales and activity in their app, whether that's pre-ordering, paying to fuel a pump or using other services around the site, like carwash, et cetera. And so I think as we bring those 2 businesses together in the future, there's going to be a big opportunity for us in that space and hopefully to do with proprietary technology as well.

And I'll come back on shrinkage in the coming years, I guess. And just a question on the Geelong Refinery, which I'm pretty sure is a safeguard liable entity. So I guess one of the question is you have commented on how the recycled plastic intake might help with carbon intensity. Just if you could maybe tell us how that is relevant relative to the 4.9 percentage point reduction required? And then also, your Geelong refining margin once it's back online is probably pretty healthy in the current market. But if it were lower in the regions where the fuel security payments apply, would that cover you for cost of Safeguard?

I guess, just generally, in terms of Safeguard Mechanism, yes, the facility is captured. And there's about just over 1 million tonnes of CO2 per annum from Geelong. So we already had as a voluntary commitment to reduce the energy intensity in Geelong by 10% by 2030. So we have a number of plans in place on how we're going to achieve that. The Safeguard Mechanism goes further than that. So that sort of brings into play other potential projects that we've got for energy emissions reduction and obviously with the cost of the Safeguard Mechanism that starts to support potentially provide economic support for those projects, which I guess is part of the design of the changes that have been announced. So we're working through that at the moment to determine how far we can get. The policy settings for processing waste or bio or recycling are not a strong linkage for improvements to the Safeguard Mechanism. So there's some work we need to do and would just want to do with government to have that more recognized as positive contributions to emissions reduction, but that's a bit for the future. But I think that is absolutely one of the benefits that Geelong can play in its current configuration. So we're certainly looking at that. What is the third part of your question. What was the third please?

Yes. Look, in the event that the refining margin was down in the levels with the security payments. Yes.

Yes. So currently no, so the cost of Safeguard Mechanism was not contemplated when the FSSP was set-up. Obviously, it was a previous government and it wasn't in place. So there is a review mechanism which is due now with government to review the workings of the FSSP, both from a mechanical point of view and obviously delivering the financial benefits to both the country and to Viva that needs to be reviewed, so that will be picked up from -- we would like to see that picked up at least anyway as we go into that review process. So that's again a bit for the future as well. But in terms of the current structure of the FSSP notes not captured as part of the cost build.

And I guess, fair to say you support the view that security trumps decarbonization in the near term, at least.

While, again, obviously, you guys got to go hand-in-hand, right? I think like any transition, you need to maintain supply of what you need today whilst you build supply of what you want tomorrow. And if you turn one off without the other, then you're obviously in big trouble and I guess that's what we see happening in a few of the energy markets around the place at the moment. So that's certainly a key role that obviously, the 2 refineries in Australia still play. And absolutely the fundamental reason why the FSSP was put in place in the first place.

[Operator Instructions] The next question comes from Scott Ryall, Rimor Equity Research.

I came late, like half the call, I'm sure. So apologies if you went over this in more detail. I'm thinking not by the questions I've heard so far. So my question solely relates to Slide 23. And I was wondering if you could be a bit more specific about the technology you're looking at for processing waste plastics, please? Also, if you've got a rough scale for the renewable fuel side of it that you're thinking about relative to your current production at Geelong. And then you I mentioned on here that it's related because it's Geelong, I was wondering if you could just tell us the progress around the hydrogen trial that you've been running in Geelong as well, please?

Okay. Yes. So Slide 23 is generally co-processing, so it's not getting a dedicated processing. It's just actually leveraging the existing processing capability that we have in Geelong and it's essentially introducing other streams of feedstocks with crude oil to co-process at the same time. So you don't end-up with a dedicated renewable fuels or dedicated recycled plastic stream, if you like, it's an outcome of the feedstocks that we're processing. So just leveraging the existing technology that exists there. And we have the capacity to process up to about 50,000 tonnes of those feedstocks and they call it like 50 million liters of renewable lower energy intensity sequential fuels as a result is probably the way to think about it. On the plastics piece, we have trialed this before. It takes a synthetic crude from processing waste plastics. So there's some pre-processing that needs to happen somewhere to produce synthetic crude that is obviously of the characteristics that Geelong is able to process. We have done a small trial about a few years back with Nestle producing recycled KitKat wrappers. So it's a proven sort of process on a small scale. This is about scaling it up now, but it also does produce a feedstock that is valued by the customers, and we're pretty confident we'll get good support for what we're doing here as we start to process it next year. Finding the feedstocks that in with Geelong's processing capability is probably the key challenge that we have to work through. But we've always got a few options that we can get.

So you got your feedstock on that trial from a Licella.

Yes.

And they have just made some announcements in the last couple of weeks around increasing funding and starting towards rolling out a larger facility. Presumably, that's what you're talking about there that they would absolutely [indiscernible].

A very good example of one of the options we've got for feedstock supply, yes.

Okay. So you're not going to replicate what they're doing on your side.

This isn't about setting up that dedicated processing to produce that synthetic crude, if you like. This relies on others doing that for this particular phase of the project. And then hydrogen, we're aiming to -- that project has been delayed for a few reasons, but we're looking to commence with that project within the sort of next 6 months. So it's still well in train and certainly some of the equipment has already been ordered on its way. But it's a new project, there has been a few challenges along the way in terms of getting it ready to start breaking ground, but we're getting close to that.

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

Thanks very much. Look, again, thank you everyone for joining this morning and for your questions. As we've discussed, just to recap, our sales and marketing businesses have performed extremely well during the first half of this year, certainly showing extremely good year-on-year growth. And in respect of both our commercial and industrial business and our convenience business, we've made some very good progress on our strategic agenda. While the refining business was, of course, impacted by the extended maintenance in the second quarter, as has been commented on during the call, the regional refining on margin environment remains very supportive for refining, which supports the long-term outlook that we saw when we committed to retaining refining capacity within our business. And we're certainly looking very forward to returning to full production in a few weeks and across all our businesses, delivering a really strong finish to 2023. So look, thanks again for all your support, and I wish you all a good day.