Thank you for standing by, and welcome to the Viva Energy Australia full year 2023 results. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by one on your telephone keypad. I would now like to hand the conference over to Mr. Scott Wyatt, Chief Executive Officer. Please go ahead.
Good morning, everyone, and thanks very much for joining us today to discuss Viva Energy's full year 2023 results. My name's Scott Wyatt, Chief Executive Officer of Viva Energy, and on the call with me today is Carolyn Pedic, our Chief Financial Officer, Jevan Bouzo, our CEO of Convenience and Mobility, and Denis Urtizberea, our EGM of Commercial and Industrial. Let me begin 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, let me start with our safety and environmental performance, which is set out on slide 5. Last year was a very busy year for the company with the extended major maintenance activity at Geelong Refinery and the transition of the Coles Express business, including taking full control of operations across the retail network.
Given that amount of change, I'm really pleased with our safety performance, which remains steady and indeed some really good improvements in process safety. Looking forward, I am conscious of the new risks we have taken on with the growth in our Convenience and Mobility business, and particularly the impact on our team members from robberies and crime that unfortunately occur from time to time. We have inherited good processes from Coles, and we will continue to look for ways to improve our security and safety across the retail network as we upgrade stores and enhance our offer. Across the rest of the traditional business, we continue to invest in improving asset integrity and inspections to reduce the risk of leaks and spills, and generally driving a strong safety culture, which remains a great source of pride amongst Viva Energy employees.
Turning to slide 6, 2023 was very much a transformational year for Viva Energy. We delivered a strong financial performance and made significant progress on the strategic agenda, which we shared with investors at the Investor Day in November last year. Group sales increased by 9% to 15.5 billion liters, now 5% above pre-pandemic levels. EBITDA was AUD 713 million, which outside of the refining business represented a 16% increase on 2022. Our refining operations were, of course, set back by the extended major maintenance. However, the team responded well to maintain steady supply to our markets, and the underlying regional margin environment remains healthy. On the strategic front, we took major steps to advance our Convenience and Mobi lity strategy. The first step was the acquisition of the Coles Express convenience retailing business, creating a platform for growth in the attractive convenience sector.
The second was the acquisition of the OTR Group, which received ACCC approval towards the end of last year. As you know, OTR is a world-class convenience retailer that creates substantial growth opportunities through its sophisticated offering, advanced systems, and substantial synergies. Our Commercial and Industrial business delivered another exceptional year and continued to improve the quality of our business through the development of high-quality strategic accounts such as RFDS and the Australian Defence Force contract, which sees us becoming the exclusive supplier of aviation, marine, and ground fuels. The Geelong Refinery was critical to this contract, cementing Viva Energy's role in providing energy security to Australia and supporting further investment in the energy hub, including the construction of strategic storage and upgrades to produce low-sulphur gasoline.
Given these strong results, the board has determined to pay dividends of AUD 0.156 per share for the year, 10% above last year for the non-refining businesses. Our balance sheet remains strong, ending the period of net debt of AUD 380 million. So let me now turn to each of our three businesses to discuss the results in more detail, beginning with the Convenience and Mobility business on slide 7. The retail marketplace was somewhat challenging last year, with cost of living pressures, high pump prices, and illicit tobacco sales weighing on sales growth. The third quarter was particularly challenging as rapidly rising oil prices compressed retail fuel margins and dented demand.
In that context, I'm very pleased with the performance of the Convenience and Mobility business, which maintained fuel sales in line with the prior year and outside of tobacco group convenience sales by 8%, with good improvements in gross margin. This demonstrates the resilience of this business through challenging times and the growth opportunity as we further extend the convenience offer and economic conditions improve. EBITDA was a very solid AUD 232 million, with a strong fourth quarter as trading conditions improved. Turning to slide 8 , the Commercial and Industrial business delivered another record result in 2023, lifting sales by 13% and growing EBITDA to nearly AUD 450 million. Aviation demands, particularly the international segment, continues to steadily recover, with jet sales up more than 40% over 2022 and now at 75% of our pre-pandemic levels.
Diesel sales have also been strong, up 7% on prior year, with strong demand from all C&I segments. New business wins provide further growth opportunities through 2023, but earnings are expected to be somewhat volatile, driven by continued tightness in supply chains, with rising shipping costs in particular providing some headwinds. Overall, the C&I business is in great shape, and we are progressing well towards our aspiration of building a sustainable AUD 500 million business. The addition of the OTR wholesale division will make an important contribution to this outcome once the acquisition is completed in the near future. Turning to refining on slide 9, our performance in 2023 was naturally impacted by the extended major maintenance during the second and third quarter. Crude intake was reduced to 31.6 million barrels, and refining margins were lower at $9.80 per barrel.
While regional refining margins remained elevated through the year, Geelong's margin performance reflected a lower production of diesel and larger production of intermediate products during the turnaround. The refinery returned to normal operations in the fourth quarter and is well positioned to capture the stronger margin environment that we have experienced so far this year. The strategic storage facilities are on track to be commissioned in the third quarter, and construction has commenced on the low-sulphur upgrades to the refinery. Now let me hand over to Carolyn Pedic. She will talk in more detail about our financial performance.
Excellent. Thanks, Scott, and good morning, everyone. Let's start on slide 11. So now, when comparing FY 2023 with FY 2022, it is important to note the extraordinary environment we experienced during 2022, which was heavily impacted by the evolving conflict in Ukraine and disruption to global energy supply chains. So Viva Energy particularly benefited from periods of high refining margins and advantage procurement arrangements that were put in place with our trading partner, Vitol. Now these procurement arrangements provided material support for the record earnings that were delivered in that year in '22 and were expected to unwind as energy markets normalized, as we have seen during 2023. This represents a normalization of earnings in the order of AUD 56.5 million, which is embedded in the C&M and C&I earnings results.
To put this in context, combined earnings across both these businesses grew by AUD 180 million in FY 2022 from the prior year.
After adjusting for this unwinding of procurement benefits, as foreshadowed last year, Convenience and Mobility grew by AUD 17 million, and Commercial and Industrial by AUD 135 million on an underlying basis. Energy and Infrastructure was, of course, impacted by the extended major maintenance event as well as refining margins normalizing. On slide 12, we set out the earnings bridge of the Convenience and Mobility business. Now, following a particularly strong result in 2022, EBITDA declined 7% to AUD 232 million due to the unwinding of procurement benefits, which I just covered, along with a significant shift in operating metrics as we took control of the convenience offering from May. Although these benefits unwound during 2023, along with some impact from the disruption at Geelong, which did flow through to the retail business, this was offset by strengthening industry margins.
Property costs increased in line with lease terms, and operating costs were higher, reflecting inflationary effects and marketing investments as well. So we have set out in some detail the impact from the integration of the Coles Express business from the 1st of May 2023 in the bridge. So going forward, fuel margins will be improved through the elimination of the fuel commission previously paid to Coles Express and also through the direct participation in convenience sales and margin. So operating costs will, of course, be higher to reflect the costs of directly operating stores and through higher overheads from Coles Express and the Transitional Services Agreement with the Coles Group. The contribution from Coles Express in 2023 reflects the first eight months of performance without any integration benefits. As we have said, the earnings uplift we expect is post-integration of that business, which is going well.
We do see significant opportunities from above-market convenience sales growth, product and category initiatives driving high gross margins, and lower overheads as we progressively exit the Transitional Services Agreement. Now moving to slide 13, as Scott mentioned, the Commercial and Industrial business delivered AUD 447.5 million of EBITDA in 2023, and that's an increase of 33% on 2022. There were several drivers of growth: robust demand from most sectors, the benefit of new business wins over several years, a continued focus on higher margin opportunities across our specialty businesses, and a continued recovery in international aviation. The C&I margin management and our focus on specialty products and services more than offset the reversal of supply chain benefits from the prior year.
Moving on to slide 14, Energy and Infrastructure EBITDA of AUD 65 million was down significantly on the record 2022 result. Lower regional refining margins and the extended turnaround were responsible.
The compressor incident in June delayed the restart of processing units for several months, preventing the refinery from producing higher margin products. And because of that, we had to sell intermediate products at a lower margin and import more refined products at a time when shipping costs were high. Insurance recoveries of AUD 80 million were recognised and mitigated part of the impact, as well as a slight decrease in operating costs and lower energy costs. Now on slide 15, we show the bridge from EBITDA to net cash flow of -AUD 75 million during what was a highly unusual period. The Treasury team did a fantastic job to manage our cash position this year, navigating the disruption from the unplanned turnaround, continued volatility in oil prices, and almost AUD 350 million of acquisitions.
As expected, the cash position also benefited from a working capital benefit of around AUD 60 million after completing the Coles Express acquisition. Underlying free cash flow was almost AUD 200 million, which includes the capital expenditure from the turnaround. This is before borrowings, dividends, and investments, and excludes operating and CapEx for one-off multi-year projects. Now talking to CapEx, delving further into that on slide 16, we continue to take a disciplined approach, prioritizing the most compelling opportunities in the current environment. We invested AUD 452 million in the business on a net basis. That's within guidance, despite the lower-than-expected government contributions relating to project timing milestones. So that's timing only. Outside Energy and Infrastructure , CapEx was broadly in line with 2022.
The increases in 2023 were driven by major refining maintenance, which required a larger scope of work than anticipated, and the ramp-up of investment in the ultra-low-sulphur gasoline project.
For 2024, we maintain our guidance set out at the Investor Day for AUD 440 million-AUD 475 million net of government contributions. Please note this excludes OTR, and we will provide an updated guidance at completion of the acquisition. Moving to slide 17, this shows our balance sheet position. After starting 2023 with net cash of AUD 290 million, net debt at the end of the year was AUD 380 million. The move was largely caused by a record dividend payment to shareholders following the outstanding 2022 result, the acquisition of Coles Express, and a high CapEx program. Our balance sheet position provides substantial capacity to fund the acquisition of OTR and also pursue opportunities in line with our strategic objectives. We expect to refinance the OTR acquisition through term debt during 2024, subject to market conditions.
So we continue to target long-term gearing of between 1-1.5x based on term debt to underlying EBITDA. Now slide 18 provides the breakdown of the dividend announcement today. At AUD 0.072 per share, the final fully franked dividend represents a 70% payout ratio of net profit from the Convenience and Mobility and Commercial and Industrial segments. This is at the top end of our dividend policy range, and this equates to a 76% payout ratio for the group. The decision to pay out at the top end of the range reflects the large and growing contribution from our non-refining business. Both Convenience and Mobility and Commercial and Industrial generate excellent cash conversion with a relatively stable earnings profile. The Energy and Infrastructure business is assessed annually under our dividend policy and did not pay dividend in 2023.
Now the dividend will be payable to registered shareholders on a record date of the 8th of March 2024, with a payment date of 22 March 2024. I'd now like to hand back to Scott to cover our strategic update and outlook.
Thanks, Carolyn. Since our investor strategy day in November, we've continued to make some excellent progress on our strategic agenda. We've obviously announced and commenced converting the Coles Express stores to Reddy Express, with 12 stores now displaying the new branding at the end of last year. We plan to convert more than 300 this year to meet the milestone set out in our agreement with Coles. These are relatively simple conversions, with the in-store experience and customer offer largely remaining unchanged. We are refurbishing selected stores to prepare them for their eventual transformation to the OTR offering. We also continue to roll out initiatives to improve the existing food-to-go offer, our loyalty programs, and more suitable pricing for the convenience sector. The OTR acquisition is on track to complete in the first half of 2024 following ACCC approval, which we secured last year.
The approval requires us to divest 25 sites in South Australia to Chevron, which have also commenced. In exchange, we are receiving 13 sites located in Queensland, New South Wales, and Western Australia. Work has also commenced to secure regulatory approvals for the remaining 50% stake in Liberty Convenience. In 2023, we laid the groundwork for our sustainability objectives for each of our businesses, as set out on slide 21. Now that we have full control over our retail network, we are better placed to pursue opportunities to benefit from the energy transition. Late last year, we entered a co-funding arrangement with the New South Wales government to develop a premium offer of 30 EV charging stations in the state. Our priority is to upgrade our convenience offer through the OTR strategy while looking to install EV charging simultaneously at the most suitable sites.
Overseas experience has shown us that a compelling convenience offer, the best locations, and a focus on customer service are critical in attracting drivers to EV charging stations over other locations. We've also initiated plans to roll out rooftop solar across the network as part of a multi-year program to reduce energy costs. In 2024, we will be targeting sites in Western Australia, Northern Territory, Queensland, and New South Wales. Last year, we also gave our customers more options to manage their emissions. We now offer a full suite of carbon-neutral products under Climate Active, which remains an important interim measure until low-carbon fuels become commercially viable. At the same time, we are actively working with customers to trial these sorts of fuels. We distributed Sustainable Aviation Fuel for the first time to the Australian Defence Force, collaborating with manufacturers and using our extensive supply network and operational expertise.
We are also supporting Cleanaway trial 100% renewable diesel made from waste feedstocks. As I mentioned, we are also well-progressed in upgrading the refinery to produce low-sulphur gasoline. We have also started planning for additional changes to aromatic fuel specifications, which will apply to Unleaded 95. As the federal government has extended the deadline for both requirements, we are no longer seeking a waiver, and we expect to complete the two projects in the second half of 2025 at a total cost of AUD 200 million net of the government funding. We are also working to reduce our own emissions, signing a 10-year power purchase agreement with Acciona to provide renewable electricity from the Mount Gellibrand wind farm.
The deal is the largest electricity and environmental certificate contract ever completed by Viva Energy, having the potential to meet nearly all of Viva Energy's net-zero scope two targets, as well as providing an effective hedge against high electricity prices in Victoria. Let's now turn to the outlook for 2024 as set out on slide 22. While energy markets remain tight and volatile, our convenience and commercial businesses are increasingly driving strong and stable earnings with steady growth from our strategic agenda. Convenience sales are demonstrating continued growth outside of tobacco, and we look forward to capturing a full year of gross margin benefits, as well as the uplift from the OTR acquisition once this completes. We expect continued demand strength from our Commercial and Industrial businesses with a further uplift from the acquisition of the OTR wholesale division.
Supply costs are expected to be volatile due to tightness in energy markets, and we are facing some headwinds from rising shipping costs in particular. Nonetheless, as you know, this is a very diverse business with demonstrated resilience to sectoral cycles. Refining margins remain elevated, and our refinery is operating well following the major maintenance last year. We have minimal maintenance planned for 2024, and we are well-placed to maximize production and take advantage of a supportive refining margin environment. In summary, we're very excited about the year ahead. The environment is challenging in some areas, but we now have strong and diverse portfolio, which is well-positioned to capture growth opportunities with strategic initiatives that provide considerable upside outside of the market fundamentals. It's a big execution year, and we have begun the year with strong momentum. On that, let me now open up for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michael Simotas with Jefferies. Please go ahead.
Morning, team. My first one is relating to the outlook commentary or the outlook comments around supply chain costs and volatility. In the past, Viva has fared very well through those sorts of environments. You seem to be a little bit more cautious on this particular environment. Could you just give us a little bit more color on why that is and how that's likely to flow through the business?
Thanks, Michael. Thanks very much for the question. I think we have fared extremely well through some pretty challenging times over the last few years. I mean, 2022 was a particularly strong year for Viva Energy, as you know, and our supply chain advantages were a big part of that performance in 2022. So I think we've got some good track record of managing periods of volatility. I have great confidence about the year ahead as well. I think all we're calling out is particularly as a result of more recent events in the Middle East and the impacts that that is having on shipping costs, that that is a bit of a headwind potentially. But at the same time, I still remain confident in our supply chain capability to navigate all of that and to protect earnings and continue to grow.
It's just one of those factors that we'll have to manage through this period. But I wouldn't say that we're flagging it as a significant drain on earnings in any sense. I think we're very confident about the ability to manage the supply chain in the year ahead and navigate some of those changes.
Okay. And do you have pass-through arrangements in your major commercial contracts?
Yeah. I mean, a lot of our contracts have had the majority of our commercial contracts provide pass-through for a lot of the costs that we face into. Again, we've got good evidence in the past few years of how we've been able to do that. Certainly, 2023, we've called that out in the commercial industrial results as well as about how we've managed to pass through some of the high costs that we're facing into. Certainly, shipping costs and other supply chain costs, there's a great degree of capability to pass that through to our customers and through to the market.
Okay. Thank you. And then just a couple on Coles Express or Convenience and Mobility, if I can. Just a clarification. If I look at the waterfall chart and I sum the individual drivers of Coles Express, they sum to near exactly zero. Does that mean there was zero EBITDA contribution from Coles Express in this period?
Thanks for the question, Michael. We've got Jevan on the call, and probably a good opportunity to give him a bit of an opportunity to talk about how the integration has gone and the contribution from the Coles Express business.
Thanks, Scott. Yeah. And thanks for the question, Michael. Yeah. That's about right. So we basically had 8 months' contribution of the Coles Express retail business. So we're progressing really well on integration, but we're still within transitional services arrangements and other transitional, I suppose, integration arrangements we put in place for the business post-transition. So I think in the context of the first 8 months, some improvement we've made in shop and margin and how industry's traded over the course of last year, it's been a good outcome to add the business in. I would have liked to see it contribute a little more, but still confident that as we complete integration plans over the next sort of 12-18 months, we'll see a meaningful uplift that we talked about when we did the deal.
Okay. Just one quick one while I've got you. There's a bit of industry feedback that Coles Express has been a bit more aggressive on fuel price in the last few months. Is there any sort of change in strategy on how you're likely to price your fuel offer, or is that just the usual sort of noise?
No. No. I think that's usual sort of noise. I mean, it's been our intention to remain competitive in market, and that hasn't really changed over the last couple of years. I mean, we're definitely focused on positioning the brand and the stores and the network both from a fuel and a convenience perspective and making sure that the fuel price positioning and the shop price positioning line up in a way that provides the right level of value for customers. But I mean, we haven't made any significant or material changes to the strategy. That's been a focus for some time now. But obviously, having control of the shop means that we can be a little bit more targeted with offers across shop and fuel and be consistent across the two. But yeah, certainly no change or no intention to move fuel pricing strategy in that regard.
I think it's been a bit of a soft mobility period over the past few months in some states. And so maybe that's contributing to a bit of chatter, but yeah, all pretty good from my perspective.
Okay. Great. Thank you.
Your next question comes from Dale Koenders with Barrenjoey. Please go ahead.
Morning, gents. Just a question, I guess, firstly on OTR. I was hoping, Jevan, you could provide a little bit more color on how you've seen that business running over the last 12 months. Has store count changed? If you can put any numbers on that, profitability, any sort of guidance on how that business has been running.
Yeah. Yeah. I can talk a little bit to that. I mean, we're obviously pre-completion. There's some information-sharing requirements that we agreed as part of the transaction. Obviously, we're pretty well engaged with how they're going. They don't publish numbers, as you know, but I can say that they're performing in line with our expectations and the business case that we put forward when we announced the deal. So feeling good about that. I think the structure of the deal and the arrangement, obviously providing a material portion of the price in equity in the Viva business, has worked well, and it's kept the sellers pretty focused on running that business successfully because they obviously benefit from that success as well through the issuance of equity. So we've got good alignment.
We're obviously still working within some competition constraints because we haven't completed yet, but everything I'm seeing and engaging with them on is heading in the right direction. The focus on innovation and continuing to expand and grow the offer in that business has continued at pace, which has been really pleasing to see. Planning for completion now, which is obviously a busy time, and then looking to start seeing some of the first sites convert through the course of this year, which will be exciting.
Is there a cash adjustment if the completion drags on?
Not typical to do something like that. I mean, I think where we're at now, we've got our ACCC clearance. We're on track for a FIRB clearance in the coming weeks based on their published dates and obviously a few things that are required for completion, but all feels like it's pretty well in hand at this stage. So I expect that we'll be able to complete within the first half, and there shouldn't be anything that really holds that up in a material way.
Okay. And then just a final question, I guess, for Scott. Just seeing the refinery operating costs quite high in the half with the T&I that was coming around, bringing costs back to $8 a barrel. Can you talk about sort of what's going on at the moment, why costs are still elevated, and how quickly you can turn that around?
Yeah. No. Thanks, Dale. I mean, I think, as you know, we sort of flagged that operating costs were high last year as a result of the extended outage, particularly shipping costs and demurrage costs associated with moving unexpected supplies of finished product into Australia and intermediates out. So that will naturally cycle out now that the refinery is back running normally and at full production. And so we've spent most of the back end of last year, quarter four, just tidying that situation. I've been getting our shipping costs back down. So that will just naturally cycle through. Energy's been a bit of a feature of refining's the last couple of years in terms of higher costs. That has cycled down through the course of last year as well.
And that doesn't mean it's not still a potential headwind given the situation in Victoria in terms of energy costs, but we are sort of happy that that's cycling back closer to where it's been historically. And a lot of our operating costs were obviously impacted by having to deal with an extended turnaround, which, again, cycles back out. So I mean, there is obviously continued action in the refinery to continue to drive productivity and performance improvement, but the sort of big cost headwinds that we've seen last year really just will cycle out, Dale, and will flow through to the results this year.
So is that kind of done now, though, Scott, or when you start?
Yeah. Pretty much. I mean, in short.
That's exactly what I'm saying. Yeah. So we're perfect.
We're essentially running this year at a level that we'd expect to be running.
Okay. Thanks.
Your next question comes from David Errington with Bank of America. Please go ahead.
Morning, Scott. Morning, Carolyn. Probably directing to Jevan. Really pleased with your shop performance, Jevan. Non-tobacco sales up 8% for the full year, where the other mob across the road only delivered 3%. I saw some really nice margin expansion, gross margin up to 35.7%, which surprised me on the positive. Past previous discussion where the business was making nothing. I mean, the previous owners previously clearly did zero to enhance that business. I really thought that that was a very pleasing result. My question now is, okay, On the Run is done. Really excited. It's public that we're pretty positive toward that acquisition, and I think there's some huge upside. The transition now, I mean, the next six, I'll say it's going to be on July starting date. It's done. The ACCC's approved it, so we're done. Let's be adult about it.
The deal's done. What can we expect now for the next 6 to 12, 18 months starting July 1? Because this transition is going to be for us as investors, we need to get this right. So what can we expect? Now, you've got a business there making zero. Do you attack that? Is there ways that you can attack it? Because that business shouldn't be making zero. It should be making something. Do you attack that, or do you basically just ride it through, and do you just go full bore on the transition? Can you give us a bit of sugar as to what your thoughts are now that the deal is ready to go? Because I think the second half 2024 and the full year of 2025 is going to be really critical for us as investors to get right in terms of your transitions.
Can you go into a bit more depth on that, please, as to what you're thinking?
Yeah. Absolutely. And thanks for the questions, Dave. I'll do my best with the sugar. We've got a fair bit to do, and I think I'm really conscious of that. We've got a really good team in place. But I mean, I think the short answer is we need to do a little bit of both. The focus now is around identifying stores for the first stores for conversion from a Coles Express or Reddy Express directly to an OTR. And we'll be putting a fair bit of focus on getting the first lot of stores converted, trading, and running well. But I think you make some really good points. It's not a case of leaving the Coles Reddy Express network where it is and just waiting for the conversion to deliver results.
Within the number that you see there or the close-to-break-even contribution, and I touched on it briefly before, we've still got transitional services arrangements in place with Coles. And some of the work that we've done on sales growth ex-tobacco and margin expansion, or in some regards, fixing the margin and the convenience store price positioning a little to be a little more aligned with a convenience network, has been done progressively over the eight months that we picked up the business last year. So there'll be a bit of cycling of that through the course of this year and a bit more to come, and obviously, some integration work that should help us improve the cost side a little. So I think the focus for us is, yes, transition is important.
We need to get the first sites converted and start to see them trade well, and there needs to be a strong focus on that. But I'm certainly not losing any focus on the opportunity that exists to integrate the Coles Express business or the Reddy Express network as it will be in the next 12-18 months and have that start to tick along and perform a little better in parallel. So plenty to do means we've got to do both, but I think there's good opportunity on both fronts.
Yeah. Because it's important for us as investors to make sure that the profit continues to grow, but at the same time, that you can transition. So that's going to be something there that you've just got to get right, I suppose. But I mean, that positive performance in that result since you took ownership is really pleasing. So may I ask, where is the CapEx going this year? You're stepping up your CapEx before the on-the-run. I think it's going from AUD 40 million-AUD 80 million. And what's your thoughts on the MyCar? I mean, every time I go in, I can't get my car in there because of MyCar. They've got 15 cars parked in the car park for servicing. What are you going to do with that?
If you pump them, what sort of benefit are you? What sort of cost will that be from the sublease arrangement? Can you give us a bit of thoughts, a bit more sugar, if you wouldn't mind, on what your thoughts are there?
Yeah. Sure. I mean, I think to start with some of the sublease arrangements, particularly. I mean, it's not just about MyCar. We've obviously got a broader relationship with MyCar across the business as a customer of the commercial business too. But there's some 430 subtenants across our network. Some of those are automotive workshops, but a lot of QSRs and other things. To give you some context, there's around 2,500 jacks in the network that are subleased. There's a number of vacant, abandoned old workshops and QSRs. There's Subways. There's plenty of things in there. Our intention would be to work through those over the remaining five years or so that a lot of the subleases are in place for, given the historical alliance to 2029. It will mean that some of those will come out and convert to company operations in time.
Some will move to an OTR and an expanded shop. Some will move to a QSR that will look to run or other offers. So there's plenty of work to do in that space. And I hear you. I think the traditional service station with an automotive workshop next to the petrol pumps is probably not necessarily the model of the future. And I think you will see a fair bit of that change over time.
The CapEx?
The CapEx for us is really it's a combination of conversion but also investment in store. There's some work I'd like to do on fuel equipment. We've got a bit of aging infrastructure across the express network, both in shop but also on the forecourt. I think there's a little we can do to optimize things like all products at all pumps, the configuration of premium at some of the sites. There's been some of that work that we've done in the past, some that we haven't given the arrangements in the way that the network was run. And there will be a little bit of improvement that we make to some of the sites that we know will stay a Reddy Express for a longer period.
I feel like there's quite a lot of opportunity in that network, and it's fantastic to see how it's performing already, as you say. I mean, everyone who's been to a Coles Express or a Reddy Express store and then an OTR can see the contrast between the two offers. It's pretty good that the base offer of Express is still outperforming competitors as it is. Really pleased about how things are going, and I think there's lots of opportunity that we'll be able to unlock.
Well, thank you. And please, if there's a price inquiry, for heaven's sake, don't do a Four Corners interview, both you and Scott, Jevan.
Thanks. Noticed.
Thanks.
Your next question from Tom Allen with UBS. Please go ahead.
Good morning, Scott, Carolyn, Jevan, and the broader team. We're hearing it's a challenging environment to manage costs currently, and so the integration with Coles has seen some higher costs coming through. So can you please talk to the specific strategies and mitigations in place to manage the risk of incurring higher-than-expected costs as Viva rolls out the Reddy Express rebranding and OTR conversions following completion?
Yeah. I can kick off on that. Did you want me to start?
That's fine.
There you go. Yeah. I mean, I think the one so there is a bit of a cost inflation environment that I think all retailers are seeing across all retail industries. I think the fortunate thing that's playing in our favor at the moment is the growth and the scale that we've got. Most of the partners and suppliers that we're working with are looking at the opportunity over the next five years plus to really double the size of the network, to grow, to refurbish and rebuild stores. And we've actually seen really good engagement across our contractor and supplier base where they look at the opportunity to come work with us on scope, work with us on cost and optimization, and really try to be part of the bigger picture. So I think that's really helpful. That supports us.
I think if you're in a run-and-maintain space and you're perhaps not as interesting to some of your suppliers around growth and expansion, it's harder to get that buy-in and support. But I felt like we're in a pretty good place, plus we'll obviously have the scale that should bring us some benefit over time too.
Okay. Thanks, Jevan. And then just hoping for some comments on the fuel volume outlook. And just specifically, what are the key initiatives at Viva utilizing to drive higher retail fuel volume growth across the network? I think your response, Jevan, to an earlier question mentioned that there was no change in the broad pricing strategy. So just wondering what other specific initiatives you're going after.
Yeah. I mean, it's definitely important to stay competitive, and we continue to do that. I think the opportunity we have now with the business being run on an integrated basis is to do a little bit more around marketing consistent with shop. So in the past, you'd see Coles Express run in-store promotions. We'd run fuel-focused forecourt-style promotions, and they wouldn't necessarily be lined up or coordinated as well as they could be. So I think there's definitely an opportunity to do more of that in a consistent way, start to link fuel purchases with shop, buy fuel, get coffee, those sorts of offers. We've tried a few things. November, December, we ran a double docket campaign where we took the 4-cent Shopper docket and effectively doubled that to 8 cents for a limited period leading up to Christmas.
Probably didn't shoot the lights out, so it wasn't as amazing as I'd hoped, but delivered some really positive results. We saw 28,000 lapsed customers return to the shopper docket program and return to stores. And obviously, the Flybuys program and the Flybuys data really helps with being able to understand the success of some of those initiatives. So I think we'll be out there in the marketing space. We'll continue to try some different and hopefully some edgy promotions both in the express network and across the OTR offer as we start to roll that out outside of South Australia. So watch this space, I think, is the message.
Okay. Thanks, folks.
Your next question comes from Gordon Ramsay with RBC Capital Markets. Please go ahead.
Thank you. Great result, gentlemen. Just interested in the move to clean fuels and your view on that market and whether you believe pricing will be at a premium for low-sulphur, 98-octane gasoline, and other products that you're going to be producing under the new standards. Just your view on that market. Do you think it's relatively tight?
Yeah. Let me answer that. Yeah. I think there's a possibility that it will be a difficult product to source in an increasingly tightening market, which obviously will flow through into product premiums. It is obviously two years away, so a lot can change in the next two years. That's a little bit hard to forecast that. But certainly, it's a tighter spec. It's falling in line with where global specs are going. So it is available. It's a product that is available on the market, but any tightening of specs can generally lead to higher product premiums. So I think there's a real opportunity for that in a couple of years' time when this goes live. But as I said, it's two years away, so a lot can change in the refining market in that time.
Thanks, Scott. Sorry, I got a cold. My voice is deep. Just on the Commercial & Industrial side, in your Investor Day , you made it pretty clear that to get to the long-term goal that you have for that business, and it's obviously performing very strongly right now, would involve an acquisition. Are you still thinking along those lines that it would be similar to the polymer business where it's a bolt-on acquisition that fits in really well with the business?
Yeah. We've got Denis here with us today as well. So I might hand that one over to him.
Yeah. Thank you very quick for your question, Gordon. Yeah. Absolutely, still very consistent with what we announced at the end of last year. We're continuing to grow our baseline business, but we have in mind our aspiration to deliver a AUD 500 million business in a sustainable manner. And we are working definitely on a few potential targets on acquisition. And to repeat the criteria, we definitely want to have acquisition that will have a very good strategic fit, taking the opportunity to continue the diversification of our portfolio as we have done, as you just mentioned, with our plastic division and potentially a bit more of geographic footprint as well. So absolutely a core part of the strategy aside from the continuous growth on our existing business. Obviously, we cannot reveal a number of targets that we are working on, but this is pretty much in the agenda.
We hope to get something in the next 2 or 3 years.
Okay. Thank you very much. That's good.
Your next question comes from Mark Wiseman with Macquarie Group. Please go ahead.
Yeah. Hi, Scott, Jevan, Carolyn, and team. Thanks for the update today. I had a couple of questions. Firstly, on the C&I business, really strong result. It looks like you've largely held on to those first-half profits. I wonder if you could just comment on the outlook into 2024. Do you think you can hold this level of profitability and sort of grow into that AUD 500 million run rate over the next several years, or should we anticipate a bit of a pullback in that level of profit in 2024?
Thank you, Mark, for your question. Definitely, the objective that we have been given as a team is certainly not to move backwards. So hopefully, we will continue to grow. More seriously, if you look at the volume growth that we had in 2023, all in all, it's about 13% growth in volume, 40% of that coming from recovery, and 60% of that being attributable to new business wins. And those things, you remember what we discussed during the Investor Day , the tenure of our contract is something very important. We have a high-quality customer base and very loyal customers. So all these wins that we have accumulated in the last three years will continue to give their fruits in the coming years. From a recovery point of view, it's interesting. We still believe there is still a bit of recovery to come.
If you look at our aviation volume, spectacular growth in 2023, year-over-year, about 40%, but still 25% below our pre-pandemic level. So there is still some recovery to happen in the international aviation, in particular with our Chinese customers. So we believe there are definitely a number of elements making us very optimistic to continue to push the business on the same trajectory we have seen in the last three years. And this is probably another element. This growth has been very consistent for the last three years. Our pipeline is very solid, and we have acquired a large number of new strategic customers. Some of them have been disclosed, like the Defence Force or Royal Flying Doctor Service, but we have many more in our pipeline as well. So we believe we are definitely in the great position to continue to grow.
The last element maybe to give you is the change of mix and the weight that our specialty business is taking from a learning perspective. From a growth perspective, we continue to grow 10% in volume on our specialty business, pretty much close to 40% compared to pre-pandemic. Obviously, from a mixed perspective, not only brings resilience to our business, but it's changing our earning profile. Combined with some potential acquisition, yeah, we believe we'll continue to grow, and we want to be very optimistic about 2024.
That's fantastic. Thanks for that detail. And just a smaller one, I just wondered if you could give an update on the LNG import terminal at Geelong. How's the engagement with the Victorian Government, and what's the update for that project, please?
Yeah. Sure. So really largely unchanged from when we spoke about it at the Investor Day, and that is we're working through the various additional studies that we were required to do under the environmental approval process. But they're progressing well and nearing completion, and that then takes us to the next milestone, which is to resubmit to a panel for the final stage of the environmental approval process. So we sort of see that running ready process continuing to run through the course of this year. And I think we remain positive about the project. We see the business case still see a very strong business case for that project in Victoria to meet dwindling gas supplies and shore up energy security. So we think it's a great project. It's going to be needed by the we think it's going to be needed by the state.
But at the same time, we've got a process to run through with government. We'll see that out, and then we'll make and then following that, once we've secured environmental approvals, there's obviously then the contractual elements that we need to secure or to take it to FID. So there's still a little way to go through that project over the course of this year.
It sounds like FID would be sort of 2025 at earliest. Is that reasonable?
I think that's reasonable. Yeah. I mean, it's going to take assuming it progresses well and we continue to progress the project through the approval processes, it'll take most of this year, I think, before we conclude that and takes us into 2025. And obviously, at the end of the day, it's a decision for the Victorian Government about whether they want this project to go ahead. So that's obviously a bit in their hands as well. But I think from a planning perspective, that's probably, I think, a fair call and how you should think about it.
Great. Thank you.
Your next question comes from Henry Meyer with Goldman Sachs. Please go ahead.
Morning, all, and thanks for the update. Just want to dive in a little bit more into some of the commentary around the supply chain impacts from shipping disruptions and perhaps around the Vitol supply agreement. Can you touch on whether you'd expect to offset some of those supply challenges through the clean-dirty spread you pick up in refining, please?
Yeah. If I understand the question, it's more about how we think about managing the higher shipping costs that we're seeing at the moment.
Yeah. If you'd offset some of those challenges in the refining segment as well?
Yeah. I mean, obviously, the refinery benefits from the clean-dirty spread as part of the refining margin. A higher spread benefits the refinery. And often, there's a bit of an offset in our business from higher shipping costs. The high shipping costs is a potential headwind for Denis' business particularly, but it's generally an offset within the refining business from the benefit we get from the clean-dirty spread. So that's the benefit of having a diverse business, I guess. But as I said earlier, there's also a lot of flexibility within the commercial business to pass on increased costs over time. There can be a lag in seeing that pass through to the market, but our contracts are set up in such a way that we have a lot of flexibility to cover those sorts of variable costs.
So I think we asked you said it right at the beginning, it's a feature of the market at the moment because obviously, shipping costs have gone up a lot as a result of the Middle East conflict. That can change quickly as well. But at the same time, we have a great degree of flexibility on how we manage it, and there's upsides and downsides within our business from that sort of change. The arrangements with Vitol are certainly helpful for us for a lot of the contracts that we have.
The very large contracts that we typically enter into on multiple years, we typically will lock in back-to-back arrangements with Vitol so that the risk associated with these sorts of changes sits with them, not with us, and we have a more certain margin that we can expect to generate from those accounts. So that does cover a lot of the C&I business that Denis manages and provides a lot of protection for us.
Great. Thanks, Scott. And maybe just to stick on the refining theme, are you able to share perhaps what the refining margin has been like in January so far? You talk about the refining back to capacity. Should we assume that you've cleared out the inventory of partially refined products, and you're back to 2019 slate levels as of Jan.?
Yeah. Completely. It's a clean start to the year. We sort of tidied up all that last year. As I sort of indicated in the commentary, it's been a good start to the year from a refining perspective. Reasonably strong refining margins in tight markets, generally supportive of refining. So yeah, pretty happy with how that business has kicked off the year and looking forward, very optimistic about it as well because we've got a pretty clean year from a major maintenance perspective and should have an opportunity, really, to run pretty hard and enjoy whatever environment we face into, which at this point in time looks pretty good.
Great. Thanks, Gordon. If I can squeeze in maybe a third, really strong performance from C&I. Again, we've touched on it a bit. I think in the past few results, you've been cautious to flag that that could be repeatable, and the language around that's changed a bit now. Could it be the case that this AUD 500 million target over the next few years is conservative, or is that still sort of a reasonable target to be working towards from this year's result?
Yeah. I mean, I'll let perhaps I should let Denis kick off on it, and I'll add some views as well, but maybe don't envy Denis.
Thank you for your comment, and I'm sure Scott will take that on board when he has to design our objective for the next three years. Again, back to what I was saying before, I think there is a very strong demand in the market, and we see definitely some positive momentum, for example, in the mining industry in the next three years. Aviation, there will be more recovery, as I mentioned. Transport is growing. So we have a number of sectors who have really good fundamentals in terms of the sector's economy and will certainly benefit from that because we have a strong position on those sectors.
The AUD 500 million obviously is at reach, and if we look at the curve of the performance of that business, it looks pretty achievable pretty soon. But again, I will never repeat enough that we don't want this to be a spike performance. We want to deliver to get a AUD 500 million business in a sustainable manner. And that's the reason why an acquisition strategy is important to make sure that even in times where there could be a bit more headwinds, we would still be in a position to repeat that performance. So whether the AUD 500 million is conservative, this is our first target, and we want to get there in a sustainable manner. If we get there sooner, then we'll review the strategy for the future. But that's definitely our first objective. But I'm glad you believe we are a bit conservative on that business.
Yeah. I mean, it's a very different look. I know you're saying that it's a much-improved business from what it was five years ago. We've obviously focused on our sweet spots and areas where we have competitive advantages. We have built a really high-quality customer base with lots of opportunities to grow from those customers and grow with them. And that's a big feature of Denis' portfolio, which is really quite diverse now. So organically, I think we're in a strong position. Add to that, there's obviously a known uplift that we'll see from the OTR Group acquisition when that's completed this year that flows into the commercial business as well in terms of the wholesale division of OTR. So yeah, there's clearly a clear trajectory to AUD 400 million-AUD 500 million.
The aspiration, as Denis said, was really to deliver that sustainably year -on -year. So we get there earlier.
It's more about delivering that on a continuous basis as the focus.
Got it. That's great. Thanks, all.
Your next question comes from Rob Gillies with Morgan Stanley. Please go ahead.
Good morning. Congratulations on the result. My first question's just a quick one about the CapEx and with the fuel quality standard for aromatics coming in 2025. Does that require any CapEx for you guys? Is that included in the CapEx budget?
Yep. I'll take that one. Thanks, Scott. So the fuel quality standard, I'm thinking you're talking about the ultra-low-sulphur gasoline quality standard in the aromatics. And we definitely have included that in our 2024 guidance, and that will come into play in 2025. So we will see some CapEx across those two years.
Okay. So some CAPEX for 2024 and 2025 for the aromatics. Great. Okay.
That's right.
Second question. Yeah. Yeah. Thank you. That's very clear. So second question is just about the remuneration report, and congrats on the result there. I don't think anybody's got any complaints about that. The return on capital employed came in at 26.4%. And obviously, you don't disclose the targets going forward for commercial reasons, but just could you give us some color on any of the drivers that go into that? Do they get reviewed because of rising rates? Obviously, capital employed will go up with the acquisition. And yeah, just if you can give us any steer on that, please.
Yeah. I mean, they do get reviewed every year when they're set by the board in terms of the grants that are made for the following three years to reflect, obviously, changes in our WACC and our anticipated capital investment program, and particularly in terms of the areas where we're looking to grow, which is becoming a big feature of the forward capital plans now, both in retail and in the commercial business too. So it's a bit of a reflection of both the cost and the opportunity, Rob, in setting a target that reflects both those elements and provides sufficient stretch for the executive team to outperform.
Okay. Sounds good. Just a final question. I guess Mr. Errington alluded to this, but it is serious. And having covered utilities for many years, unfortunately, there is such a thing as making too much money in this day and age. Can you just give us a sense of how you're gauging social license risk for the current cost of living initiatives going on by government? And if you have a crisis management team on retainer or just because it's not necessarily enough to just keep your head down and keep on with business in this day and age?
Sure. I totally understand. And I know we were very focused on that through the course of last year, particularly in respect of the retail business, which obviously is focusing on consumers and wanting to continue to provide real value to customers through challenging times. So that reflected in obviously making sure that we remain competitive and providing that value to customers, but also investing in programs like the one that Jevan touched on that we did towards the back end of the year to provide double discount, double docket discounts to consumers for a period of time, provide an opportunity for those that were looking for opportunities to save to be able to do that in terms of their relationship with us. So I think now we've got full control over the network and the convenience offer and obviously with OTR coming on board as well.
I mean, I think that is something we'll certainly it's top of mind, and we'll have many more levers to be able to provide value to customers and particularly support those customers that are looking for opportunities to save, ways of doing that as well. So on that front, I think it's very much part of the retail strategy. In terms of our general preparedness for crisis, I guess, it's something we do prepare for. We do train for, not just in these sorts of reputational issues, but all elements of the risks that we face into, whether it's operating risk or cyber risk and so on. So we have quite a lot of effort goes into that, and we do train for that regularly and have access to people to support us in the event that we need that support.
Okay. Great. Thanks very much. Sounds good. Good luck with it.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Scott Ryall with Rimor Equity Research. Please go ahead.
Hi. Thank you. Hopefully, two very quick ones for you to finish off. I'm just referring to slide 21 of your pack, and I'm interested in your view around what makes for a premium EV charging station as opposed to a normal one. I think from your press release, you're referring to the fact that there'll be sites where you've got very strong convenience and maybe restaurant offerings, but maybe you could give a bit more color on that one. And then the other one, hopefully, again, is pretty quick. How do the vehicle emission standards impact your thoughts on the refinery investments that you're doing at the moment, please?
Jevan, would you like to tackle the EV question?
Yeah. Sure. Yeah. I mean, it's really a couple of things. I mean, you touch on the point around convenience. So it's making sure that where we've got an EV charging offering, we've got a convenience offer that supports it. And that will be a little more focused around the OTR-style convenience offer going forward and trying to align sites that have EV charging with the sites that are obviously converting to the OTR offer. So that's the first point. The second is making sure that the EV charging offer itself is something that works really well for customers.
I know you know this space well, but making sure we've got fast charging, making sure that there's sufficient space on site and on the forecourt to do that, that there's sufficient bays and the infrastructure and the systems that run that charging offer work really well and effectively without the usual bugs that EV owners seem to suffer when they look for charging stations. That's what we mean when we talk about a premium EV charging offer.
Okay.
On the emissions question, obviously, the changes to vehicle emission standards is designed to increase the availability of low-emission vehicles coming to the market in Australia, and obviously, EVs are part of that. And I guess the attempt is through having greater availability of those vehicles in Australia, it will drive an uptake in transition, particularly to EVs, over time. That's obviously something that we've anticipated, and that's a market change that we've anticipated for quite some time in terms of and which, I guess, drives the investment in convenience and in EV recharging facilities for customers as well to try and meet that growing market demand. In terms of the investments in the refinery, I think the refinery's investments remain resilient in a world where we've got greater EV uptake because at the end of the day, 80% of Australia's fuel demand is imported from overseas.
So the two refineries in Australia really only meet 20% of the fuel demand. Fuel demand has to decline a long way before the markets for refined production are impacted in Australia. The life for the refinery is quite a long one. From a supply perspective, and obviously, it has a particular key role to play in energy security as well, which has only become very prominent through the pandemic and is only growing with all of the geopolitical issues around the world as time goes by. We feel very confident about the refining investments that we've made. As we've foreshadowed in the past, we sort of see for the next decade that refining and the supply-demand balance for refining is going to remain quite tight and should be overall largely supportive of refining margins through that period.
Okay. Great. That's all I had. Thank you.
There are no further questions at this time. I'll now hand back to Mr. Wyatt for closing remarks.
Look, thank you very much for taking the time to join us today. I think I'll just close just talking about the year ahead. I think it's a very exciting year for Viva Energy with the strategic agenda that we've got, having completed the Coles Express transition last year and not far from completing on the OTR transaction. We've got all the platforms in place to really accelerate our convenience strategy and the transformation of our retail business. It's very much a year of focus on execution, a lot of work going into, obviously, managing the transition of those businesses well, bringing together the integration, and moving forward with the rollout of the convenience offer across the network and really accelerating the product that we have in the retail market. So that's exciting. And commercial, it's maintaining the momentum that we've built up now over a number of years.
The acquisition of the OTR wholesale division will be a material one. It will really help to continue to build our presence in rural and regional Australia as an example. As Denis touched on, we continue to look for other opportunities to build on what has become a really strong capability in our Commercial and Industrial business. Refining, a clean year ahead, a good start to the year in terms of the regional refining margin environment. Obviously, a lot of work happening to prepare for next year in terms of the upgrades to low-sulphur gasoline, but that is going well and an opportunity to really turn in, I think, a good result in refining in 2024. So yeah, I said the big theme for us is execution, maintaining focus on customers, and delivering on our promises.
So looking forward to talking to you a bit more about that at the half-year point when we've got the first half behind us. But thanks again for joining us today and for your questions. Much appreciated.
That does conclude our conference for today. Thank you for participating. You may now disconnect.