Viva Energy Group Limited (VEA) Earnings Call Transcript

Thank you for standing by, and welcome to the Viva Energy Australia Half Year 2025 results. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Wyatt, Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining us this morning to discuss our first half results. With me on the call is Carolyn Pedic, our Chief Financial Officer; and Jevan Bouzo, our CEO of Convenience and Mobility. Carolyn and I will share the group results, and Jevan will provide more commentary on the development of our retail strategy, which is a clear priority for the business and an important driver of long-term growth. Over last year, we have made substantial progress to bring together our retail businesses under a single unified operating platform. And with the bulk of the transition now behind us, we are very focused on delivering on these aspirations in the period ahead. We look forward to sharing this progress with you this morning as well as the performance of our broader business. So let me begin by turning to Slide 4 and 5 to briefly discuss our broader operational and trading performance. Our safety and operational performance in the first half was very solid, injury frequency rates continue to improve, and I'm particularly pleased with the step change we are seeing across the retail business as common expectations and processes are implemented. Our process safety performance was equally strong, and we are well prepared for a busy operational period as we commence our major maintenance at Geelong and the start-up of our ultra-low-sulfur gasoline production. After suffering a site-wide car outage in January, Geelong Refinery recovered extremely well and has since delivered a strong operating performance with availability at 92% and crude intake at just short of 19 million barrels. Fuel sales were comparatively strong across the group, with retail sales largely in line with the prior period despite the broader market decline by more than 20%. Convenience sales were, of course, heavily impacted by the continued loss of tobacco sales to illicit trade and the knock on to sales in other convenience categories. I think we've done particularly well to minimize the margin impact from this dynamic but there's no doubt it's been a significant challenge for this part of our business. The company delivered an EBITDA of $305 million, in line with our guidance for the half and has declared an interim dividend of $3.08 per share. The balance sheet remains strong with peak CapEx coming to an end and net debt finishing at $1.947 billion. Let me now hand over to Carolyn to discuss our financial performance in more detail.

Thanks, Scott. So turning to Slide 7. This summarizes the financial performance by segment. As Scott just highlighted, group EBITDA on a replacement cost basis was $305 million, which was slightly above the guidance we gave in late July. Net profit after tax for the group was $63 million. That's reflecting another strong period of delivery from commercial and industrial, along with a period of challenging conditions for the retail and refining businesses as well as higher depreciation and amortization and net interest costs associated with recent acquisitions. Significant item was recognized outside underlying earnings during the period included a noncash $245 million impairment of individual sites in the convenience and mobility business. It's primarily the reduction of the right-of-use assets for certain sites during a period of softer trading conditions and decline in tobacco. The Board has determined a fully franked dividend of $2.08 per share that represents a payout ratio of 50% for the convenience and mobility and commercial and industrial businesses at the half. Now turning to cash flow on Slide 8. Free cash flow for the half was impacted by a period of significant investment and integration activity. You can see the bridge from EBITDA to net free cash flow, the impact of capital expenditure on multiple year projects, the acquisition of Liberty Convenience as well as integration costs associated with convenience and mobility. When we adjust for these items, underlying free cash flow is slightly positive. Now given we report on a pre-AASB 16 basis, EBITDA remains a good proxy for underlying operating cash generation. Now on the next slide, net capital expenditure for the half was $225 million. We remain on track for around $500 million of investment in FY 2025, net of government grants. Spend is weighted to the ultra-low-sulfur gasoline and aromatics projects, which are expected to be completed in October this year at a total net cost of approximately $270 million. From FY '26 onwards, as we've previously guided, we expect capital expenditure to step down to between $350 million and $450 million per annum as these major projects are delivered and integration spend moderates. Now moving to Slide 10. On gearing at the half was elevated at 1.66x, which is just above our target range of 1x to 1.5x term debt to trailing 12-month EBITDA. Gearing, including total net debt was 3.2x. This reflects a period of significant investment, which, as I mentioned earlier, will reduce heading into 2026. Our focus is on reducing gearing as we move through the current period of intensive capital investment towards 2x by the end of FY 2027, including utilization of the revolving credit facility. This will be supported by the completion of major projects, delivery of earnings and improved market conditions. Now on Slide 7, you'll see the Board has determined an interim fully franked dividend of $0.028 per share for the half, and this represents, as I said, a 50% payout ratio of NPAT RC from the convenience and mobility and commercial industrial segments and 73% of the group overall. Consistent with our dividend policy, no dividend has been declared for the Energy & Infrastructure segment, which is assessed on a full year basis. The interim dividend will be paid on the 30th of September 2025 and to shareholders on the register as at the 8th of September 2025. Now our dividend reinvestment plan remains active, with 52% participation in the final FY 2024 dividend and eligible shareholders for reinvest their dividends directly into shares at a 1.5% discount. The dividend reinvestment plan is not underwritten. With that, I'll hand over to Jevan to discuss the development of our convenience business.

Thanks, Carolyn. I'll kick off with a short recap of the retail strategy. We're reshaping the petrol and convenience industry by creating a business that fills a gap between traditional petrol stations and quick service restaurants. It's the area of convenience and fast food that's more and more in demand in people's busy lives. Our retail business will be the largest player in the convenience market with a network of irreplaceable locations and an offer which delivers over half of the earnings from convenience and QSR. This is a long-term strategy, and we think about delivery over the 5 years to 2028, which largely started at the end of the first quarter last year when we completed on the OTR since acquisition. When you look at the diagram on this slide, we've completed 3 material acquisitions and the heaviest part of the integration is almost behind us. On slide 14, we've set out a summary of the progress achieved in the first half this year. It's a really long list, so I'll just call out some of the highlights. Our investment in technology has been significant and to stand up a new ERP point-of-sale payroll system and supply chain management system at this scale in what is about 18 months is an exceptional feat by a really dedicated team. The transition of brands, investment in stores and building out our network plan has taken considerable effort, and we're set up really well to focus on conversions going forward. There have also been some fairly large disruptions to trade between consolidating organizations and navigating the new tobacco legislation. This has not been a period of business as usual by any means. The positive is that this is all largely behind us now, and we're focused on driving the core business forward from here. On Slide 15, we've set out the first half results bridge from 2024 to 2025 and the result is in line with our quarterly update to the market from last month. This has been a period heavily impacted by the transition over the past 12 months with impacts from tobacco and one-off and transitional costs dampening earnings. We've missed opportunities to better manage margins in the first half. And we haven't passed on prices and increases from suppliers in a way that we would have liked. We managed labor cost fairly well given the addition of new stores and mandated award increases, and I'll cover some of these areas in a bit more detail on the next slides. Turning to Slide 16. We've separated tobacco and SMGB from convenience and quick service restaurants. The decline in tobacco sales continues to be driven by the significant shift into illicit tobacco and despite illicit tobacco representing over 50% of the total market, we've managed margin to soften the impact of the sales decline and we'll continue to pursue opportunities to do this going forward. Our convenience performance on sales results were down a couple of percent with OTR outperforming the Express offer. We did miss some opportunities to deliver a better outcome during the first half. Given the focus on transition of people and systems, However, this trend is improving into the second half as we're starting to pass on some of those supplier cost increases. On Slide 17, we've set out the results of the synergy and the cost out program we highlighted earlier in the year. Overall, we expect to deliver $65 million of earnings improvements from a combination of the business integration synergy and the cost-out program that's designed to manage underlying earnings. This is the retail program of the overall commitment that we made earlier in the year. Of this, there's about $15 million in the first half and $50 million expected in the second half of 2025. We're on track to deliver the second half commitment given the work we've done to date on the new payroll and HRIS system, cost rationalization and consolidation of supply terms. Over time, the cost-out component will become part of underlying earnings, and we still expect to deliver the $90 million plus of integration synergy as we exit 2026. Slide 18 sets out a bridge between the poor result in the first quarter of the half and the second quarter, which is more representative of underlying performance going forward. There was a clear improvement in fuel margin in the second quarter, along with the contribution from the Liberty acquisition. Although it's hard to say given the seasonal performance of segments like car wash, the improvement in merchandise and food and beverage margin is evidence that our actions to lift performance are delivering results. While some of the synergy and cost out results are embedded in the second quarter numbers. On the previous slide, we called out about $35 million of improvement in the second half beyond what's already in the Q2 result. Slide 19 sets out our network segmentation. Our primary focus is conversion of Reddy Express sites to OTR stores with a significant improvement in the range and food and beverage offering. The Liberty acquisition provides us with a discount fuel offer that can compete in certain markets more effectively than the Shell brand. This allows us to continue to run sites that are not suitable for OTR conversion and compete more actively with low-cost independent and unmanned sites. Slide 20 outlines the progress on our network conversion program. Year-to-date, we've opened 15 new OTR stores with conversions focused on New South Wales. These stores are absolutely exceptional and incorporate a lot of the learnings from the first 4 that we completed last year. While the conversion spend has averaged $1.5 million, a significant proportion of this spend relates to replacement of end-of-life fit-out and equipment given the underinvestment that has occurred in the Express network. Over time, this should further reduce repairs and maintenance expenditure. Looking forward, we expect to deliver around 40 OTR sites this year with about 25 in the final 3 to 4 months of the year. This is the result of significant investment in capability, which will see us make a strong start to 2026 as well. In addition, we expect to convert about half a dozen sites to the Liberty discount fuel offer by the end of the year. These sites were not suitable to convert to OTR. Slide 21 sets out the performance of conversion stores to date. The first 4 sites we converted are performing really well. and delivering results that are far superior to the Reddy Express network. It's important to note that these results are dampened by the removal of Reddy Express loyalty and promotional programs typically designed to drive headline sales. and the gross margins are impacted by the subscale interstate supply chain. These factors will be addressed in the future once we've integrated flybuys across both platforms and implemented our interstate supply chain during 2026. On Slide 22, we've set out a summary of the progress this half and some of the key priorities going forward. The progress we've made in the past 6 to 12 months has been really significant. Collectively, the systems implementations and integration is the sort of journey that most stable businesses would deliver over a decade. I admit we've been focused on building an incredible business over the long term. with a lot of risks of systems implementation across all aspects of the operation now behind us, we're starting to shift the balance back to managing the short-term earnings. This doesn't mean there isn't still a lot of work to do. The key focus areas through to the end of next year are delivering on the store supply chain implementation outside South Australia, integrating the loyalty programs and continuing to execute on conversion to exceptional ATR stores. transition of this size is hard, but we're building something really exceptional. So if you can bear with us and give us time, the rewards will be significant. Over to you, Scott, for the next section.

Thanks, Jevan. Turning now to the other parts of our business. Let me give a quick overview of our commercial and refining businesses from Slide 24 before turning over to your questions. As Carolyn touched on earlier, the commercial and industrial businesses delivered an EBITDA of $238 million, which was in line with the same period last year. Sales volumes for the half were down 2% on that same period with weather impacts on the East Coast and softer sales to the wholesale channel, partly offset by strong aviation demand, increased demand from defense for planned exercises and growth initiatives in marine, bitumen and other commercial segments. The stability and ability to withstand sector cycles and softer conditions is a direct reflection of the diversity we now have within our commercial business. and I'm really pleased with the way this part of our business is performing. From a strategic perspective, we continue to expand our infrastructure footprint to grow our presence and meet demand from our commercial customers with the entry of the marine fuel market in Brisbane and plans to enter 3 new airports over the next few months. Our national infrastructure position supported by high-quality customer relationships provides an important point of differentiation and continues to be a key factor in the continued performance of this high-quality business. As I mentioned earlier, our refining business turned in a strong operational performance as set out on Slide 10, which has translated into a modest EBITDA of $18 million due to the weak refining margins which persisted for much of the half. Margins have strengthened somewhat in recent months, which are long recording a GRM of USD 10 per barrel in July just prior to entering our turnaround. We have commenced the major maintenance of our catalytic cracking unit in August and are in the process of preparing for start-up of our ultra-low sulfur gasoline processing units, which are both expected to be online in early October. With both projects behind us, this will bring to an end a period of heavy investment, which sets us up for a clear run through to 2030 when we commence our next major maintenance cycle. As I mentioned at the beginning of the presentation, this is a very important year for the company. We are nearing the end of a heavy investment period for the refining business, which allows us to shift our capital focus to store conversions and the development of our convenience business. We will, of course, continue to invest in our commercial business, but this will be largely organic where we have achieved great success over the last few years. We have now completed the acquisition of Coles Express, OTR and Liberty Convenience, these businesses have been integrated under a common set of systems and processes, and we are building experienced momentum in upgrading our convenience software through the extension of OTR across the Reddy Express network. We aim to end this year with at least 40 new OTR stores and capacity to deliver 20 to 25 stores per quarter through the years ahead. At a group level, we are on track to deliver group synergies and cost out improvements of approximately $80 million this year with $60 million embedded within the convenience and mobility business. We aim to build on the performance we delivered in the second quarter and finished the year with strong operational and earnings performance in Convenience. We expect our commercial and industrial business to deliver another stable performance and our refining business to deliver a strong fourth quarter once we complete the major maintenance and production of ultra-low sulfur gasoline. There is much to achieve in the coming months, but we are clear on our priorities, and we look forward to ending the year with solid momentum across all our business units. That concludes the presentation. So let me now hand over for your questions.

[Operator Instructions] Your first question today comes from Tom Allen with UBS.

On the network conversion growth, to hit the market's expectations for medium-term earnings lever need to deliver 100 conversions annually. And are that including the new-to-industry sites. So having delivered only 9 conversions over the half but expecting from the fourth quarter of this year that the required 25 sites a quarter can be met. What additional color can you provide to help build conviction that, that growth rate can be achieved whether that relates to additional color on the contractor or additional work that you've done to mitigate challenges that you've seen with delays from counsel and planning departments. Just keen to understand how we can hit that target.

Sure, I can take that one. Yes, thanks for the question. We've done quite a lot of work on building the pipeline. And we definitely have seen a ramp-up in both capability and -- lodgement and planning approvals through the course of this year. And with the plans for the remainder of this year, we'll see us deliver almost 25 or so across a single quarter. I mean that's been a really sharp ramp in capability. Beyond that, we haven't just focused on the program to the end of this year. We're focused pretty heavily on completing and concluding designs and approvals, building counsel, [ DA ] lodgement packs and getting them lodged in. So as we stand today, we have quite a lot of sites that are already in planning approval process with councils. And those aren't the sites that we plan to deliver between now and the end of the year. those are sites that will be on schedule for delivery next year. And that's now a process that's running in parallel to conversions. I expect that when we get to the end of the year, a lot of the sites that we plan to deliver next year will either already be in canceled or will be approved. And that will give us the opportunity to go as fast as we like as we move into 2026. So it's taken a bit of time to build the capability and to build that pipeline of approved DAs and lodge designs. But we're starting to get in front of that now, and I expect over the next 4 to 5 months, we'll be well in front of that and have the process coming. But that's the key, I think, Tom, that's getting designs in getting the DAs lodged and getting them approved well ahead of time.

I appreciate that extra color. How confident are you on achieving Viva's target of growing convenience and mobility EBITDA to over $500 million by '28, just given that there has been a bit of a slower start to the conversion ramp-up?

Yes, there's definitely been some disruption. And I think if you go back to the original bridge that we set out, the conversions were only 1 component of that. I mean, a big part of it is underlying business performance. It's the synergy and integration work that we've been working to deliver and have called out for delivery by end of next year. It's also the new sites, the acquisition of Liberty. And so I think the work that we've done in the past 6 to 12 months has been really important to lay the foundations that will help us get to that sort of level in 2028. There's obviously still a lot of water to go under the bridge and there's a few years ahead of us. But from where we stand today, I think we have put everything in place with the integration work that we've done to give us the best chance of delivering on that. There's obviously a bit of work we need to do to manage the earnings in the short term but really focused on the long-term delivery, which I think is really positive for the business.

Just expanding your comment there on the underlying business performance being a big part of achieving that EBITDA growth in convenience. There's obviously a lot of focus on the performance of the new OTR conversions in the new-to-industry stores, but yes, there's obviously a very large express network that is competing in a tough operating environment with to use your language and under-invested convenience offer. Can you talk just a little bit more to specific initiatives to improve the Express store performance we're seeing industry offers proliferating discount fuel and unmanned sites. And so keen to understand how Viva might adjust its fuel pricing strategy perhaps just to mitigate the pressure on fuel volumes and drive more traffic through the shop?

Yes, totally. I mean, our fuel volume result in the first half was quite positive. And I think the team have done a pretty good job of working to optimize fuel volume and margin across that network in a way that's better than we ever had before. And one of the reasons for that is just having the scale and the wider network and the wider range of offers to manage the way we compete in different markets. And so if you reflect on a few years ago, the Express network was all we had. And we didn't have exposure to convenience earnings and so our only lever for earnings management was fuel price and fuel margin if you reflect on the different elements in the retail business today, we've got the HR work. We've got the Express network. We've got the Liberty business the fuel offer that's associated with that and our ability to compete in different segments in different markets. And so that alone has given us a lot of confidence and a lot of opportunity to run and manage that network and position it in a better way than we ever have been able to in the past. And so I think there's definitely more we can do to grow the fuel presence. I think we'll use the Liberty brand and the Liberty offer to do that in markets where sites are more suited to a discount fuel offer than the Shell brand. And that doesn't need to be a move away from the Reddy Express store. I definitely think we can grow the Shell card presence within our Shell offer, and we're continuing to focus on that too, which will be a big part of that network acceptance. And over time, as we see more and more OTRs interstate and outside of South Australia, that will change the shape and the brand presence for Shell as well as a bit of a halo to Reddy Express. So A bit of a focus across all platforms. It doesn't mean we've forgotten about Reddy Express because there's still a lot of sites out there, and we've been running some marketing and advertising on that more recently and seeing some really good customer response to that. But definitely, the move to OTR stores and away from Reddy Express stores will help accelerate that.

Next question comes from Dale Koenders with Darren Joey.

Maybe just another 1 for Jevan. Thanks for the incremental color on, I guess, earnings from -- today in the waterfall. Just wondering, when we look at that second quarter EBITDA for Convenience and Mobility what are the one-offs that are worth calling out maybe some of the color around the waterfall or the $3 million one-off costs are and the $12-odd million of transition costs, how much of that is in that run rate in the second quarter?

Yes, totally. I mean I think there is a bit of balance between first quarter and second quarter. Most of the negative impacts were in the first quarter. And while it's a bit hard to say from the first to second quarter bridge, there's obviously the improvement in fuel margin and the addition of Liberty. There is an improvement in our convenience gross margin there. And so some of the work that we've been doing to lift contribution from convenience, particularly in a Reddy Express network where we're slow to pass on price increase from suppliers are starting to take shape in the second quarter. There's obviously a bit more of that to do into the second half. And you can say that the flattish cost of doing business into the second quarter is representative of starting to improve results given the cost increases that we saw half-on-half from last year. But the way I would think about it, Dale, is the underlying performance of the business going forward, at least in the short term, is going to be fairly similar to what we've delivered in Q2 and then there's obviously the incremental synergy and cost out that's not embedded in Q2, which we called out on that slide as being $35 million of the $50 million delivered in the second half.

If we take that second quarter run rate, we can all times wide to and plus the synergies to get to a number for the second half. But what are the other moving pieces you think we should be considering? I don't know if there's like seasonal fuel strength normally in the fourth quarter? Any sort of comments on tobacco, further outages in OTR? Anything else we're sort of talking about the moving pieces for the second half?

Yes. I mean I'll cover a few. I mean there's plenty. But I think -- I mean the second quarter is a good baseline to reflect on as what performance will look like going forward. I mean the obvious factors are the ones that you've called out are impacted tobacco, a fact that, that's been flat from first quarter into second quarter demonstrates that we've started to see results from the management strategy despite the sales declines that we've experienced. So our focus is on continuing that sort of performance into the second half. There's obviously the award wage increases that occur from 1 July each year, and that left wage costs for our team members across the network. But then you have a little bit of seasonality that is likely to offset that at the same time. So a few moving parts. But overall, we'll be pretty focused on delivering that synergy and cost out target, which is effectively the incremental $35 million beyond what's embedded in the second quarter. And while there's a few moving parts, and I expect them to largely offset each other, I think 2Q performance is a good baseline for now.

Okay. And then just finally, on the OTR conversion performance, I guess, relative to comments provided in Feb where you've sort of spoken about $170,000 to $220,000 of annualized margin improvement. Are you seeing these results now better than that or similar? Because I guess, last time around, we said the cost increase is really offsetting that margin and the -- breakeven at an EBITDA level. Just wondering if we're seeing positive contributions yet.

Yes. I mean definitely seeing positive earnings contribution on those stores. There's been some really good results. And I think what we're realizing is that it takes time for the offer to be embedded in market for people to understand what is on offer and start to take full advantage of the store. It's 1 thing for people to come in and fill up petrol and walk in and say what's in the shop, it's another for people to stop in regularly because they know that the store offers what they know and love and want. And there's definitely an opportunity for us to start to get the OTR offer and acceptance out there in markets outside South Australia. I expect once we get a meaningful number of stores in New South Wales, we'll be able to focus on more brand awareness campaigns start to tell people a little more actively about what we offer in store and what they can come in and expect and those are the sorts of things that will help further lift shop-only transactions and frequency of visitation over time. So I feel really positive about the contribution of the early stores. I feel really positive about the stores that we've converted in the past few months. And the ones that we've recently converted are pretty large and impressive stores. And so if you haven't had the opportunity to get to them. They're well worth a visit. There's some pretty exceptional delivery of offer in those stores and I think will only grow from here as we continue to incorporate the learnings in the next program.

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

Just a last 1 with some convenience and 1 on the [ border ] business. But just firstly, just on this conversion CapEx, $1.5 million. I mean how is that sort of comparing to sort of medium-term expectations. And you talked about the 100 sort of ready, but what do you sort of expect to do in FY '26 or more of that 50 sort of level? Or just give us some color there, please?

Yes. Thanks, Adam. We're definitely working on capability to deliver the equivalent of 100 a year or this sort of 20 to 25 a quarter. So I think as we enter next year, we'll have the opportunity to go as fast as we like on conversions. There's been some really strong results on the early sites and strong results so far on the sites that we converted in the last few months. And obviously, as we enter 2026, we'll have more data and more color on the sites that were recently converted as well as the sites that are ahead of us. So I think the momentum on that program will just continue to build. We obviously haven't guided for a number of stores for next year, but the positive from my perspective is that we've got the capability now and so we'll just focus on execution and delivery.

Okay. And just a follow-up or another question to Scott. Just on LNG imports, I mean you're talking the pack there about sort of FID ready or early 2026. How is sort of discussions with commercial partners going there? Are you looking at some sort of farm down here just given where the balance sheet is that perhaps just give us a bit more color there, please?

Yes, sure, Adam. Thanks for the question. I mean the -- so reaching the environmental approval was a major milestone, and it's now allowed us to move forward more clearly with commercial negotiations with potential customers. And I'd say, look, the interest is very strong. I mean the need for the terminals and import terminal is increasingly recognized as an important part of the overall gas [indiscernible] so I think we feel positive about that. It's -- there's other things, other processes we also need to work through as well, but the commercial side is going to be key for FID. We're pretty open. And in terms of how we fund it, and we're certainly -- that's obviously also part of the work that we need to do is determining the funding mechanism and how that works with the potential customers that we would look to involve in the terminal. So -- and all those things are in play, Adam. I think it will play out over the next 6 months or so and potentially getting us to a point for FID late this year, early next year is our objective still at this point in time.

Your next question comes from Henry Meyer with Goldman Sachs.

In C&M, we've got the total $90 million cost reduction from the end of next year, which would suggest there's another $25 million from this year. Could you just step through what those key drivers will be and how those costs have come out through the year?

Yes, sure. I mean, there's a few elements that go to that synergy and cost reduction bucket, some system integrations and bringing teams together and reducing above store costs. Some have been rationalizing supplier terms, and that will continue to deliver some benefits as we consolidate buying across the 2 businesses and align terms in a way that gives us the best opportunity to compete in market and grow our convenience gross margin. There's definitely some that's associated with transition activity concluding and things like our supply chain project, supply chain implementation that will occur through the course of 2026 will be a big part of that as well. So there's a number of things that we're working on through the course of this year into the back half and through the first half of 2026 that will help us deliver the full run rate as we exit '26 and enter '27. But quite a few elements that make up the 90 plus. I think as you stand back and look at the business, there is still a lot of opportunity to bring things together and really start to leverage the scale that we've got and the size of the organization, particularly now that we're starting to get the systems in place that will enable us to do that.

Okay. And more broadly, gearing is now above the target range. How rapidly do you think you could gear the balance sheet? And are there any other opportunities like asset sales that you could issue to accelerate?

Yes. Thanks for the question. I'll take that one. So I mean, I mentioned I guess, on the call in terms of from a gearing perspective, we're exactly where we expected to be just given we've been going through a higher period of CapEx and weaker earnings. And so we expect that this will improve as we cycle out of this higher CapEx period, as we mentioned before, the low sulfur gasoline project and the turnaround will be behind us this year. So that will definitely help. And we expect earnings to improve going forward. So it's been a pretty weak period. So we've talked about moving towards a gearing of 2x, that's total net debt-to-EBITDA heading towards 2027.

Your next question comes from Gordon Ramsay with RBC Capital Markets.

Jevan, I'm going to come back to your kind of rollouts of your OTR stores. I think the company was previously targeting 40 to 60 OTR format stores during 2025. That's a combination of new builds and conversions. On my numbers, you're looking at delivering 39 now because 6 of them are going to be converted to Liberty sites. So I guess my question relates to guidance going forward, where you're saying you're going to do $20 million to $25 million a quarter. Is there a risk that not all those sites get converted to OTR sites and some of them become Liberty sites?

Yes, sure. I'll take it. Yes, we will deliver -- so if you sort of work the numbers through, I expect we'll deliver about 40 this year, and that's a combination of OTR conversions and new OTR stores that's within the pipeline. In order to deliver that, we'll see 25 delivered effectively between now and end of the year. And it means close to 25 are delivered within 1 quarter. So it is the program that's in place to deliver that between now and the end of the year, which is repeatable and the level of planning approvals that are in at the moment for consideration along with those that are continuing to be prepared and lodged, I'm pretty confident we've got the capability in place to deliver that sort of level going forward. The 6 or so Liberty sites that we're looking at rolling out between now and the end of the year are sites that were not suitable for OTR conversion. And so over time, I think we'll be additive or separate to the OTR conversion program and the delivery of the new OTR pipeline stores. It's just an opportunity for us to think about sites that struggle under the Shell brand. that are perhaps close to an area where discount fuel offers are more prevalent and more accepted by customers. And are better suited to a different sort of offer than a Reddy Express shell and aren't necessarily suitable for an OTR store. And so in the past, we would have had limited options to deal with those sites and run them effectively. I think today, we can rebrand the forecourt to Liberty and compete differently. We can convert the shop as well. And so -- there's a few things that we're going to explore with those Liberty sites. It's really quite separate to the OTR conversion program and the strategy to deliver that over time, and it's obviously managed by the Liberty team. And so it has an impact on the capability to deliver conversions. So I feel fairly comfortable that the 2 can coexist in a way that will get us a better overall outcome for the business.

Okay. And just 1 more. There's a comment about landlord funding preferred for stores requiring major building works. I just wanted to get a feel for what the take-up is for that? And is that ongoing right now? Or is that in the future, and how that affects average conversion costs, which you're estimating at $1.5 million?

Yes. I mean we're in regular conversations with the landlords, and I think we've got pretty good relationships with all of them. There's obviously quite a lot across quite a wide network, and it's slightly different for different owners of sites. But broadly speaking, I think when you're doing a fairly basic refurbishment or remodel of the store that's the sort of spend that we've called out. It's the sort of site conversion that we've done more recently and the opportunity for landlord funding is there, but it's not essential. When you're doing a full knockdown rebuild or a major redevelopment of a site such as the sites at Glasshouse Mountain, which we're working on with the guys at Dexus, those sorts of things are big investments in site and infrastructure and buildings and more commonly across all sectors really funded by the landlord and managed through adjustments to rent and typically come with resetting leases and new leases in place. And so -- as we go through the network and we move into next year, we start to tackle some of the bigger and more impactful sites on highways and in other locations around the country, that sort of model is more likely to be adopted, and it will obviously be subject to cost of capital and negotiations and arrangements with landlords. But I think on that front, there's opportunity for us to do more. At the moment, we haven't done a lot. We've been focused on building capability and rolling out the conversions in the most agile way as we move into a more programmatic phase, we've got opportunity to tackle that a little bit more than we have.

Your next question comes from Rob Koh with MS. .

My first question is just on Slide 21 in relation to the store conversion performance, that kind of swing between the margin of the conversion versus the Express looks very attractive. Is that -- can you maybe give us a sense of the distribution of outcomes that you're looking for in the pipeline in the year ahead? Are they all around that level? Or is that middle of the bell curve...

Yes. I mean it's not that wide. They are mostly around that level. But when you think about the impact of the conversions, in my mind, it's less about the size of the uplift and more about the speed of getting it. We feel pretty comfortable and confident that the uplift will be there over time, and it will be significant. You can see that by just walking into a store and saying what an old tired Reddy Express looks like with a fairly limited range and multiple facings and then you go walk into an OTR and it's got a much more fulsome food and beverage offer. It's got almost 4x the SKUs. I mean the simple fact is that there is like 4x the amount of stuff that you can buy in a store. And so no doubt, over time, we'll see the basket size continue to lift and grow, and uplift will be there. The question in my mind is more how fast do you get it? And I think what we're saying is that when you convert a single store in a state that doesn't know what an OTR is, it takes a little bit of time to grow. As we roll out more and more conversions. And by the end of the year, we'll probably have north of 30 stores in New South Wales. People start to become more familiar with the offer. And my expectation is that the more stores we convert, the faster we'll start to see that uplift. And the more that halo effect will start to uplift earlier stores that we converted some time ago that have performed for quite a while with our real brand awareness of the HR offer. So yes, I think the performance that we've called out in the slide is fairly representative of where we expect it to trend across the network over time. The question is more how fast can we get these stores to grow and start to mature and how soon can we start to market a bit more actively across the state so that people know and understand what they can get when they visit an OTR.

Yes. Yes. Okay. Cool. Does that kind of network benefit also applied to the CapEx per store, the kind of $1.5 million, does that maybe have scope to come down as you build critical mass in each stage?

Yes, we're definitely getting more efficient, like we're learning more. I mean, the first 4 [indiscernible] a bit. We've incorporated some of that into the last 10 or so sites that we delivered. We're already making changes to the few that we'll deliver in the next couple of months and the 20 or so into the end of the year, and I think those learnings will continue to add value as we go into 2026. I would say though, a lot of that spend relates to a full replacement of the equipment and fit out in stores. And so in certain conversions, you would hope that you can retain shelving and equipment and various bits have fit out. The problem we've got in the Express stores is that a lot of that is very old and is in need of replacement. And so there's an obvious opportunity to replace all of it when we do the conversion. I think the side benefit that we haven't talked about a lot in the past is that as we do more conversions, we'll see a general reduction in the overall reactive repairs and maintenance spend across the network because at the moment, we're running around replacing things as they break or fail because they're pretty close to end of life versus having a sort of proactive and ongoing replacement program.

Yes. So that kind of ongoing replacement program benefit, is that kind of like a post 2027 type time frame for that or...

Yes, I think so. I mean we're talking about a network of some 660 sites or so, having converted close to 40. It will cause a little bit of improvement. I think as we move through the next couple of years, and we've converted 200, and we've done 1/3 of the network, those sorts of benefits will start to become more obvious.