Abu Dhabi National Oil Company for Distribution PJSC (ADNOCDIST) Earnings Call Transcript & Summary

Good day, and welcome to the Goldman Sachs ADNOC Distribution Q1 2020 Analyst and Investor Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Faisal Al Azmeh of Goldman Sachs. Please go ahead, sir.

Good morning and good afternoon, everyone. I'd like to welcome you all to ADNOC Distribution's Q1 2020 Results Conference Call. It is my pleasure to host the company's senior management team. On the call today, we have with us Mr. Ahmed Al Shamsi, acting Chief Executive Officer; Mr. Mohamed Al Hashemi, Chief Operating Officer; Mr. Petri Pentti, Chief Financial Officer; and Mr. Athmane Benzerroug, the Chief Investor Relation Officer. The call will start with a discussion of key trends this quarter, followed by a Q&A session. And without further delay, I'll hand it over to Athmane. Thank you.

Yes. Hi, everyone. Good morning, and good afternoon. So the purpose of this call is to take you through our first quarter 2020 results. We will start with the key highlights, including how we have responded to COVID-19 development. We will then discuss in detail our strategy update and financial performance for the first quarter of the year. And finally, move to -- move on to the outlook for 2020. Going forward -- so before handing over to Ahmed, please allow me to reiterate our cautionary statements regarding forward-looking statements. This presentation includes forward-looking statements relating to our business. Important factors that could cause actual results to differ materially from our expectations are detailed in the international offering memorandum relating to our IPO and in our other investor communications, all of which are available on our website. I direct everyone to our website to read the full text of the disclaimer and all other important information. I will now hand over to Ahmed, who will start by presenting the key highlights of our full year performance and the outlook. Thank you. Ahmed, please.

Thank you, Athmane. And good afternoon and good morning, everyone. Thank you for joining us today, and I hope everyone is staying safe and healthy. Before we take you through our first quarter results, let me first update you on our response to COVID-19. In Q1 2020, we have shown strength and agility as a business. We have taken and will continue to take every step to ensure the health and well-being of our employees and our customers, which includes daily cleaning of sites and providing personal protective equipment to our front-line colleagues. During this period, we have strengthened our focus and understanding customers' needs by engaging with them and staying connected. We were quick to adapt our products and services to the evolving situation and took this as an opportunity to accelerate our digital transformation strategy. We widened our portfolio of services, such as enhancing contactless payment technology, a new low-cost grocery essentials range at our ADNOC Oasis stores, online home delivery for more than 1,000 of our Oasis products, mobile fuel delivery services and complementary car interior sanitization with every auto carwash. Let me now take you through the key highlights of our first quarter and outlook for 2020. Despite the challenging operating environment and the uncertainties ahead, our core business fundamentals remain robust and resilient, and we are well in place to navigate the current times. The company has demonstrated resilience in Q1 2020, with underlying EBITDA, excluding inventory movements and one-offs, increasing by 4.7% compared to Q1 2019. Adjusting for one-offs, which Petri will talk about in details while discussing financial performance, the company's earnings showed growth despite impact of COVID-19 in the month of March. Cash flow generation remained strong during the quarter, and the company maintained a strong financial position at the end of March 2020 with ample liquidity to help weather the impact of COVID-19 on our long-term strategic commitments. We also remain focused on our business strategy of smart growth and bringing further efficiencies in our operations. For the full year 2020, we expect to attend 50 to 60 new stations in the UAE. We have assessed the impact of COVID-19 on our business plan and capital structure. We maintain our CapEx guidance of $300 million to $400 million in 2020, reiterating our commitment to deliver smart growth beyond 2020 and offer best-in-class services to our customers. We are also exploring new growth opportunities presented by the current environment. Our focus is to ensure CapEx is allocated more efficiently towards our growth and value assertive Dubai expansion. We are, therefore, targeting 20 to 25 new stations in Dubai, the majority of which will be traditional stations. Delivering on our international expansion also remains integral to our ambitious smart growth strategy. We continue to assess potential opportunities to achieve disciplined growth and operational success, while targeting the highest return on investment. In our nonfuel business, we remain focused on providing superior customer experience, and we'll continue with our convenience store revitalization program. As a company, we are always looking to optimize our cost base, ensuring our margins and cash flows remain healthy. Finally, we are committed to deliver attractive long-term shareholder returns underpinned by a progressive dividend policy, smart growth and supported by strong balance sheet. For 2020, company's dividend policy is set to continue with an expected dividend of $700 million, subject to Board and shareholders' approval. I will now hand over to Mohamed for an update on our strategy. Thank you.

Thank you, Ahmed. First of all, good morning and good afternoon to everyone on the call. Let me begin by giving you an update on our fuels business, which, of course, includes our B2C and B2B segments. In the first quarter of 2020, our total fuel volumes we've sold has decreased by 1.2% compared to the first quarter of 2019. Commercial fuel volumes on the other hand remained stable year-on-year. Retail fuel volumes declined by 1.9% compared to the same period last year despite growth acceleration in the first 2 months of 2020, but this was mainly due to the business impact of COVID-19 in the month of March. Our school, retail malls and offices had started to close starting in the month of March. We saw an impact on demand, and we saw that impact in both fuel and nonfuel sales. So the full impact of the COVID-19 restrictions became apparent in the month of April. This is when our retail fuel sales volume declined by around 40%. Commercial fuel sales volume in the month of April declined by around 20%. So despite this decline in volumes in the short term, we do expect the impact on our EBITDA to be partially mitigated. Now this is on account of various initiatives that we've undertaken, like widening our portfolio of services, optimizing our operating expenditure as well as support we've received due to the higher retail fuel margin in the short term. The retail pump prices for the months of April and May 2020 have not dropped in line with crude oil prices. So despite the challenging operating environment, we continue to deliver on our growth strategy. We've opened 7 new stations in the first quarter of 2020 and 3 additional stations in the month of April. So of the 10 new stations that we opened in the UAE across the UAE in April alone, 5 of these were in Dubai. So total number of fuel stations we now operate in Dubai is 11. Now as part of our drive to effectively tackle competition with faster and more efficient deployment of our fuel stations and while also optimizing our capital expenditure, we also opened our first 5 ADNOC on the go neighborhood service stations in Abu Dhabi as of April 2020. So I'd like to give you a brief update -- further update on the construction progress of our new stations. New stations that we were expecting to open during the first half of 2020 are now in advanced stages of completion from a construction standpoint. However, the COVID-19 situation has reduced our productivity of the labor at these sites, given the mobility restrictions of our labor. This would also have an impact on our ability to make these stations fully operational in time. So we now expect to open around 15 additional stations by the first half of 2020. And these stations under progress, under construction at the moment have achieved an average completion rate of around 75%. So this makes us very confident in achieving our target. While some of the stations we expected to be operational during the first half of 2020 have now been pushed back to the second half of 2020. We still expect to open 50 to 60 new stations in 2020. This is, of course, versus the 60 stations that we guided to earlier. As we continue to innovate and seek new ways to grow our fuels business, we've also extended our current B2B mobile fuel delivery services that we call My Station. We've extended this to retail customers in select areas of Abu Dhabi. We've already deployed about 8 trailers and 22 trucks to provide effectively on-demand fuel delivery to serve our large customers as part of our growth plan and our commitment to providing our customers with a fast and reliable fueling service. In addition to the 30 mobile assets that serve our B2B business, we continue to see opportunities to grow our mobile fuel delivery service in both B2B and B2C segments. So we've got 15 new trucks that are set to join our existing fleet during 2020. We will continue to explore options to further expand this service to enhance the overall customer experience, whether that's B2B or B2C. Finally, international expansion remains integral to our growth strategy. We're in various stages of discussions with several players in different markets to expand organically as well as pursuing inorganic opportunities. Obviously, the ongoing travel restriction could impact the overall timing of concluding these discussions. So we will announce further updates at an appropriate time. Moving on to the nonfuel retail business. Our convenience stores network increased to 269 in March -- as of end of March 2020. So we've added 5 new convenience stores in the UAE during Q1 2020. Our focus on category management contributed to an increase in average gross basket size by 12% year-on-year in Q1 2020. Our convenience store revitalization program that we introduced to you the last time was expected to pick up pace starting early Q2 2020. However, given the current COVID-19 situation and safety restrictions that are in place, we are now targeting 40 to 50 convenience stores to be refurbished in 2020 phased over the rest of the year. Also, we are accelerating our digital transformation strategy, particularly in response to the current pandemic, which has evolved the needs of our customers, thereby enhancing the company's position as the best-in-class fuel and convenience retailer. [Audio Gap] a key element of it. A key element of our digital transformation strategy has been providing customers with a seamless digital experience and activating advanced Mobile Pay technology, which allows our customers totally contactless refueling and payment. As a result, we saw significant uptick in the ADNOC Distribution Wallet users. This increased by more than 100,000 users in the first quarter of the year, so now the total stands at approximately 730,000 users. So obviously, we're going to continue to focus with the aim to further grow our ADNOC Wallet user base, which will allow us to deliver targeted promotional offers to our users, to our customers, thereby increasing customer loyalty. In the second quarter of 2020, also, we will introduce a new point-based system to our ADNOC Rewards loyalty program. This will enable our customers to enable points against ADNOC Oasis convenience store products as well as the various services in the ADNOC Distribution stations. Now we've also responded to new social distancing measures by launching a new essential products range in our convenience stores. This includes fresh food, household and health care products at a low cost -- to help customers across the UAE at a low cost. More recently, we also launched an online home delivery service of more than 1,000 products from the Oasis convenience stores. This includes groceries. This includes hot beverages. Ultimately, our aim is for the convenience and safety of our customers, particularly during the ongoing pandemic. And the service is already proving popular. We've seen an increase in basket size for the participating stores. So stores which have participated in the online home delivery service, the basket size has gone up quite significantly. We've also currently piloted this theme in 12 of our stores. So far, the results are very encouraging, and the customer feedback is very positive. So we see a great opportunity in our recently launched online food and grocery delivery service from our ADNOC Oasis convenience stores. Now we're expecting the hope to expand this service to more convenience stores by the end of this year. We're confident that we will because this supports our ambition of sustaining strong growth in our nonfuel offering. Finally, let me give you an update on our cost efficiency initiatives. That is, of course, the third pillar of our strategic plan. Now during the first quarter of 2020, there was an increase in like-for-like operating expenditure by USD 4 million compared to Q1 2019. Now this increase was mainly due to an increase in maintenance as well as smart technology utilities costs. In addition, total operating expenditure also increased due to the cost of additional staff to implement the free assisted fueling, given that we have completely dropped the Flex initiative. So this was in line with our guidance and pertaining to our growth and new stations operating expenditure. So we remain focused on accelerating delivery of our cost optimization and margin improvement initiatives. We are now moving in the process of moving to a more efficient and effective retail site operating model. This allows us to focus on staffing optimization as well as staff redeployment leading to a like-for-like reduction in full-time employees per station. We are also accelerating operating efficiency as well as the asset optimization initiatives across our network. In light of those initiatives, we will reiterate our target of like-for-like OpEx savings of approximately USD 25 million in 2020. Now in line with our guidance and plans to continue with our expansion strategy, we've spent $50 million during the first quarter of the year. Now this is much higher than the Q1 2019 capital expenditure of USD 13 million. This, of course, reiterates our commitment to deliver growth beyond 2020, while providing best-in-class services to our customers. Of course, we will continue to improve CapEx efficiency, including the rollout of Flex capital-intensive station format, such as ADNOC on the go and My Station. At this point, I will hand over to Petri to present the financial highlights of our performance.

Many thanks, Mohamed. Good morning, good afternoon, everyone, from my side as well. As stated by Ahmed and Mohamed, we've delivered resilient financial and operational performance during the first quarter despite the challenging operating environment. Q1 2020 revenue increased by 3.6% compared to last year, driven by an increase in fuel retail revenues. This was, of course, as a result of higher pump prices and higher corporate volumes, partially offset by lower volumes in our retail and aviation businesses as well as lower nonfuel retail revenues. Q2 2020 gross profit is at USD 302 million, representing a decrease of 3.1% compared to last year. Fuel retail business posted strong operating performance. However, total gross profit for the first quarter was negatively impacted by USD 16 million due to inventory losses and other one-offs in the commercial business, whereas last year, first quarter included one-off recoveries of $15 million at gross profit level. So when excluding these inventory losses and one-offs, Q1 2020 total gross profit grew at 7.1% compared to last year. First quarter EBITDA was USD 151 million, representing a decrease of 24.1% over Q1 '19. Reported EBITDA was negatively impacted by a total of USD 20 million in Q1 2020 due to inventory losses as well as prudent provisioning on trade receivables and other one-offs, whereas last year was benefiting from one-off reversals of prior period accruals as well as recoveries totaling $36 million. Hence, our underlying EBITDA, which is defined as EBITDA excluding inventory losses as well as one-offs, remained resilient with a growth of 4.7% compared to Q1 2019. Net profit for the first quarter is at USD 109 million, declining by 30.9% compared to last year, and once again, mainly due to the inventory losses as well as one-off losses for the first quarter as well as due to the presence of the one-off gains I mentioned for Q1 last year. However, adjusting for these elements, we've reported earnings at 6% up despite the business impact of COVID-19 for the month of March. And finally, cash generation remained strong with free cash flow of USD 145 million for the first quarter. Okay. Let me now briefly walk you through the key operational highlights for the first quarter. Total fuel volumes decreased by 1.2% compared to the first quarter of last year. This is mainly as a result of the business impact of COVID-19 in March. However, in the period prior to COVID-19, we actually saw higher year-on-year growth compared to Q3 as well as Q4 of 2019. Our commercial fuel volumes were up marginally, 5.1% year-on-year, driven by an increase in corporate volumes by 1.9% and partially offset by a decrease of 4.9% in aviation volumes sold to our strategic customers in the first quarter. In the nonfuel business, transactions decreased by 17.1% compared to last year, and this is due to the absence of vouchers after implementing free assisted fueling, as Mohamed mentioned. This was effective November 2019 as well as the impact of COVID-19, once again, in the month of March. However, average gross basket size has increased by 12% year-on-year, driven by improvement in category management and also as a result of the COVID-19, once again, with customers visiting less frequently, but spending more during each visit. I'm now moving on to talk about gross profit performance by segment. Firstly, let me also highlight and remind that effective this first quarter 2020, we've implemented new segment reporting structure, which is based on natural categorization of our businesses into 2 buckets of retail or B2C and commercial B2B segments. First quarter retail segment gross profit increased by 9.5%, driven by fuel retail business. Fuel retail business posted strong operating performance with gross profit growth of 13.1% year-on-year. And this is on the back of higher retail fuel margins, reduction impact from the costs following renegotiation of our fuel supply contract effective last November as well as higher retail volumes during the first 2 months of the year. Our nonfuel gross profit in the retail decreased by 7.5% compared to last year, and this is due to the absence of the voucher redemption I already mentioned as a result of implementing free assisted fueling, together with the impact from COVID-19 in March. Commercial business performance was negatively impacted by USD 16 million at gross profit level. This is due to the revaluation of our inventory, our stock at the end of March, USD 10 million following lower oil prices as well as one-off items of $6 million. Whereas in Q1 2019, we had one-off recoveries of USD 15 million. Excluding the inventory losses and one-offs for the commercial business, commercial gross profit would have grown by 1.6% year-on-year. And moving on to EBITDA per segment. Q1 retail EBITDA declined due to the lower fuel volumes as well as the additional cost of staff to implement the free assisted fueling and the OpEx related to new stations and, of course, due to the presence of OpEx reversals, I mentioned, in Q1 2019. Commercial EBITDA declined due to the lower aviation volumes, inventory losses and, once again, the one-offs in Q1 2020, whereas we had one-off recoveries present in Q1 2019. And finally, a few comments about our cash flow and capital structure. Net cash generated from operating activities has increased mainly due to stable cash flows as well as positive working capital movements. Working capital requirement reduced as a result of decrease in trade receivables as well as in inventories, partially offset by a decrease in trade payables, given the big swings in oil prices and the decline in our volumes towards the end of the quarter. As of 31st of March, we have a very strong liquidity position of USD 2.2 billion in the form of $1.4 billion in cash. And then we have a revolving unutilized credit facility of USD 750 million. And our existing term debt is maturing at the end of 2022 with no covenants in place. As a result, the balance sheet remains strong with a net debt-to-EBITDA ratio of only 0.1x as of 31st of March. However, when adjusting for the final dividend that got paid early days of April, the adjusted net debt-to-EBITDA ratio would have been 0.55x, strong as such at the end of March 2020. Now let me hand it back over to Ahmed for the closing remarks.

Thank you, Mohamed and Petri. As mentioned during today's presentation, we have delivered resilient underlying results in Q1 2020. While demand for fuel and nonfuel products may take time to recover to normalized levels, we expect decline in volumes to be partially offset by various management initiatives and higher retail volume margin in the short term. As retail pump prices for the months of April and May have remained comparatively high despite drop in crude oil prices. Our ability in managing our capital expenditures and cost base as well as our diverse product platform and strong balance sheet provide us with an important flexibility to respond in this volatile operating environment. We remain committed to pursue our expansion plans in a disciplined manner as well as delivering an enhanced customer experience, both of which are expected to drive future earnings growth. We are also exploring new growth opportunities presented by the current environment. We remain confident that we will responsibly manage the impact of COVID-19 on our long-term strategic commitments. This concludes today's presentation. We are happy to take any questions that you may have. Thank you.

[Operator Instructions] We will now take our first question from Nick Coulter from Citi.

Two questions, if I may, please. Firstly, can you just give a sense of how much mitigation the fuel margin and other measures will provide to the impact of COVID-19. I note kind of the words partially offset. So it'd be good to get a sense if that's possible. Secondly, obviously, it's incredibly hard to have any visibility given the unprecedented circumstances, but what possible scenarios do you see for COVID-19 volume impacts as we move forward through the next few quarters? So what are you seeing in terms of the latest exit trends as perhaps things begin to open up a little bit?

Thank you very much. Petri, perhaps can you elaborate a little bit more on the fact that for April and May, the margin should be higher given the pump prices. You have some points that we can perhaps share with everyone. And just remind people what is our minimum margin today?

Yes. So especially the ones listening to the call and living in UAE probably would be well aware of the fact that both months of April as well as May, the UAE pump prices are the same. And of course, given what's going on in terms of oil market and product prices, the Ministry of Energy, who regulates the pump prices on a monthly basis in UAE has made a decision to maintain pump prices. In terms of forward-looking and going forward, we cannot really make any estimates or forecast for how long, et cetera. But given that we are in second quarter, we can limit ourselves and then have some visibility for the Q2 itself. Partially offsetting the lower volumes, we've stated that April month retail volumes are down by 40%, whereas our commercial volumes are down half of that at minus 20%.

Yes. And if I may, I guess that on the pump prices, I guess that it's quite easy to make the calculations. If you look at our minimum margin of AED 0.39, AED 0.4 per liter and you use the current pump prices that did not go down really compared to the oil prices of late, you will easily find that the margin would be substantially higher on the retail fuel margin. What was your second question, sorry?

I answered the second question, if I heard correctly. Sorry, go ahead.

Okay. Sorry. Petri answered. Sorry.

So I think second question was around visibility and possible scenarios, but I think Petri answered that with the April stats. If there's any further color, then obviously, that would be gratefully received. Thank you.

We will now take our next question from [ Nick Stefanus ] from Renaissance Capital.

I have 3 for me. The first one is actually in regards to how you think about inventory write-downs. And the reason I'm saying this is that, obviously -- I mean, the retail prices would be quite strong compared to the inventory price you got. And then on top of that, you've got the ADNOC margins for like stabilization mechanism. So I'm trying to understand, when it goes through of course writing down inventory, what is that inventory write-down? Is it the excess of, say, what you got versus what you're going to sell it for or is it something different? That's my first question. And then secondly, on the volume impact. I appreciate if you could give me a breakdown on commercials and the reason I'm asking about is because aviation is about 25% of your volumes. So I was surprised to hear that you only lost only 20% for the month of April. And then finally, on the dividend. From what I look on Slide 6, it looks like you've got an intention of paying 75% on earnings from 2021. Should I take that would be at least the same in dollar terms as the year before? Or is that -- is it a progressive dividend is what I'm saying with the floor?

Okay. Okay. So if I take the first one on the inventory valuation. So it's relatively straightforward. Bearing in mind that we have the backstop guarantee provided by ADNOC parent company, so we have very limited downside in terms of inventory volumes carried for retail business. Of course, retail volumes overall represent 2/3, close to 70% of our total sales volumes. So mainly the exposure is coming from our corporate volumes as well as aviation volumes. And if you just look at the first quarter itself, you can see that our gross profit has taken a more serious hit because the inventory -- net realizable value, NRV, valuation as per IFRS had to be booked. We've managed, of course, our inventories. Nominal inventories are down in line with our view about the oil market, so there's a tactical element to some degree as well. And that was partly the reason why working capital and inventory levels at the end of March were down compared to earlier periods.

Okay. So the inventory write-downs mostly come from the commercial segment then?

Yes.

Okay. That was very clear.

So in the fuel retail business, we don't have any inventory loss, and we benefit from a backstop from ADNOC main if there is any potential loss, but we also benefit from the upside risks when the oil prices are high. We benefit also from we keep the inventory gains as what we had last year and 2 years back. Mohamed, perhaps if you can elaborate more on the corporate business quickly, and then I will answer the question regarding the dividend.

Sure. Our corporate business is not just aviation, but aviation logistics, aviation on the product side to the government and military, but also B2C -- B2B in terms of gasoline and gas oil. The decline there has been lower. This could have been a result of the lockdown affecting the -- our end consumers more than the B2B segment, right? That's the breakdown we can provide so far, which is -- in aggregate, the volumes have declined about on the commercial side. This is April, by around 20%, compared to the 40% on the retail side, but it's not reflected in Q1. This is -- again, this is April of 2020, not Q1.

Understood. But do you see -- basically, my question then is what is the aviation, like, reduction from that -- from commercial volumes? Because from the sound -- it sounds like about -- like 50%, 60%...

Okay. So there's 2 pieces to the aviation business. There's a military piece, where we sell the product. And then there's a civil aviation piece, where we are the logistics service provider. From the civil aviation, irrespective -- yes, irrespective of the volatility in volumes sold, we are covered because we have an exclusive -- we are the exclusive logistics service provider to ADNOC on the civil aviation side, and we have a cost-plus mechanism. We have 0 exposure to the actual volatility in the market. On the military side, on the government side, this is where we own the product itself. There, we're seeing a flattening out in terms of volume sold at least in 2020.

Okay. Thank you very much, Mohamed. So regarding the dividend policy and especially the 75% -- minimum 75% distributable profit, let me, first of all, start with what is our dividend policy. So during the general assembly 1 month back on 31st of March, the company shareholders approved a couple of things. So first of all, the segment and final dividend payment of $300 million for the year of 2019 -- in 2019. And this dividend payment came on the top of an interim dividend of $325 million for the year, which was paid in October 2019. All in all, the -- this resulted in a full dividend payment of $650 million. So this is consistent with our dividend policy approved by the shareholders in 2019 and representing a 62% increase versus 2018. Then the -- during the general assembly, we maintained the company's 2020 dividend policy, which is set to continue with an expected dividend of $700 million, an increase of 7.5% compared to 2019, and this is for 2020. Amendments to the dividend policy for 2021 onwards with an expected dividend of $700 million for 2021, okay, compared to a minimum 75% of the distributable profit as the previous policy. And the dividend equals to at least 75% of the distributable income for 2022 onwards. And this is obviously subject to the discussion of the Board of Directors and the shareholder approval. So we said clearly, the minimum 75% will not provide obviously today if it's -- this 75% means a number that we can compare to 2021. The philosophy of the company is that we have strong balance sheet. We have ample cash reserves. We invest in growth. This is our priority in the future business. And we have set clearly a minimum of dividend for our shareholders with 2020 and 2021 clearly stated as per the statement that I made and also beyond this with a minimum 75% payout.

We will now take our next question from Mehdi Kaoukabi from FIM Partners.

Congrats on the results. I had 2 questions. One with regards to the growth strategy. You've mentioned that you're 50 to 60 station this year compared to previous guidance, I believe, of 60. I just want you to explain this better. Does that mean that you guys think this COVID is very temporary and you're keeping your plans on this? A lot of companies or other companies in the market are ruling back the expansion plan. So I just wanted to understand a bit more on this guidance. Is this a reflection of you being very confident about the economy? Is it a reflection of your business model being very strong and thinking that we'll do well no matter how the economic situation of the country is? And my second question has to do with the one-off items. So you explained very well the inventory losses due to fuel. But I believe there was also a mention in the earnings release about provisions. So maybe on the Corporate side, if you could just remind us what's your provisioning policy in general when it comes to receivables? That's it from my side.

Thank you. Please, Mohamed.

So as far as our growth strategy, this reflects, I think, I brought up a very good point. This reflects the resiliency in our business model. So we're not trying to forecast how long the crisis is going to last. Always stating that simply at some point, there will be a return of normalcy. The lockdown will end. And whenever that happens, rather than put our growth plans on the back burner and pick them up at that point, we've contemplated on this point, and the decision we made is that we keep our growth on track. Particularly, as we pointed out, we are not going to set back is the Dubai jurisdiction. Why? Because any time we open a station there, those are organic volume that we are not capturing today. So while we will continue to focus on our growth and expansion plans, you've seen because of the constraints, the numbers have been slightly revised downward, that both on the same-store refurbishment side as well as the number of stations we had committed to a few months back. It went from 60 to now it's 50 to 60. But we haven't moved away from is the number of stations we intend to open in Dubai. Again, that's the resiliency in our business model. We're not trying to forecast when, how long it's going to last, but when it does, we're ready to capture that growth. As far as your second question, which was on the provision side, I will let Petri address that question.

Yes. Just before you, Petri, sorry, just to make sure that we -- the answer is very clear. I guess that we are all aware as a management that the COVID situation is clearly bringing us some challenging times, especially on delivering the stations and also on refurbish -- refurbishing, sorry, the C-stores. What happened and just to build on what Mohamed Al Hashemi was saying is we had a target of 60 -- minimum 60 stations for this year. We have now come down to 50 to 60. But if you look at the way we have looked at our numbers is, first of all, the first half, if you remember well, we said roughly 40 to 45 stations in H1. And we are putting this number at 50. And then we believe that the situation will improve gradually. And the 50 based on the fact that we have today, 75% completion. On the C-store side, we have clearly factored the COVID impact today. We had a target of 100 C-stores to be revitalized this year. More towards Q2, Q3 and Q4. And we have banked this number to 40 to 50 as per the feedback from our development business team, actually looking at each of the C-stores and how we believe we can deliver the digitalization program. I hope that this answers your question.

That's very clear. The answers are very clear.

Petri, please?

Yes. Let me just make a few comments on the so called expected credit loss or bad debt provisioning approach. So first of all, it is good to remember that the core part of our Retail fuel business. We don't really have exposures given that the whole business nature is cash-based or people pay with credit cards or ADNOC Wallet and Mobile pay, et cetera. So where we have exposures is in the commercial part, where we have 3 categories of customers. We have government-related entities, where we do not request typically any bank guarantees. We have nongovernment-related parties where we have substantially, in most cases, bank guarantees issued by creditory banks. And then we have a third bucket of nongovernment-related customers without bank guarantees. This would include also our food and beverage, F&P tenants across our retail network as rental agreements are regarded. So basically, the external metrics are very clear. When we look at credit default swaps and other metrics that can be considered in this market for the banks that have issued bank guarantees or even for the government entities, clearly, as indications are that the prudent provisioning is required. And indeed, we have doubled the amount of bad provisions as of 31st of March. We continue monitoring the developments very carefully and closely. And this is, of course, a recurring evaluation once we get to the end of Q2.

We will now take our next question from [ Ahmad Kadir Amid ] from National Bonds Corporation.

I'm [ Mohammed Ahmad Amid ]. I believe I've got a couple of the questions where I like, I mean, again by other participants. However, I -- I mean, I mean, again, from a strategy point of view, don't you see -- I mean, again, do you have any kind of impact of the delays that took place on again, for Expo 2020 on your operations and general renewal expansion? And the other side -- and the other question that I have, and going back to the question raised by the gentleman from FIM, regarding the provisions. We have seen an impairment losses of $19 million was reported, I mean, again, in the first quarter. Can you explain -- I mean, again, what is that for? And my last question, in terms of the impact of the interest rate, how do you see that like being impacted because I believe that you've got like almost $6 billion north of that. How we're going to end back to you?

I'll take the first one on the growth piece. So again, good question. So you made a reference to the Expo being postponed from 2020 to 2021. So our whole strategy, the growth strategy, particularly in Dubai, is based on capturing a segment of the market that we do not capture in any way, shape or form today outside of the 11 stations that we have here today. So when we say, when we focus on Dubai, the Expo piece was the added potential uplift. But today, even in present market conditions, I'm better off, we are better off, opening a station in Dubai than not having a station there or opening a station anywhere else in the UAE because that is the offensive part of the strategy. That is where we capture volumes that are not part of our system today. We are not selling those volumes today. These are not volumes that are cannibalized from 1 station ADNOC Distribution versus another ADNOC Distribution station. That is the processed cornerstone of our strategy, particularly when it comes to the expansion in Dubai. So again, hopefully, this answers your question. Expo being kicked out, postponed by a year. That's fine. Has no detrimental impact on our expansion plans in Dubai. Once again, alluding back to the earlier question, yes, we've revised our estimate of the number of stations we can possibly deliver in 2020. And the number of C-stores we hope to have refurbished in 2020, as Ahmed pointed out as well, we've revised that. To keep in mind that the lockdown has constrained mobility of our contractors and labors. Hence, we expect some kind of an impact there. Outside of that, we're fully conscious, aware. We don't know when the crisis will end. But as soon as it does, which gradually as it ends, gradually as the markets pick up, we want our growth to be on track, particularly, coming back to the Dubai side. And on the Corporate side, I'll leave it to Petri again.

Yes. Let me first address the question on interest rates, how would that impact? So bearing in mind that we have net debt lower interest rates as such net positive. And indeed, if you look at Q1 itself, you would see a reduction in our finance costs. And bearing in mind the adjustment, I stated with respect to net debt-to-EBITDA ratio after we paid the final dividend for 2019 in early days of April post-Q1. Can you elaborate more on your question on the asset provisioning expected credit was? I'm not sure what is the question.

Thank you for the answer. The question was, there was a $19.3 million impairment losses has been reported. Can you -- I mean, again, you highlight what is this for? Is it like linked to the corporate account of contract or what? So the reported was about favorable...

It's -- this is the so-called expected credit loss provision. It's not an out write-off or impairment of any particular clients. It's just so-called prudent provisioning given that external metrics are quite clear. Overall, credit standing is not what it used to be. And I guess, this would be something that any business that has customer trade receivables unfortunately, in the current circumstances, would need to evaluate. It's not an easy exercise. It's a fluid picture. And hence, we need to carefully consider what's going on during the second quarter. Including every relevant customer segment, including the F&P tenants that we have across our retail network in UAE.

Do you expect that this number will get increase? Because, I mean, again, if I look to the numbers over the past, the number wasn't like that, I mean, again, that big, suddenly like move to $19 million. Do you expect -- I mean, again, this number was going to be increased as a result?

Well, I mean, of course, it's extremely difficult to make any forecast on the overall credit standing. We have noticed the government providing certain support liquidity to the system. And in Abu Dhabi, for example, the economic department is providing up to 20% support for relevant tenants in certain basic businesses, including the F&P tenants that we have, for example. So it depends really on a case by case, we can't make any estimations about the tenure of COVID impact on a short to medium-term basis on a business like ours.

We will now take our next question from Sashank Lanka from Bank of America.

Yes. I have 2 questions here. The first one is on your dividend outlook. You have announced dividends of 2.7 -- AED 2.57 billion for 2020 and 2021. I just wanted to understand how secure do you see the 2021 dividends in a black swan situation? And assuming things deteriorate from here, would the company be willing to raise debt to pay the dividends, which have been announced for 2021? That's my first question. And the second question is related to your mobile fuel delivery system. Just wanted to understand the region you are focusing on? Is it Abu Dhabi? Is it Dubai? Is it Northern Emirates? How are you thinking about this business segment?

Petri, do you want to answer the dividend? Or should I answer?

Yes, please go ahead.

Okay. So look, dividend policy, I would say that, obviously, when 1 months back when the amendment to the dividend per share has been actually announced, we, as a management, made a couple of stress tests, looking at what could be the impact on the dividend policy. I guess that the way to look at this company is, first of all, you have a company, I would say, very secured cash flows coming from the fuel retail business, which is 70% of our EBITDA today with secured margins. Today, we have a COVID situation. But looking at even the impact of COVID, you can see that this company is able to generate substantial cash flows, plus the balance sheet with a net debt-to-EBITDA 0.1 gives you room to anyway, be able to raise that to invest. And I would say that the way to look at this company is operating cash flows are able to match with the dividend in a normal circumstances, and we have room to invest and to increase -- to use our cash to invest in future growth plus using potentially our $750 million of credit facility if requires for future growth. Petri, if you want to add something?

Yes. So indeed, in terms of how secure? This is a business model and capital structure that has very few limitations, bearing in mind that in the existing funding documents, we have no covenants whatsoever. At IPO, a few years ago, we stated that we are perfectly comfortable with net debt-to-EBITDA ratio, a level of 2x. We are at one quarter of that also as we speak. So we have substantial headroom and capacity in terms of funding either growth or funding dividends.

Thank you, Petri.

And on the second question on your mobile delivery system.

Can you remind us what is the question, sir?

About the mobile fuel. Yes. Basically, what are the regions you are focusing on the My Station platform?

Mohamed, or perhaps your station Mohamed or Ahmed or I don't know. Go ahead. Yes.

I'll start off and then Mohamed can add, if he'd like.

Yes.

But My Station is it's not specific 20 jurisdictions. So we are going after -- originally, this was we wanted to go offer this as the enhanced service for a B2B client. But as we found out lately, we've experimented offering it to a B2C, our retail clients, and it's done well in Abu Dhabi, but we intend to hit across the UAE with the My Station rollout. So it's not jurisdiction specific at all. This was going to go on B2B side. It's going to go on B2B side as well as the B2C, our retail customers as well. And the 1 other development is this will be rolled out across the UAE. So not just in Abu Dhabi, but Dubai and in the Northern Emirates as well, both for B2B as well as B2C.

Yes. I think well said by Mohamed, maybe another piece of information related to My Station as a service, it's not only for fuel, we have but also for LPG and other types of products as well. We started just a few weeks back with the big head of COVID to offer the B2C services here in UAE. And it was part of our CSR initiatives to promote fuel -- home fuel delivery to the customers. This service rate was really amazing. Customers like the service, very positive feedback.

We will now take our next question from Divye Arora from Daman Investments.

So just going back to your expansion strategy, you have mentioned that we have already scaled it down a bit on the fuel stations that has come down to around 50 to 60 from 60 before. And obviously, the way is clear that because it's not going to cannibalize your sales, so you can go and add new station. And it's going to add to the sales volumes further. But how about -- can you break this 50 to 60 number down by different Emirates and even by Saudi? And if there is -- if some of these stations are going to come in the Northern Emirates or in Abu Dhabi then won't it be -- why is in this environment to just put it on hold and just wait for things to pick up in the next 6 months and see that you really need them or not?

Okay. Mohamed, I will give you the floor for this. I will just remind everyone that we don't provide the split of these new stations for competitive reasons. And then, Mohamed, I give you the floor, I guess, what is interesting is how we address the CapEx in -- especially Abu Dhabi through on the go, how do we adapt in terms of OpEx and CapEx versus the traditional stations? I guess that people will be very keen to hear what you have to tell them on this.

Precisely. So the first part of your question, we -- look, we have not revised it downwards. We're seeing as we originally said 60 stations at least, out of which 20 to 25 in Dubai, that continues, but the 60 is now 50 to 60 in light of the crisis. So 20 to 25 in Dubai and the remaining across Abu Dhabi and the other Emirates. So you raised a point where you said, why not put those on hold? But the ones that are opening up, particularly in Dubai, I have said this on 2 other questions, it's an important part of the strategy. It's irrespective of the crisis going on at the moment. At some point, we cannot anticipate nor do we want to predict when it's going to end. But at some point, we will. Even during the crisis, it makes sense to have stations in Dubai. Abu Dhabi and the Northern Emirate, there's a larger play here that is also for nonfuel retail. What we found out, particularly with the stations that we've opened up in the past few weeks, Q1 2020, the ones where we're piloting the home delivery, those neighborhoods, on the go stations that are a big part of what we're rolling out in Abu Dhabi and the Northern Emirates, they are returning absolutely good results. Customer feedback has been absolutely positive. That was the intent to be in the neighborhoods, that's the defensive part of the strategy, but also the second part is take that nonfuel retail piece to people, our customers in the neighborhood. Well, because of the crisis, where we got lucky, where we're able to exploit a part of this crisis was the nonfuel retail piece, something we had been contemplating and building up, which is the online delivery. Now that has taken off where we piloted. It's taken off, it's increased the basket size, and we are set to roll it out across a wider part of our network. And that -- for that, beyond on the go station, the neighborhood stations are important. So I'm confident, we are confident the way we're progressing in light of the crisis, we've contemplated, we've relooked at the strategy. It is important that we continue and wait while even the volumes are low, there's other parts of the business that are doing well, exceptionally well in light because of the crisis. So I'm still confident we made the right decision to progress as is. The second part of your question was -- remind me again.

Yes, that was it, a concern was more -- okay. Hopefully, I have another question. So it's fine to open stations in Dubai, but just to understand the recent stations that you have opened in Dubai over the last 1 year. How are they performing, what sort of a volume they need? It depends on the location, obviously. But are they breaking even? So you can keep on opening new stations in Dubai, but what is that breakeven volume you need? And have you got there already with the new stations that you opened over the last 1 year?

For competitive, for in the interest of the business, we don't disclose certain information to you specifically alluded to just now. What we can tell you. How are they doing in terms of volume? Much better than even what we expect. What that tells us this is addressed. We've addressed this in the past with every station we opened. The concrete message we got back, and this was based on the volumes that we've sold in these stations is that there is room, most certainly room for more and more stations in Dubai. That's why we felt confident by committing a portion of our growth strategy, focused solely on Dubai. The volume, again, without talking numbers, are much higher than even some of our busiest stations outside of Dubai.

Let me just add 1 point, if I may, Mohamed. So if you look at Dubai, first of all, it's clearly the only market where you are right, we can get market share. And this is as per the guidance of 50 to 60. The focus is just telling, thank our investors that the focus is still Dubai and we are committed to this growth because this is the only market where we can really gain market share. For the other markets, and especially for Abu Dhabi, we have a solution. We have brought a solution, which is the on the go station, compact stations, which have much lower CapEx requirements and can leave us the opportunity to protect our market because this is where we have 100% market share. So the way we are adapting to the market conditions is to still, and thanks to the balance sheet that we have, focusing on Dubai. And choosing -- have a much more, I would say, linear approach on the other address through an answer on the go station. Last point on Dubai, the volumes, as Mohamed was mentioning. If you look at the total volume that we have, average is 18 -- 17 million, 18 million liters per station per year. In Dubai, you are above this number. And this was our investment case for the past 1.5 years to clearly say, should we go to Dubai? If yes, what will be the returns? Today, the returns are double digit, and the volumes are above this 18 million, 20 million liters per station.

Okay. Just the last thing on this 50 to 60 stations. So how many of on the go stations are in this guidance?

Did we provide this number? I was just thinking if we didn't say -- I don't know. We have to come back to you if we provide this guidance. I don't want to state something here that we didn't state before.

We haven't provided this guidance in the past. We have not.

Yes, we did not. Yes. Again, we are deploying this new concept. So we don't want to obviously disclose everything on it.

I mean, what we can say is help is that the majority of the stations almost all, but certainly a significant portion of the Dubai stations are traditional, the full fledge service stations. The one in Dubai.

We will now take our next question from [ Baron Wi ] from Decimal Point Analytics.

So I have a couple of questions. One is the first one. Is it possible to share the market share across segments, be it retail, Corporate and Aviation business? And the second question is, I want to understand the growth strategy going forward. I mean, obviously, we are opening up 50 to 60 stores in 2020, I mean, outlets in 2020. What is the outlook going forward? I mean if you provide any sustain? And what is the CapEx per -- I mean what is the average CapEx that you spend per outlet is also what I want to understand. At the same time, my last question will be on the Retail business. If you can just help me understand the business model? Is this like do you work on a fixed margin? Or is it like you can gain margin as well in this.

Thank you. Mohamed, can you start with the retail perhaps, and then we can answer the market share, et cetera?

Yes. On the retail part, our margin share, given our footprint across the UAE, we effectively have more than 65% -- much more than 65% of the market share. And this is across the UAE. Now as far as commercial, it's LPG, Aviation, to date, we have not explicitly shared our market share in those parts of business. But in aggregate, across the UAE, more than 65% in aggregate.

The next question was on the retail. What is the -- you mean the convenience stores, what is the kind of business model that we have?

No. In general, I mean, the outlet -- I mean, so if you take the other countries, it's like they operate on fixed margin. Basically, the price is fixed, the pump price -- I mean, the retail prices are fixed by the government and then you have a fixed margin. I would like to understand what is the business model with respect to fuel outlets in North UAE?

I'm not sure I catched the question. Are you talking about commerce? You're talking about the fuel retail business? Are you talking about the business? Yes. On the fuel retail. Business. Sorry, I was -- sorry. So first of all, if you look at the UAE, actually, the -- in the UAE, there is a stable regulatory environment for the pump prices. So UAE pump prices are set monthly by committee in which ADNOC Distribution is represented by our CEO, Ahmed Al Shamsi. So the pump prices countries of the base price and the regulated unit margin that has not changed since August 2015, [indiscernible]. So and then although there is no change in the margin that is currently contemplated. Any reduction will be backstopped by ADNOC Group. So our main shareholder, throughout December 2022. So the short answer is, in the UAE, since end of 2015, the pump prices and the margins are regulated, offering us minimum margin of roughly 22% gross profit margin, if you look at the historical trend. And the additional, I would say, trick that we have compared to the 2 other competitors is given the shareholders that we have, at the IPO, we have been able to get a backstop for the fuel retail margin in case there is inventory losses. We will not incur any inventory loss, and we'll have a minimum margin. And we can also benefit from higher pump prices, which leads to inventory gains.

Okay. Got it. Okay. Yes, coming to my -- I have one more question, basically. I would like to understand how does the Corporate and Aviation business work in terms of pricing? I mean, given the current scenario, will there be any pricing pressure from the Corporate and Aviation customers? Or is this like long-term contracts that we have with you?

On the Corporate side, this is a combination of on track as well as spot market. But this is purely tied to the market. There's no margin protection on the Corporate side. Now when you talk about the Aviation piece, there's 2 -- there are 2 pieces to that business, as I pointed out earlier, there's the civil aviation where we're purely a logistics service provider for the big -- one of the biggest players, the ADNOC. So that's on a cost-plus basis. So we provide the service and we recuperate all our cost-plus margin. The second piece is the government/military. And there is, without disclosing the actual numbers itself, that is, again, pegged to the market plus a premium. So when we sell to government and military, there, we do have market exposure. But again, it's never below it’s pegged at plus a premium on top of it.

We will now take our next question from Sashank Lanka from Bank of America.

A very quick question. I just wanted to understand in terms of OpEx and CapEx, how would the ADNOC on the go stations compare versus your traditional stations? I understand this could be confidential, and you may not be able to give me the exact number, but even the percentage would be helpful to understand.

Question?

Sorry, you were cutting out. Can you just repeat the first part of your question?

My first part of the question was I just wanted to understand how the OpEx and CapEx for the ADNOC on the go station compares to your traditional stations?

Significantly lower. On the CapEx side, it's about 1/3 of the traditional station. And on the OpEx side, it's even lower. Given the reduced manpower, it's a much more efficient model that we can deploy, particularly where we're opening up these sites in the neighborhoods.

Okay. Understood.

On the CapEx side, significantly lower than the traditional station. Yes.

There are currently no more telephone questions.

Okay. Thank you very much. Do we have any question from the web, guys?

No questions here. No questions? Okay. I guess we have -- let me just check. If we have questions. And we give the floor to our CEO, Ahmed Al Shamsi for a quick conclusion. I guess that we have no further questions from -- all questions have been answered, I guess. Anyway, if anyone has any question, please feel free to send them to our IR team. Perhaps, Ahmed, if you want just to conclude the call. And thank you very much.

Thank you very much for the excellent questions. There were also tough questions. I hope the guys provided concrete answers and accurate level that makes everything crystal clear. We are looking forward to grow together here. And we'll keep having these calls on frequent basis. Thank you.

Thank you, Ahmed. Thank you very much.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.