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

Good afternoon, everyone, and welcome to ADNOC Distribution Q1 2021 Earnings Call hosted by Citi Group. We are joined by Ahmed Shamsi, acting CEO; Mohamed Al Hashimi, CFO; Athmane Benzerroug, Chief Investor Relations Officer. I will now hand over the call to the ADNOC team for the opening remarks, which will be followed by Q&A. Athmane or...

Good afternoon, ladies and gentlemen. Yes, can you hear me?

Yes.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the ADNOC Distribution conference call for the first quarter of 2021 results. So I'm Athmane Benzerroug, the Chief Investor Relation Officer. And we're going to start with today's call, giving you some thoughts on the key highlights of Q1 2021, and the outlook for this year. We'll then discuss in detail our growth strategy and the financial performance. We'll then answer any questions you may have at the end of this presentation. Can you just move to the next slide, please, guys. I cannot see the slides moving but -- thank you. So just -- yes, thank you. Just before we begin, please allow me to reiterate our cautionary statement 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 other investor communications, all of which are available on our website. I direct everyone to our website to read the full text of this disclaimer and other important information. I will start with brief summary of ADNOC Distribution key achievements in Q1 2021 and the progress we have made in context of our 2021 outlook and growth strategy. Our CEO and CFO would provide further insights on our strategy and financial performance. Q1 2021 has been another solid quarter for ADNOC Distribution, demonstrating resilient business performance and continued delivery on smart growth strategy. The company's fuel volume continued to show progressive recovery compared to pre-COVID levels, i.e., versus 2019. Q1 2021 total fuel volumes decreased by 4.9% compared to Q1 2019, while Q4 2020 total fuel volumes were down by 7.3% versus Q4 2019. This gradual recovery is driven by improved consumer sentiment following government vaccination rollout program, incremental volumes from our Dubai stations and proactive sales strategy in our operating business. Sorry, we are hearing some music around. [Technical Difficulty] Thank you. So subsequently, Q1 2021 underlying EBITDA grew by 17.5% year-on-year, driven by growth initiatives such as Dubai expansion, proactive sales strategy to increase corporate fuel volume and improved margins across business units and reduction in OpEx. Despite growth in our network, our total OpEx declined in Q1 2021, and the companies recognized like-for-like OpEx savings of $10 million in the first quarter, putting us in a strong position to achieve a $25 million like-for-like OpEx savings in 2021. This is our guidance. We continued to deliver on our strategic growth plans in the first quarter. Our key priority in the UAE remains expansion in Dubai, where we are gaining incremental volumes and EBITDA, and we remain on track to open 30 to 35 stations in the UAE, including 12 to 18 in Dubai. Our convenience store network has grown by around 23% versus Q1 of last year. In line with our ambitious nonfuel retail strategy and building on the momentum of last year, we refurbished 14 convenience stores in the first quarter to offer fresh layout and new food offering, thereby further enhancing shopping experience for our customers. We remain on track to refurbish 40 to 60 stores for 2021. In addition to our UAE expansion, we are progressing to expand internationally. We have good news on acquisitions we announced in December 2020, and our CEO will provide more updates when we will discuss our strategy. Once we close the 3 announced transactions to acquire 35 stations, our total network in Saudi Arabia will increase to 37 stations. Beyond this, we are in discussion with several players to further expand our presence in KSA, in line with our international growth strategy. Finally, we are committed to deliver attractive long-term shareholder returns, underpinned by our progressive dividend policy that offers high visibility of cash returns to our shareholders. For 2020, we paid dividend of $700 million, half of which was paid in October 2020, and the second half was paid in April 2021, taking full year dividend of -- to, sorry, $20.57 per share. The company's 2021 dividend policy is set to continue with dividend of another $700 million, offering a 4.4% dividend yield. During the company's general assembly meeting in March, shareholders further proved amendment to dividend policy, setting minimum $700 million for 2022, thereby enhancing payback visibility until April 2023. For years thereafter, the dividend policy remains unchanged at minimum 75% of distributable profits. Amendment in dividend policy recognized the company's strong financial position, confidence in its growth prospects and cash flow generation ability going forward, and our CFO will dig into this. Finally, regarding ADNOC Distribution share trading activity, a key milestone of free float, doubling to 20%, was realized in September 2020. This has led to significant increase in trading activity of ADNOC Distribution shares on the Abu Dhabi Stock Exchange as you have witnessed. Also, and finally, we expect tomorrow, a key event for ADNOC Distribution shareholders. MSCI could announce inclusion of ADNOC Distribution in its EM Index. In that case, it will further enhance the company's investment appeal and visibility among global investors and awareness of ADNOC Distribution's unique value proposition. This would also attract foreign inflows in ADNOC Distribution shares, thereby further diversifying our shareholder base. I will now hand over to Ahmed for an update on our growth strategy. Over to you, Ahmed.

Thank you, Athmane, and good afternoon, and good morning, everyone. Thank you for joining us today. I hope everyone is staying safe and healthy. Before I move on our growth strategy, allow me to reiterate our commitment to health and safety of our employees, customers and all stakeholders, which remains our key priority at all times. Supporting the nation's ongoing fight again COVID-19, ADNOC Distribution has ensured all health and safety measures are maintained -- and Q 2021, the company became the fairest fuel retailer in the world with 100% of its frontline staff working in our service station network now vaccinated. We will continue to strive to meet energy needs of our customers and communities in a sustainable and safe manner. To provide further color on our growth strategy, let me begin with our fuel business, which includes our retail and commercial customers. Our fuel network has grown by 15% in Q1 2021 compared to Q1 2020. We maintained leading market position, in UAE's retail fuel network. And now operate 449 fuel stations in the UAE as of 33rd of March 2021. We also remain focused on value assertive and underpenetrated Dubai market. And as of April 2021, we opened 5 new stations in Dubai. As a result, the company's Dubai service station network has increased from 26 stations at the end of 2020 to 31 stations by end of April 2021. Dubai is delivering as per our plans with double-digit growth and fuel volumes sold in Q1 2021, driven by new station openings. And we expect our Dubai expansion to contribute meaningfully going forward as full impact of our new station openings become visible in 2021 and as mobility restrictions are lifted further following vaccine rollout to wider population. We have also started to see growth materializing from management initiatives in our commercial business. We witnessed strong increase in bulk LPG sales volumes as well as profitability of LPG cylinders sold in Q1 2021. With the support of government authorities to enforce strict controls, share of gray market and LPG business, has reduced, thereby contributing to higher growth. Secondly, profitability in LPG cylinder business has increased following our decision to increase price of LPG cylinders last July. We continue to see a potential $20 million incremental EBITDA contribution from this initiative on a yearly basis as guided previously. Thirdly, our commercial sales team is more proactively managing dynamic pricing in order to grow our market share in gas oil fuels sales through spot deals as well as bringing new corporate customers. This has also contributed to higher sales volumes and margins in our corporate business. Finally, international expansion remains integral to our growth strategy, and we remain well positioned to harness international growth opportunities. Out of the total 35 stations acquisitions we announced so far in 3 different transactions, [indiscernible] one of 15 stations has now received approval from the General Authority of Competition, GAC, and the [ Canton ] Saudi Arabia. While as the other 2 are currently under review by GAC. The next steps to close these transactions are to transfer all necessary licenses. Beyond these 35 stations, we are continuing to explore further opportunities to expand in Saudi Arabia, Egypt and other countries and international markets. We will announce further updates at an appropriate time. Moving to our nonfuel retail business. We opened 6 new convenience stores and DOE in Q1 2021. Our network of 332 C-stores as of 31st of March 2021 has grown by 23% compared to same period end 2020. After strong momentum and the revitalization of our convenience stores in 2020 with refurbishment of 100 stores, pace of revitalization has continued in Q1 with refurbishment of 14 convenience stores. We aim to offer superior customer experience through various customer-centric initiatives such as modem and digitally enabled environment, improvement in category management, offering high margin, fresh food and premium coffee. On the back of these initiatives, average gross basket size sustained growth and increased by 2.2% year-on-year in Q1 2021. We also saw increase in margins at our C-stores following better product offerings. We also maintained our focus on providing an increased level of convenience to customers, particularly through our partnerships with delivery services, Talabat and Carriage, which allow customers to order from more than 1,700 ADNOC Oasis products from over 100 convenience stores across the UAE. Finally, the company continued its drive to enhance its offering through ADNOC Rewards loyalty programs, the UAE's fairest customer loyalty program from a fuel provider. In the first quarter of 2021, we launched a new partnership with Etisalat Smiles, which allows members of both platforms to cross exchange points and maximize benefits. We also added 27 new partners to the ADNOC Rewards program, offering members more deals and discounts from some of the UAE's leading leisure and entertainment brands. ADNOC Rewards has recorded more than 1 million registered users at the end of Q1 2021 and over 12 million transactions since the launch of the program. I will now hand over to Mohamed Al Hashimi to present the highlights of our financial performance. Over to you, Mohamed.

Thank you, Ahmed. Good morning, and good afternoon, everyone. I'm just going to take you through our financial performance for the first quarter of the year. So as you can see on the slide in front of you, we've demonstrated strong financial as well as operational performance in Q1 2021. Our revenue decreased by approximately 13.3% year-on-year. This, of course, was driven by the lower fuel volumes as well as lower selling prices as a result of lower crude oil prices as well as a decline in the nonfuel revenues. But the operating performance has remained strong. Gross profit has increased by 19.4% in the first quarter compared to the same period last year. Now this growth was driven by the fuel retail and commercial segments, which we will elaborate in the next upcoming slides. So the Q1 2021 reported EBITDA of USD 222 million, increased by 46.8%. Now this was driven by an increase in corporate fuel volumes, as I just mentioned; higher retail and commercial margins; retail inventory gains of $29 million that we booked in Q1; lower operating costs, as the CEO mentioned; and lastly, one-off expenses, lower, but one-off expenses of $9 million during the first quarter of this year. Now the same period last year, of course, was negatively impacted by a total of about $20 million in one-off items. Now the underlying EBITDA, as you've seen, which we calculate, excluding inventory gains and losses and any one-offs, this has remained strong with growth of 17.5% year-on-year. The underlying operational performance was driven by higher margins as well as a reduction in our operating expenditure. So the first quarter of this year, net profit was $172 million, which, of course, is an increase of almost 58% compared to the same period last year. This is, of course, resulting from a higher EBITDA. Let me just go on to the next slide, please. Thank you. Now let me briefly walk you through the key operational highlights for the first quarter. The total fuel volumes we've sold have continued to witness progressive recovery. Now this is, of course, compared to the pre-COVID-19 levels. However, the aggregate Q1 2021 fuel volumes are still down almost 4% year-on-year. And this is, of course, resulting from the ongoing mobility restrictions. Retail fuel volumes, which is approximately 68% of our total fuel sales during the first quarter, declined by almost 5%, 4.7% to be precise, compared to the same period last year. Now as we talked about the mobility restrictions, the retail fuel volumes have been particularly impacted by the Abu Dhabi border restrictions as well as due to the fact that many of the organizations, both professional, government, schools, for instance, continue to allow remote working amidst the safety restrictions. This, of course, has an impact on the retail fuel volumes. On the commercial side, fuel were down by 1.6% year-on-year during the first quarter. Now this was mainly due to the lower sales on the strategic aviation customers, but also partially offset by the growth that we witnessed in the corporate fuel volume side. The corporate fuel volumes growth was driven by an increase in mostly gas oil sales. Now this was on the back of a proactive sales strategy, both to gain spot deals as well as increased scrutiny and government support in forced regulations, tackling the gray market, especially in bulk LPG. As we look at the nonfuel business, the transactions have decreased by 17.5% year-on-year during the first quarter of 2021. But the good news there is that the transactions have increased by just a little over 5% compared to last quarter. So the sequential recovery is supported by an increase in the number of convenience stores, vehicle inspection centers. And both of these -- a focus of our expansion. In addition to improved product offerings at the stores, the refurbishment revitalization of our convenience stores, marketing and promotion campaigns, very targeted campaigns, under the ADNOC Rewards loyalty program, and the objective is, of course, to attract higher footfall and increase customer spending. The average gross basket size, sustained growth increased by just a little over 2% year-on-year during the first quarter of 2021. We believe this was supported by our customer-centric initiatives, such as improvements in category management, ADNOC Rewards, our focus on that as well as the online delivery service. Now starting the Q1 2021, we've also started to see some margin improvement in our convenience store business. So if you look at gross profit margin in the first quarter, it's about 31.6% Q1 versus approximately 27% in Q1 last year. So 31.6% Q1 this year versus 26.9% last year, same period. Now moving on to the gross profit performance by segment. Our gross profit has increased by 19.4%, driven by retail and the commercial businesses. Now on the retail side, the Retail segment gross profit increased by about 10% year-on-year, driven by the fuel retail business. Now this part of the business posted strong operating performance, gross profit growth of almost 13%, 12.6% year-on-year. This was on the back of higher margins because retail fuel pump prices did not fall in line with the fuel supply cost for the month of January. Ministry of Energy support, in addition, to the inventory gains of $29 million. Both of these upsides were, of course, partially offset by the lower fuel volumes. On the nonfuel side, the Retail gross profit has decreased by about 4.4% year-on-year. Although the nonfuel revenues have declined by 13.2%, this, we believe, is supported by improvement in margins in the C-store business. The margins have improved, we believe, as a result of better product mix, introduction of high margin fresh foods and coffee products and [indiscernible] our [indiscernible] entire footfall. On the commercial business side, the gross profit increased by 48.5% year-on-year, mainly driven by higher corporate volumes, higher margins, of course, offset by the lower aviation volumes. And if you look back to the same period last year, Q1 2020, this was negatively impacted by revaluation of inventory stock, following lower oil prices and other one-off items. Let's go onto segment-wise EBITDA performance. So as I mentioned before, the first quarter 2021 EBITDA increased by 46.8%. Once again, driven by higher retail and commercial fuel margin. However, I would also help this OpEx optimization, $10 million savings like-for-like, as we mentioned, whereas the first quarter of last year included negative one-offs of about $20 million. On the retail EBITDA, this has increased on the back of higher margins, inventory gains as well as a reduction in OpEx, however, offset by the lower fuel volumes and decline in the nonfuel gross profit. On the commercial side, EBITDA growth was driven by higher volumes, corporate volumes, higher margins, OpEx savings, and again, just similar to retail, the first quarter of 2020 included negative one-offs. This didn't help at the time, of course. Excluding inventory gains, losses and one-offs, the underlying EBITDA is up by 17.5% in the first quarter of the year. Let's go to the next slide, please. Okay. Let's have a look at our operating expenditure. As we've alluded to, throughout the presentation, our total OpEx has decreased by 3.8% year-on-year in first quarter 2021. Now once we have excluded depreciation, the OpEx has decreased by 6.5% year-on-year, demonstrating benefits that we have extracted for management initiatives, to optimize OpEx across all business units. We've talked about it, starting last year, especially when COVID struck us, that we're going to maintain continued pressure on operating expenditure and the results are starting to come through. So we remain committed to reducing operating expenditure, despite growth in the company's retail network. As a result, now, during the first quarter, we've realized like-for-like OpEx savings of USD 10 million in the first quarter of the year, mainly due to optimization in staffing costs, which, of course, is a major driver in our total OpEx. Now we have been diligently focused on our response to COVID-19, ensuring the safety and well-being of our customers and our staff, but the transformation efforts will continue. We will continue to ensure that operating costs are market competitive, and the company remains well positioned to deliver on our future growth emissions. Last but not least, the cash generation or free cash flow generated for the quarter -- for the period was $227 million, of course, driven by strong cash flow from operations as well as some positive working capital movements. The positive working capital movement, mainly the result of increase in [indiscernible] related parties, driven by higher fuel purchases, higher value of the same fuel purchases in a rising oil price environment, higher trade payables, and of course, partially offset by increase in our inventories. In line with our guidance and our plans to continue with our expansion strategy, we've spent USD 65 million of capital expenditure in the first quarter of this year. We maintained our strong balance sheet at the end of March with net debt-to-EBITDA ratio of 0.93x. Of course, this is well below the 2x as for our commitment to the marketplace. Let me hand it back over to Athmane. Over to you, Athmane.

Thank you very much, Mohamed. Thank you. So I discussed our 2021 key strategic targets at the beginning of our presentation, which are summarized on this slide. In a nutshell, after strong results in Q1, the company is well positioned to grow its earnings in line with our long-term strategic commitment to reach at least $1 billion EBITDA target by 2023. So we remain committed to pursue our expansion plans in a disciplined manner, deliver an enhanced customer experience, further optimize our operations to become a leading, cost efficient, fuel retailer and generate sustainable value creation for our shareholders. Our Dubai and Saudi expansion momentum is likely to sustain in 2021. In our convenience store business, around 60% of our C-store network that was operational at the end of 2019 would be refurbished by the end of this year. This will put us in a better position to reap the benefits of our initiatives that offer superior customer journey and in-store experience, coupled with high-margin products. We are confident of achieving growth in our convenience stores business once economy recovers fully from the impact of pandemic. We are also confident to sustain attractive dividend payback backed by a strong balance sheet, as mentioned by Mohamed, and confidence in cash flow generation capability while retaining sufficient cash to support growth. This concludes today's presentation, and we are happy to take any questions that you may have. Thank you.

[Operator Instructions] We will now take our first question from Faisal Al Azmeh from Goldman Sachs.

Congratulations on the strong set of numbers. Maybe 2 questions on my side. The first is more relating towards the volume recovery. What is the run rate like in Q2 so far when you compare it to where you were in Q1? Are you seeing continued recovery throughout this year? And when thinking about the Saudi expansion, if you can maybe shed more color around the target that you plan to achieve maybe 5 years from now, just so we can get a sense of how big you want that presence to look like.

Faisal, thank you very much. So perhaps, we can start first with Saudi -- Ahmed or Mohamed, if you want to take this question? On ambitions -- and even we will not provide any target. It's too early. But just to get a sense of what we want to do.

Right. Sorry. And -- then okay, well, if I can start and just jump in. It's a good question, Faisal. It comes up every quarter. As we've been consistent with our messaging, we hope and we are actively working to build up a sizable presence. Now we're not going to add a number to that and turn that into a guidance, but a sizable presence is certainly not the total announcements that we've had so far. So we continue to basically focus and beef up the pipeline even more. And as we've said in prior calls, during earlier quarters, this is not going to be one large acquisition. It's going to be many, many, many smaller acquisitions as we build up their prices there. So we're far from it. But as we've said, we hope, and we're aspiring and certainly working to execute on this front, that the KSA market, which is absolutely crucial for the growth of ADNOC Distribution continues to deliver, but it's going to do that once we get to that size, and that's not going to happen anytime soon. So we're going to be at it for a while.

Ahmed, do you want to add anything? Or can we tackle the volume part? Look, first of all, Faisal, as you know, we don't provide any guidance regarding the volumes given the situation. And we are going into a period that -- where the volumes given aid, et cetera, could be perhaps weaker, softer, I would say. So we would not anyway give a guidance in a situation where we are seen in a COVID situation. What we can tell you is that the trends that we have been highlighting should -- are still valid. And as the vaccines roll out, we expect a gradual recovery as people start to be able to move.

We will now move on to our next question from Sashank Lanka of Bank of America.

Yes. I have a couple of questions. My first question is related to the fuel volumes. So when I look at volumes in Q1 '21 versus Q4 2020, we did see a decline both on the retail and the commercial side. So just wondering what drove this decline, given the further reopening and the vaccination rollout that we have seen in the UAE in the first quarter versus fourth quarter of last year. And the second question I have is more on fuel retail margins. I think in line with your guidance last year, we have seen fuel retail margins correcting versus the $0.65, $0.70 per liter that we saw in Q3 and Q4. I think it was closer to $0.53 per liter. I did notice that the fuel retail pump prices are up in March -- sorry, in April and May again. At the same time, oil prices are up as well. So I was just wondering if you could give us some guidance on the trajectory for fuel retail margins going into the remainder of the year.

Sure. Thank you for the questions. So please, Ahmed.

Thank you for the questions. I see the question related to the volume is coming now for the second time. Yes, the volumes are not 100% recovering as expected after the rollover of the vaccination campaigns across the country. However, we remain cautious about the situation. We are trying really to ensure growing by opening sites outside Abu Dhabi and are focusing more in Dubai to ensure unlocking more volume. In terms of the margins, we don't have visibility about the Ministry of Economy, if there will be a change in the margins. However, the clear message we received that we will continue now with the official fix margins regulated by the Ministry of Energy. I'm not sure Mohamed or Athmane would like to add more.

I just try to jump just on the volumes, perhaps very quickly. Just when you compare Q1 to Q4, just be mindful that there is a seasonality between Q4 and Q1. And Q4 is usually strong. And you have seen, for instance -- we have seen also in Q4 of last year, a lot of tourists in the UAE and especially in Dubai, which has led to higher volumes also. So quarter-on-quarter comparison is not appropriate, and this is what I just wanted to flag.

And just to complement what Ahmed and Athmane just mentioned. Yes, vaccinations have gone up. The mobility restrictions continue to go down, but we're now at the full stage of normalcy yet. The mobility restrictions are still in place, especially between Abu Dhabi and Dubai. So we're not completely out. As I mentioned, when we were covering the fuel volumes part, many organizations are still doing remote working. Schools continue to go on and off. So we were far from full normalcy, although much, much, much ahead of where we were during lockdowns, for instance. So do we expect to let the numbers -- or expect the numbers to continue to get better going forward? And the answer is yes. It's not going to happen overnight, and we'll be back to pre-COVID-19 levels just in a matter of weeks, probably not. But the good news is that we expect the numbers to get progressively better over the rest of the year. In terms of margin, as we said, when we finished out the 2020, we said we don't know when the extra support from the Ministry is going to end. Most likely at the end of January. And indeed, that's what has happened. The Ministry support has officially ended at the end of February. So everything that you see now is full exposure to the market movements, whether the oil prices go up or down. So as of March, we are without any support from the Ministry of Energy. That was, of course, there to help this sector during an extremely stressful time during the lockdowns. That has ended, and going forward, we have zero guidance. We have no guidance in terms of if and when we can expect more support from the Ministry. So our expectation for the remainder of the year is it's business as usual. It's business as normal. So if prices at the pump have gone up, it's purely a function of oil prices having gone up. Okay?

Yes. That's very clear.

[Operator Instructions] And we'll move on to our next question from Nick Stefanou of Renai Cap.

It's Nick from Renai Cap. I have -- 2 for me. The first one is on India. You used to have expansion plans there for lubricants, I think. We haven't heard about it in a while. So I was wondering if you could give us an update there. The country is facing quite a big COVID crisis. But I guess, did this affect you? Or are the plans like still there? The second question is on the debt. I think I read on the notes that it's maturing next year. So I was just wondering what are -- your thinking is around refinancing but or what kind of rates we should be looking at?

Thank you. Ahmed, would you like to cover the lubes part? And then we can move on to the refi.

No, I mean the lubes part is still under evaluation internally. We didn't take any kind of decision whether go or no go. There are potential opportunities in the lube area in India, part of the BD valuation process. As mentioned, we don't have clarity on a clear or solid decision. Once we reach an advanced stage, we will for sure communicate to public. Mohamed, [indiscernible] a few.

Yes. Thank you. Thanks, Ahmed. Yes, just to complement what the CEO has mentioned, we have not moved away from our expansion, our focus on international sales when it comes to lubes. This, obviously, was a sector that slowed down tremendously because of COVID, both last year and early this year. But the good news there is we're seeing progressively this part of the business, getting better and better. And those international markets that we had to pause or slow down because of the COVID impact, those are now starting to come back on. So on the lubes front, that seems seismic. So we haven't backed away from anything. It just had to slow down because of mobility restrictions. But now it's starting to come back on. On the loan, on the debt part, yes, most likely, we haven't given any specific guidance. We haven't made those final decisions, but it made sense most likely, we will refinance. Once it matures for us. Okay?

Yes.

And it appears we have no further questions over the audio at this time, sir.

Okay. Okay. I guess this would end the call. Ahmed, do you want to say a final word?

I fully appreciate this session. Great to be here. Thank you, everyone. Please stay safe and Eid Mubarak in advance. Thank you.

Thank you very much, everyone. If any question, please feel free to reach out the Investor Relations team. Thank you.

Thank you, everyone.

Everyone, goodbye. Bye-bye.

Thank you. Bye. Bye-bye.