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

Good day, and welcome to the ADNOC Distribution Q1 2023 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Athmane. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to the ADNOC Distribution First Quarter 2023 Earnings Conference Call. I'm Athmane Benzerroug, Chief Strategy, Sustainability and Transformation Officer. Joining me today is Wayne Beifus, our Chief Financial Officer. Our Chief Executive Officer, Bader Al Lamki, is not present today. In today's call, I will start with the key highlights of the first quarter and also speak about company's outlook. Our CFO will then discuss in detail, delivery of our growth strategy and the Q1 operating and financial results. After the presentation, we turn to Q&A. Before we begin, I will quickly reiterate our cautionary statement regarding forward-looking statements. The presentation includes forward-looking statements relating to our business. Such statements involve a number of factors that could cause actual results to differ materially from our expectations. For more information, please refer to the IPO prospectus and our 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 would like to start with highlighting ADNOC Distribution unique value proposition, supported by cash flow visibility and strong balance sheet. The company is operating under a robust regulatory framework in the UAE and benefits from predictable industry-leading retail fuel margins. The company has successfully renewed its 5-year supply contract with ADNOC, including the margin backstop for the [indiscernible]. Our focus is on delivering smart growth through efficient capital allocation, future growth in our business and unlocking additional value from OpEx savings. Finally, the company generates strong free cash flows, supporting its new dividend policy to pay a minimum of $700 million for 2023 and minimum 75% of distributable profit onwards. ADNOC Distribution management's priority is to create incremental shareholder value through efficient capital allocation and leadership in sustainability. In that capacity, as one of the leading UAE-based companies, ADNOC Distribution has a key role to support the decarbonization and energy transition that is led by the UAE government. Let me start with our decarbonization agenda. During Q1 2023, we unveiled our sustainability road map, including a commitment to reduce the carbon intensity of our business by 25% by 2030. We are progressing towards its implementation. We aim to cut emissions through a set of identified initiatives, including installing solar panels at service stations, use of biofuels to power fleet of vehicles and other energy optimization initiatives. Also, ADNOC Distribution announced last week, partnering with Emerge, a joint venture between Masdar and EDF, to install solar panels across its service station network in Dubai as a part of the company's phased approach to UAE-wide solar rollout. ADNOC Distribution is also exploring opportunities offering the energy, offered by the energy transition to future-proof its business and create new revenue streams. We are leveraging on our extensive network to promote EV charging and clean energy to further enhance customer experience. In the EV space, we announced a partnership with TAQA to create a new mobility joint venture, E2GO, with intention to provide mobility and charging solutions to our customers in the public and private sites across Abu Dhabi and the wider UAE. At the recent General Assembly Meeting, our shareholders have approved amendments to the dividend policy to set a minimum dividend of $700 million for 2023 compared to 75% of distributable profits as per the previous policy. After 2023, the dividend is equal to at least 75% of distributable profits. ADNOC Distribution's new dividend policy recognizes the company's strong financial position, its growth prospects and ability to generate long-term and sustainable returns for its shareholders. That ability has been reaffirmed by a successful renewal of the supply contract with ADNOC for a 5-year term, as I mentioned earlier. The contract secures predictable fuel retail margins with a downside protection provided by the margin backstop and at the same time, offers upside potential in the rising [ food ] price environment. Moving to Q1 key achievements and outlook. In Q1 2023, we completed the acquisition of TotalEnergies Marketing Egypt and consolidated it in our financial statements from February. All figures in this presentation include contribution from this entity unless stated otherwise. Regarding the key achievements, ADNOC Distribution had a positive start of the year, delivering solid operating performance and underlying profitability, driven by a 10% increase in our network, UAE network. 8% volume growth in the UAE and KSA and a double-digit growth in nonfuel transactions in the U.S. We achieved encouraging like-for-like OpEx savings of $9 million, demonstrating significant progress towards target of OpEx savings in excess of $25 million in 2023. Also worth mentioning is that we achieved the highest convenience store conversion rate in 3 years at 24%, coupled with the largest -- with a larger basket size. This is a result of revitalization of our convenience stores and digitally enabled customer journey, improved capital management and in-store experience. Regarding the outcome. We are making good execution progress on our smart growth strategy and expecting positive outlook for both fuel and nonfuel businesses in 2023 and beyond. We are on track to open 25 to 35 new stations in 2023. Nonfuel business growth will be driven by our continued focus on improved category management, fresh food and hot beverages. We invest in offering our customers a modern and engaging retail experience in our convenience stores as we continue our refurbishment program after renovating 193 convenience stores over 2020-2022. We continue to pursue organic and inorganic growth opportunities. Our 2023 CapEx plan of $250 million to $300 million is focused on growth, including network expansion and revitalization of our convenience stores. Following the successful acquisition of 50% stake in TotalEnergies Marketing Egypt, ADNOC Distribution will continue to explore opportunities in high potential international markets. I will now hand over to our Chief Financial Officer, Wayne, who will walk you through the ongoing delivery of our strategy.

Thank you, Athmane, and good afternoon, everyone. Thank you for joining us on this call. I'll walk you through the progress we have made towards achieving our growth plans. Let me begin with the first pillar of our growth, the fuel business, which includes retail and commercial. We recorded the strongest ever first quarter volume with an 8% increase in the UAE and KSA, driven by a 6% growth in retail volumes and 13% in the commercial business. This was driven by new contracts with our corporate customers. We have also benefited from the expansion of our retail network and positive momentum in the economic activity. We opened 7 stations in the UAE and KSA in the first quarter. Including the consolidation of TotalEnergies Marketing Egypt, our total fuel volumes increased to 3.1 billion liters, representing an increase of 28%. This contributed an additional 240 stations, bringing our network to 814 stations on a consolidated basis. The second pillar of our growth strategy is the nonfuel retail business, which continues to demonstrate consistent solid performance across the board. Our focus is on delivering a modern, digitally enabled shopping experience and an attractive customer proposition in our convenience, lubes, car wash and vehicle inspection centers. Our focus has been on enhancing customer experience and loyalty through innovation, a more personalized reward experience, smart marketing and the C-store innovation. This has resulted in the number of nonfuel transactions increasing by 11% year-on-year in the first quarter of '23, after growing by more than 15% in the prior year, along with the sharp increase in footfall, higher conversion and an increased basket size. This has all in turn translated into increased gross profit of the nonfuel retail business by 9% year-on-year. At ADNOC Distribution, we are committed to putting the customer at the heart of what we do, to help accelerate the mobility revolution and redefine the experience at our service stations. Convenience, service offering, digital experience, price and loyalty are all key to our approach in differentiating ourselves in the market and cementing our position as a destination of choice for our customers. In February, we pioneered an innovative ADNOC Fill & Go technology at our service stations. The AI-backed solution utilizes the latest innovation in computer vision technologies, comprising machine learning models, allowing computers to recognize vehicles and offering a hyper-personalized fueling experience. This step reaffirmed ADNOC Distribution's leadership position in the UAE's fuel and convenience retail sector. We believe customers seek a personalized experience, and want to be recognized and rewarded as individuals. Our loyalty program and ADNOC app are rewarding customers who choose ADNOC Distribution stations as their destination of choice. During the quarter, the total number of members exceeded 1.6 million for the first time. I'll now present the highlights of our financial performance. In Q1 2023, we continued to demonstrate strong underlying performance. In the fuel business, our retail volumes increased by 5.5% compared to the first quarter of 2022, excluding Egypt, while daily retail fuel volumes increased by 2.2% compared to Q4 '22, indicating the ongoing improvement in fuel demand. We continue to record strong growth in commercial fuel volumes, which increased in Q1 by 13% year-on-year. This was driven by 21% growth in corporate volumes, supported by new contracts, but offset by lower aviation volumes in the UAE. In the nonfuel business, our convenience store conversion rate increased from 22% prior year to 24% in Q1 2023. And finally, our gross basket size in our convenience stores increased by 2.5% compared to the prior year. Turning to the key financial highlights. Our underlying profitability at ADNOC Distribution reflects the strength of our operations. In the first quarter, we saw growth in underlying EBITDA and net profit, excluding inventory movements, while on a supported basis, those metrics demonstrated a reduction due to material inventory gains of more than $40 million in the same period last year and inventory losses of $4 million in this quarter. Revenues increased by 19%, supported by higher selling prices, growth in fuel volumes and a higher contribution from the nonfuel business. In addition, we consolidated the Egypt business from the first of February. Our gross profit fell by 13% compared to the prior year as we cycled over the inventory gains of Q1 '22. This was partially offset by growing fuel volumes and higher nonfuel business contribution. Excluding these inventory guidance, our underlying EBITDA increased by 8% to $215 million, supported by a company-wide efficiency drop. However, the reported EBITDA decreased by 12% to $211 million. Adjusted for inventory gains and losses, the net profit increased by 5.5% due to the higher underlying EBITDA. However, the reported net profit was $146 million, a 20% reduction year-on-year. Free cash flow of $285 million remains strong, and our net debt/EBITDA ratio is 1.06x at the end of the first quarter, offering room to invest in growth while sustaining attractive dividends. Let me now walk you through the performance of gross profit by operating segments. Total first quarter gross profit decreased by 13% year-on-year. As I mentioned before, this reduction in gross profit was mainly the result of inventory movements. This factor was partially offset by higher fuel volumes as well as growth in the nonfuel business. Fuel retail gross profit fell by 9% despite the higher fuel volumes, principally as a result of inventory movements year-on-year. Nonfuel retail gross profit increased by 9% year-on-year in the first quarter, driven by our customer-centric initiatives, which have translated into a higher number of transactions. Our commercial segment gross profit declined by 30% as a result of the inventory movements and increased pressure on our margins, offset by higher volumes from the new corporate contracts. The performance of the commercial segment was also negatively impacted by the decline in the aviation business due to lower volumes, which are reflective of the reduced military aviation activity in the area. Now turning to operating expenditure. We have reduced our OpEx excluding depreciation by 9% year-on-year despite an increase of nearly 11% in our network size. On a per-station basis, cash OpEx decreased by around 20% year-on-year, while staff costs, which account for approximately 70% of the total OpEx, reduced by 18%. In the first quarter of '21 -- of '23, we achieved like-for-like OpEx savings of $9 million, demonstrating significant progress towards our full year OpEx savings target. In the first quarter of 2023, we generated reported EBITDA of $211 million, a reduction of 12% year-on-year. However, the underlying EBITDA of $215 million increased by 8% year-on-year, which was mainly the result of efficiency improvement measures across all our operations and businesses that I've already highlighted. Retail EBITDA, excluding inventory gains and losses, increased by 16%. While commercial EBITDA, excluding inventory gains and losses, was 10% lower on the year. Looking at cash generation. The company reported free cash flow of $285 million in the first quarter, supported by positive underlying profitability, in line with our plans to continue the expansion strategy. During the period, we've invested CapEx of $57 million. Our financial position remains strong with a net debt-to-EBITDA ratio of 1.06x compared to 0.78x at the end of 2022. During the quarter, we made a cash payment for the 50% stake of TotalEnergies Marketing Egypt. In addition, we distributed the final dividend payment of $350 million. I'll now hand it back to Athmane for closing remarks.

Thank you, Wayne. Before opening the floor to Q&A, I would like to reiterate our outlook and priorities. ADNOC Distribution continues to offer a compelling investment story. We had a positive start to the year and expect momentum to sustain in 2023, driven by both our fuel and nonfuel businesses. In Q1 of this year, we saw growth in both retail and commercial fuel volumes in our home market of the UAE and expect this positive trend to sustain in 2023, while also focusing on our network expansion and delivering higher nonfuel retail contribution. During this period, we progressed towards delivering of our 25 to 35 new stations target for 2023. We are reinforcing nonfuel retail offerings to transform ADNOC Distribution stations into a destination of choice for our customers. As we implement various initiatives to improve the efficiency across all operations and businesses, we aim to further optimize our operations to become the leading cost-efficient fuel retailer. We are also placing sustainability at the core of our day-to-day operations, reducing the carbon footprint and future-proofing our business. We continue to see growth opportunities and new revenue streams, including electric vehicle charging. We remain committed to pursue our expansion plans and allocate capital towards growth in a disciplined manner, delivering an enhanced customer experience and generating incremental value for our shareholders. This concludes today's presentation. We are happy to take your questions.

[Operator Instructions] And we'll go to our first caller.

This is Faisal Azmeh from Goldman Sachs. And congrats on the strong start for this year. Maybe 3 questions on my end. Maybe starting with the nonfuel retail, the number of C-stores declined in this quarter. If you can shed some light on what's driving some of these closures. We've seen a good increase in the number of stations. So we're just trying to gauge what is driving that trend? My second question is related to the acquisition in Egypt. If you can just shed some color on how the devaluation of the currency is actually impacting you or how it impacted you in Q1 and how it is impacting you today? And then finally, maybe if you can add a bit as well on what the contribution from Egypt is towards fuel versus nonfuel? And maybe if you can shed some color on that aspect as well. And then finally, if you can also provide us with an update on whether the $1 billion target EBITDA is attainable this year.

Thank you very much for your question. In terms of the C-stores themselves, our C-stores, we have closed quite a few C-stores. I think it was approximately 20. Important to remember that -- in fact, all of those C-stores were connected to our on-the-go offer. So these were small C-stores. We have an ongoing program to increase our footprint where it makes sense, but also to drive for efficiency where it doesn't make sense. So as part of that, we've taken a decision to close a few C-stores in the last quarter. With regard to the question on Egypt, this is a question in everybody's minds. There is an ongoing -- there has been in the last quarter, devaluation in the Egyptian pound, and there continues to be a risk of devaluation in the Egyptian pound. The business that we've acquired is, to some extent, insulated from this devaluation risk. Roughly 2/3 of that business are -- is U.S. dollar-denominated. There's a very strong aviation segment as part of the business, as well as the lubes -- local domestic lubes, together with a lubes export part of the business. The main part of the Egyptian business that's exposed is the NFR and the network. So there is somewhat an exposure in that business. However, our investment case factored in an ongoing devaluation. At this stage, we're very pleased with the performance of the business. Bearing in mind, it's only 2 months that we've been consolidating Egypt into our numbers. I think in terms of the final piece, the $1 billion question, let me hand over to Athmane for that.

Thank you very much, Wayne. Yes. So we maintain our $1 billion EBITDA target for 2023 on the back of organic growth initiatives and inorganic opportunities, such as domestic volume growth and market share gains supported by network expansion. Customer-centric marketing conveys to drive higher footfall in our stations and market share gains in the commercial business, also focusing on sweating our assets, including reinforcing the nonfuel retail offering in our stations and also focusing -- lots of focus on OpEx optimization after the $9 million OpEx savings on the like-for-like basis that we achieved in Q1 2023. And the last bit is the international with growing contribution from TotalEnergies Egypt and also potential impact of new potential amenities.

And just maybe a follow-up question. Maybe if you can provide us with the split between what the revenue contribution was for the Egyptian business on the retail versus corporate side of things? Thank you.

Sorry, could you just repeat that part of the question, please?

So how much is the contribution from the acquisition to retail fuel and retail nonfuel? If you can give us a sense that if that's possible -- if not, I mean we can take it -- we know what the exact -- what the total number is, but if you can give us the contribution to the different segments that would be great.

So the vast majority of the income from Egypt is related to fuels, primarily aviation and traditional fuels as opposed to nonfuel. We don't, at this stage, break up Egypt as a separate reporting item in our segment reporting.

We'll go to our next caller.

This is Ildar Khaziev from HSBC. I just have one question, please. So we've seen reports about the launch of Etihad [ Airways ] last year, and I think they have signed a few contracts already. Can you tell us maybe -- could you talk about the sort of impact on your operations and demand from the launch of Etihad [ Airways ]. Is that a downside risk or maybe it's actually quite the opposite of that, an upside risk? Should we expect negative trade activity to increase? And is this company your customer now? Any color would be appreciated.

Okay. Thank you. Thanks for the questions. So let me try to provide [ complete ]. So first of all, there is limited publicly available data. So we are still assessing the overall impact, but we still believe that the impact will be really minor on us. Based on the available data, Etihad Airways tends to purchase 45 locomotives and each locomotive can target up to 100 rate cost. So therefore, there could be some impact just on the commercial need. Okay? But however, we believe that this may potentially be offset by an increase in diesel demand from the rates, diesel/electric engine, as well as increased growth rate activity around the rail connection ups. So on the consumer gasoline demand, we expect negligible impact on the number of vehicles on the road, given the engineering requirements for vehicle in the UAE.

[Operator Instructions] And at this time, there are no further questions from the phones.

Let us look at some questions we have from the web, and please let us know if there is further questions. Just give us a sec.

Okay. We've got a question on Egypt's fuel margin, to try and understand the retail margin. We can share that Egypt's fuel margin is approximately USD 0.01 a liter, it is low. It's lower than our margin that we enjoy in Saudi and definitely lower than the margin we enjoy in the UAE. Important, again, to remember that the Egyptian business is -- that the network contribution of the business is a relatively small part of the overall profit pool. The majority of the profit pool in the Egyptian business is coming from a combination of the aviation segment and the lube segment. With regard to the retail margin itself, there has been over the last 4, 5 years, a strong drive by the Egyptian authorities to maintain the foreign currency equivalent of that margin. So there have been increases over time with devaluation. I trust that answers the question best as we can.

And we do have a question from the phones, if you'd like to take it?

Yes, please...

This is Ildar from HSBC. Just one more question, please, about the Saudi expansion. Can I just ask you whether you are sort of happy with the pace of expansion so far? Would you like the company to grow faster there because opportunity is still great? Do you expect or maybe do you have a pipeline of projects which actually could lead to a faster rate of expansion in this country? How do you view this market at this point?

Okay. So your question is regarding Saudi, am I right?

Yes, correct.