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

Good day, and welcome to the ADNOC Distribution Q4 and Full Year 2023 Earnings Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Athmane Benzerroug. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to ADNOC's Distribution Fourth Quarter and Full Year 2023 Earnings Conference Call. I'm Athmane Benzerroug, Chief Strategy, Transformation and Sustainability Officer. Joining me today, Bader Al Lamki, our CEO; and Wayne Beifus, our Chief Financial Officer. In today's call, I will start with the key highlights of 2023 and also speak about the company's outlook. Our CEO will then discuss progress on our growth strategy. Then our CFO, will take you through the Q4 and full year 2023 operating and financial results. After the presentation, we'll turn to Q&A. Before we begin, I will quickly reiterate our cautionary statements regarding forward-looking statements. This 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 international offering memorandum relating to our IPO and to 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. At the beginning of this call, I would like to outline the key highlights of our equity story. First of all, ADNOC Distribution has a strong record of value creation. Since IPO in 2017, the company has nearly doubled the value for its shareholders. This has been achieved through efficient capital allocation and value accretive investments which have translated into a robust return on capital employed that exceeded 25% in the past 5 years. The company aims to pay a dividend of $700 million for 2023, half of which was paid in October 2023, and the second half is expected to be paid in April 2024. As part of our Smart Growth strategy, we are transforming the largest UAE fuel and convenience retail network into a destination of choice for our customers. We continue to focus on delivering incremental growth through allocation of capital towards mobility in a disciplined manner, future-proofing our business and unlocking additional value for OpEx savings. In addition, we see growing contribution to operating and financial results from our international assets. Thirdly, our track record of demonstrable solid performance has been reinforced by strong results in 2023. The company is operating under a robust regulatory framework in the UAE and benefits from predictable industry-leading retail fuel margins, with a limited exposure to all price volatility. This visibility was reinforced at the beginning of last year when we renewed the refined product supply agreement with ADNOC for the next 5-year term. This agreement offers us protection against inventory losses through a retail margin pact of guarantee, but also provide exposure to inventory gains. These strong fundamentals have enabled us to pursue new growth opportunities and continue with attractive dividend distribution. I will begin the presentation with key achievements of ADNOC Distribution and then briefly talk about the outlook for 2024. All figures in this presentation include contribution from our international assets in Saudi Arabia and Egypt unless stated otherwise. First of all, let me start with our key achievements. 2023 was truly a remarkable and transformative year as we achieved our highest ever EBITDA of $1 billion and delivered on a critical commitment we made to the capital markets. The delivery of this target is underpinned by our unwavering commitment to HSE, capability building and digital transformation. Our free cash flow of $1.1 billion and robust balance sheet support our plan to pay $700 million dividend for the full year 2023 and provide capacity to pursue new growth opportunities. This strong financial performance was driven by strong operating performance with a double-digit growth in our fuel volumes and number of nonfuel transactions and growing contribution from the international assets. ADNOC Distribution continued to expand its retail fuel network in 2023 by adding 41 new stations and exceeding the full year 2023 target of 25 to 35 new stations across its network. We witnessed a strong momentum in nonfuel retail business with transactions up 13% driven by our customer-centric initiatives. Worth highlighting is that we achieved the highest convenience store commission rate in 4 years of 25%, coupled with a larger basket size. This is a result of reutilization of all convenience stores, digitally enabled customer offering, improved category management with a focus on SMB as well as the expansion of our ADNOC Rewards loyalty program. Supported by these strong operating metrics, nonfuel retail gross profit increased by 20% compared to 2022. Finally, we achieved like-for-like OpEx savings of $28 million in 2023, exceeding our target of $25 million. This brings the total OpEx savings achieved during 2019, 2023 to more than $130 million. Regarding the outlook. ADNOC Distribution has demonstrated a proven track record of value creation since IPO by pursuing new opportunities in domestic and international markets, and allocating capital towards growth. We have delivered on targets that we communicated to the market in 2019. To highlight the next phase of growth and discuss new targets for the next 5 years period, we will host the Capital Markets Day towards the end of this month. As far as 2024 is concerned, we expect to deliver incremental growth with a focus on operational excellence and future-proofing our business. We planned CapEx of $250 million to $300 million in 2024 after $320 million last year, including nearly 70% of that amount invested into growth. We expect momentum to sustain in our network expansion and plan to add 15 to 20 new stations to our network. Our priority is to create incremental value supported by a set of initiatives to achieve leadership in sustainability. To achieve that goal, last year, we launched our decarbonization road map and committed to reduce carbon intensity of our operations by 25% by 2030. We also tapped into sustainable financing by converting an existing $1.5 billion term loan into a Sustainability Linked Loan. The company signed a contract with Masdar Emerge to roll out solar PV clean energy generation across our service station network in Dubai and already installed at 26 stations in 2023. We also introduced B20 biofuel to our energy mix, which is now used across 100% of our supply chain fleet. Finally, we extended our corporate social responsibility efforts to our customers by launching reverse vending machines at 40 of our service stations across Abu Dhabi. In addition, we started our reforestation program with a customer-focused approach through the integration of adopt a mangrove option on the ADNOC Distribution app. We are leveraging on our expensive network to drive customer choice for EV charging on the go. As part of our strategy, we launched the first wave of over 50 fast and super-fast charging points across our stations, in line with the guidance we provided to the market. I will now hand over to our CEO, Bader Lamki, who will walk you through the delivery of our growth strategy.

Thank you, Athmane, and good afternoon, good morning, everyone. Thank you for joining us today. Before I begin my presentation, I want to talk about safety, which is at the heart of our operations. In 2023, we delivered an industry-leading safety record through ownership by all our staff and continued investment in our facilities and staff training. ADNOC Distribution recorded 42 million man hours in 2023 without any major incidents. Strengthening our commitment to 100% HSE and prioritizing awareness in all facets of the business. We also received the prestigious global WELL Health-Safety Rating for advancing safety and well-being across more than 500 service stations. This certification is a testament to the company's commitment to maintain the highest level of healthy environment and safety practices for all its staff and customers. I will now walk you through the progress we have made towards achieving our growth plans, starting with the fuel business, a key pillar of our growth strategy. Fuel volumes in the UAE and KSA increased last year to a double-digit rate, demonstrating growth of 12% and reached a new record of about 11 billion liters. Retail fuel volumes increased by 10% year-on-year, which was supported by the strong momentum in the region's economic growth and high mobility. Taking into consideration of our operations in Egypt, total fuel volumes last year increased by 40% to nearly 14 billion liters. As already highlighted by Athmane earlier on this call, we managed to sustain growth trajectory in our network. It expanded by 30 stations in Q4 2023 and by 41 stations in full year of 2023, which is above our guidance provided a year ago to open 25 to 35 new stations. Our domestic growth was supported by Dubai where we've opened 5 new stations, taking our network in the emirates at the end of 2023 to 44 stations, up 30% year-on-year. Finally, total network in the 3 markets of our operation expanded by 50% and reached 847 stations following the successful integration of our assets in Egypt. To pursue further growth, we will continue to expand opportunities in mobility retail in the Middle East and beyond to promote adding distribution plants and create additional value for our shareholders. Nonfuel retail business is the second pillar of our growth strategy. In 2023, it demonstrated another year of solid performance. The number of nonfuel transactions increased by 30% year-on-year, supported by our constant focus on enhancing customer journey and loyalty through innovation, personalized rewarding experience and smart marketing. As the convenience store conversion ratio reached a 4-year record high of 25% and basket size continued to increase, we achieved a 20% increase in gross profit on the basis of the same number of convenience stores. After upgrading 42 stores in 2022, we refurbished another 15 in 2023, taking the total number of stores renovated since the launch of the program to almost 210. As a result, 90% of our convenience stores in our network in the UAE are new or refurbished offering a modern, digitally enabled customer journey and in-store experience and resulting in a higher footfall and improved margins. ADNOC Distribution is committed to putting the customers at the heart of what it does to help accelerate the mobility revolution and redefine the experience at the service stations. ADNOC Rewards program is a key driver for delivering incremental growth to enhance customer experience and loyalty. Our reward loyalty program continued to expand and welcomed nearly 350,000 new members in 2023 with the total enrolled members of more than 1.9 million customers. This indicates a strong growth of 22% year-on-year. As part of the loyalty program, the company offers its customer promotions, in-store and a range of initiatives that include linking ADNOC Rewards across service stations purchases and allowing customers to earn and redeem points against valuable offerings. All of this contributed to growth of our nonfuel business, including higher convenience store conversion rate and basket size, translating into increased number of transactions and gross profit. I will now hand over to Wayne to present the highlights of our financial performance.

Thanks, Bader. Good morning, and good afternoon, everyone. To recap on what has been highlighted by our CEO in 2023, ADNOC distribution demonstrated robust operating performance. Last year, growth momentum in fuel volumes accelerated with the UAE and KSA adding 12%, up to 8% in 2022 and 6% in 2021. 2023 was also the fastest year-on-year growth for ADNOC Distribution since the company's IPO in 2017 as we deliver to our customers 1.1 billion liters of fuel more than last year. Additionally, the company set a new benchmark in terms of fuel transactions in the UAE, which reached the highest level ever driven by the growing car park and mobility of the population. In the UAE, nonfuel business number of nonfuel transactions, conversion ratio and convenience store gross margin were all at the highest level in 4 years, indicating the success of our initiatives to convert service stations into destinations of choice for our customers. Now looking at key financial highlights. Supported by the strength of our operations, we demonstrated solid growth in underlying profitability. The 2023 full year underlying EBITDA adjusts for the effect of inventory movements increased by more than 15% year-on-year. While our headline EBITDA reached the highest ever level of $1 billion despite lower impact of inventory gains in 2023 versus prior year. Our net profit, excluding inventory movements, increased by 6.4% year-on-year, despite the higher depreciation and finance costs. Our net profit attributable to equity holders was down due to the lower impact of inventory gains in 2023 versus the prior year. Let me now walk you through the gross profit by operating segment. 2023 fuel retail gross profit increased by 6% year-on-year, driven by volume growth but offset by the impact of lower inventory gains. In 2023, Retail segment inventory gains were $91 million compared to $133 million in the prior year. Our Commercial segment gross profit decreased by 7% year-on-year, given that the inventory gains in 2022 were $36 million, while in 2023, they were reduced to just $2 million. Our nonfuel retail gross profit increased by 20% year-on-year, driven by our customer-centric initiatives. More specifically, in the convenience store segment, gross profit was up 16% year-on-year. Now moving to operating expenses. We remain committed to achieving further operational excellence and in 2023, we realized like-for-like OpEx savings of $28 million. That's above the $25 million guidance that we provided to the market. This was achieved through efficiency improvements across all our business units, including the optimization of logistics, the renegotiation of supply contracts with vendors, the centralization of key functions and payment standardization. Thanks to these initiatives, in 2023, the cash OpEx was unchanged despite the increase of 5% in our network in the UAE and Saudi as well as the consolidation of the operation in Egypt. Our 2023 EBITDA increased by 5% year-on-year, supported by volume growth, higher contributions of nonfuel retail and international activity as well as efficiency improvement measures that I've highlighted earlier. We demonstrated this growth despite the lower positive impact of inventory gains year-on-year. Retail EBITDA increased by more than 10% year-on-year to $720 million while Commercial segment EBITDA was 6% lower year-on-year to $285 million. If we exclude the impact of inventory gains, our underlying EBITDA in the retail segment has increased by 21% year-on-year to $629 million, while the commercial segment is up by 6% to $284 million. Now looking at cash generation. In 2023, the company reported free cash flow of $1.1 billion supported by positive operating and financial performance, and is 19% higher than prior year. In line with our plans to continue the expansion strategy during the year, we invested $279 million in CapEx. Our financial position has remained strong with a net debt-to-EBITDA ratio of 0.62x compared to 0.78x at the end of 2022, despite making the cash payment in February for a 50% stake of Total Energy's Marketing Egypt. Our strong balance sheet and consistent robust cash generation provides support to efficient capital allocation towards our future growth as well as shareholder distributions. I'll now hand back to Bader for his closing remarks.

Thank you, Wayne. Before opening the floor to Q&A, I would like to highlight the key priorities. With the delivery of historic high $1 billion EBITDA, we are excited about the next phase of our growth. At the end of this month, we will communicate to the market our new 5-year strategy that takes our current strength into concentration and outlines plans to shift capital towards mobility and convenience while investing into growth and distributing attractive dividend to our shareholders. We aim to diversify our revenue streams and increase customer satisfaction by positioning ADNOC distribution stations as destination of choice with multiple attractive nonfuel offers. ADNOC distribution will pursue expansion plans in a disciplined manner supported by a robust balance sheet and confidence in our cash flow generation capability. We plan to invest $250 million to $300 million in 2024 with 70% of that CapEx focused on growth. We will continue to invest in sustainability as the core of our day-to-day operations, reduce the carbon footprint and align financing to sustainability projects and objectives reflecting the evolving expectations of our shareholders and customers. The execution of these priorities will help us to deliver highest shareholders' value by accelerating sustainable and profitable growth. Finally, we remain committed to delivering an attractive dividend payback supported by a strong balance sheet and confidence in our cash flow generation ability, while retaining sufficient cash to support the growth. Subject to shareholders' approval ADNOC distribution will pay the final 2023 dividend of $350 million in April. This concludes today's presentation. We are happy to take your questions.

[Operator Instructions]. Our first question comes from Ricardo Rezende with Morgan Stanley.

First question is on the cost side. You have been doing a phenomenal job on cost control. How do you see cost behaving in 2024? Do you see more scope for reduction on a like-for-like basis? And then the second question is on Saudi Arabia. Given the regulations that have recently been published last December by the government, have you estimated what could be the impact for your operations in the country?

And from the speaker line, you may want to check your mute button. If you're speaking, we can't hear you.

Ricardo, it's Wayne Beifus, the CFO. Thanks for the question. In terms of the cost, I think ADNOC distribution has actually had a very strong focus over the last few years on driving cost out of the business. Particularly in the last 2 years, we've been able to achieve a step change in cost efficiency, primarily from the use of technology, giving us insights into where we can drive the most cost out for the benefit and reinvestments into the business. We believe that as we get into 2024 and the periods beyond, there's still opportunity. Could you give us more clarity on your second part of your question, please?

Yes. Second question is on Saudi Arabia. Given the new guidelines and the regulations for the sector. Have you -- would you be able to comment what could be the potential impact for your operations there? Or how do you see the change in the competitive landscape?

Ricardo, Athmane here. Look, we -- first of all, you have seen some positive developments from the authorities regarding safety and better customer experience around the retail network in the Kingdom of Saudi Arabia. Of course, we will not comment on the potential margin increase we have seen like everyone in the press that there were some highlights on this. And again, we cannot comment.

[Operator Instructions]. Our next question comes from Faisal Al Azmeh at Goldman Sachs.

This is Faisal Al Azmeh from Goldman Sachs. Just a quick question. Maybe 3 questions on my side. Maybe starting off with volumes this year. Obviously, you've had a great year. Generally, volumes are probably back to pre-COVID levels. But how should we think about 202,4, are we going to come up from what is a high base, and so we should expect things to moderate quite meaningfully? Or should we expect something of a similar trend for the year on the volume front? So that's my first question. My second question, obviously, with the target of $1 billion now achieved, how should we think about the next kind of drivers of growth into the coming years? Should it be mostly EVs? Or should we start to think about different venues? Or is it just the Saudi expansion? If you can shed some color there, that would be helpful. And then thirdly, just on the dividend front. Maybe if you can talk a bit about the policy for 2024 and how you envision that changing. And then finally, maybe if I can squeeze the fourth one, just on the CapEx front. Obviously, you're guiding for this year, but should we expect CapEx to start to come off from 2025 onwards? Or should we expect something in line with what we're seeing today?

Faisal, thanks for those questions. So let me maybe address your question on volumes, and then I'll hand over to Athmane for the questions on EV and dividends. Our volume growth in 2023 has been very positive. And that volume is primarily driven by, first of all, the increase that we've seen in mobility within the UAE. We've also seen a strong increase in our volumes in Saudi as we've invested in building our brand on the ground through our existing network in Saudi as well as the expansion of our network that we've seen in the UAE. So we do have plans to continue to expand in the UAE where it makes sense for our business and we'd expect a volume benefit to come with this. And at the same time, this is the first financial year where we've consolidated Egypt into our numbers as well. So you're seeing the benefits of the overall Egyptian volumes coming through as well. So I'll hand over to Athmane just to cover off the other 2 points.

Yes. Thank you very much, Wayne. So Faisal, to question one is regarding the next drivers of growth and dividends. So I guess that first of all, what is important to highlight is that the Board of Directors has approved a new 5-year strategy for 2024, 2028 and this is mentioned in our press release. This is targeting the next phase of growth with a focus on sustainable mobility and convenience, and it includes also optimizing the existing assets to improve the profitability. We want also to double down on onshore retail and have also on the mobility front focus on EV. We have installed already 50 fast and super-fast chargers. We want to have a disciplined approach on EV, but taking the opportunity of the pickup when it comes of the EV market. Of course, we will update in due course the market about this new phase of growth and how we're going to execute this growth. I guess this is what you will be focusing on. Regarding the dividend policy, so this year, the dividend was -- has been $700 million, $350 million will be paid in April, which is the H2 dividend. And this is equal to what has been paid last year. And in a nutshell, going forward, we will update the market on the dividend policy. But the way to look at ADNOC Distribution again, is that the 75% payout ratio for 2024 and beyond is just an indication. What we have to tell you is that this company has very strong free cash flow, as highlighted by our CFO before, $1.1 billion. Very strong cash generation profile, very strong cash in the balance sheet and very high level of retail earnings. So we do not expect the dividend to go down if I can just summarize. And then we'll update the market.

And maybe just to kind of follow up on the CapEx question. If you can just comment on how should we think about CapEx beyond 2024.

Yes, Faisal, sure, again, all the targets and outlook beyond 2024 will be shared with the market with our CEO and our CFO and myself. And this will be, as we are targeting, as mentioned, at Capital Markets Day at the end of this month. So a very exciting update for the market at the end of this month.

[Operator Instructions] We'll take our next question. Kindly please state your name before posing your question.

This is Ildar Khaziev from HSBC Bank. Can I ask a question about the economic model for the rollout of the EV charger network. Maybe if you could share some light on what are the investments you should make like charging points on the charging station? And what sort of margins or what sort of revenue it generates at the moment? That would be very much appreciated.

Ildar, so just on the EV side. So we have installed 50 fast and superfast chargers. Our aim is to leverage on the most important and critical asset that we have, i.e., our network and as you know, we have more than 500 stations within the UAE. And we cover all the UAE and the key strategic, I would say, highways. We will update the market on the strategy. Again, we will have a very disciplined strategy on EV and making sure that this -- with the EV will be a very profitable business for us, and we will share kind of financials, I would say, or returns that this business can provide with automotive statements. But I can tell you this is a profitable business.

And maybe secondly, if I can ask a question. I think I posted already this online, but could you share any guidance on the commercial margin and volume in 2024 possible, please?

Yes, Ildar. Just -- we don't provide guidance as such on the commercial business. But what is important is that we have been growing this business substantially. Yes, we had margins that have been down, but still at a very lucrative level. The reason being that you have higher competition, but also that we have been pushing higher volumes, and therefore, setting in bulk and the margins are lower than -- are just lower. But again, the commercial business remains a key priority for us in terms of growth. And then I don't see the margins going down, I guess, we are very, I would say, confident level today.

And I do not have any other questions holding from the phone lines.

We will take a question from the chat. What was Egypt's revenue and EBITDA contribution during 2023? And what's the percentage of Egypt's revenue are dollarized.

Yes. Thank you for that question. We don't specifically call out the financials of the JV in Egypt. You can see the contribution that the Egyptian entity has made in our financial statements, just in terms of the minority interest numbers, et cetera. What I can share in terms of currency makeup. If I run through the business that's been acquired, from Total in Egypt in terms of our joint venture share, we've acquired essentially a network of over 240 stations with convenience stores attached to most of those stations. We've acquired a lubricants business, a car wash business and an aviation business. Now the vast majority of the profit pool is coming from the contribution of very strong aviation sector within this investment, and that aviation sector is U.S. dollar denominated in terms of buying the fuel and selling the fuel. So from an operating perspective, the business is largely U.S. dollar insulated. However, it is fair to say this business is operating in Egypt and has a currency exposure as well.

There's another question. Can management highlight their area of focus in terms of targeting inorganic growth? Does the full year 2024 CapEx guidance includes budget for M&A?

Yes. Thank you for that. So the -- regarding the potential inorganic opportunities, we are looking at, of course, opportunities -- and again, we have always the same discipline to ensure that any potential M&A opportunity will be in benefit to our shareholders, which means accretion of the earnings per share, but also at the value of the company. This is one. And we are not providing, of course, what are the jurisdictions, et cetera. The CapEx guidance for 2024 does not take into account, of course, M&A opportunities.

Do we have any other questions on the line?

I do have a follow-up question from Ricardo Rezende with Morgan Stanley.

A follow-up question, if I may. When you look at the guidance for station opening in 2024, there are fewer stations than in 2023 and thinking more broadly about your current footprint, would be feasible to assume that from now on, we should even see more stations being closed as you have a higher focus not only on selling fuel, but also on mobility, on EV and nonshore retail as well?

Thank you, Ricardo. So just on -- no, we are not planning to close stations, I guess, what the idea is to continue to grow the network. But we went through a dramatic phase of growing the stations in the past few years, and this has led the company to deliver the results that you have today and especially with Dubai and Northern Emirates making sure that we gain market share. The strategy in convenience and mobility is again to get the best of this network where we can optimize actually this network by adding much more nonshore retail and mobility, okay? And again, our focus is profitability and making sure that the network continues to grow in that demand. And today, the market in the UAE anyway is not a saturated market. There are always opportunities, especially in Dubai and in Northern Emirates, as you know that we have 100% market share in Abu Dhabi and the Abu Dhabi market is growing. But again, the opportunity is really to balance the growth of the network and the profitability of all the new stations.

I have no further questions from the phone lines. That does conclude the Q&A session, and that will end today's conference. We thank you all for your participation. You may disconnect at this time.