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

Good day, and welcome to ADNOC Distribution's First Quarter 2025 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the call over to Athmane Benzerroug. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to ADNOC Distribution's Q1 2025 Earnings Call. I'm Athmane Benzerroug, Chief Strategy Transformation and Sustainability Officer. Joining me today, Bader Al Lamki, our CEO; and Ali Siddiqi, our acting CFO. In today's call, I will start with the key achievements and speak about the company's outlook. Our CEO will discuss progress on our growth strategy, and then Ali will take you through operating and the financial results. After the presentation, we will turn to Q&A. Let me start with the disclaimer. So this presentation includes forward-looking statements relating to our business. Such statements involve a number of factors that cause actual results to differ materially from our expectations. For more information, please refer to the international offering memorandum relating to our IPO prospectus, and to other investor communications, all of which are available on our website. I would like to start by sharing with you the key highlights of our attractive equity story. ADNOC Distribution operates under a robust regulatory framework with industry-leading margins and with exposure to oil prices, which translates into predictable cash flow generation. More specifically, the 5-year supply contract with our supportive majority shareholder, ADNOC, offers a guaranteed against inventory losses. Such protection is key in today's volatile oil price environment. The contract also allows us to record inventory gains. Since its IPO, ADNOC Distribution has nearly doubled the value for its shareholders. Our 5-year dividend policy provides long-term visibility on expected shareholder returns and offers upside from future earnings growth. In line with our strategy, we are working to implement key strategic initiatives to achieve further growth by leveraging on our market leadership and operational strengths like one, investing in highly profitable UAE markets, doubling down on nonfuel retail offerings and transforming our stations into destination of choice, investing in digital and AI to grow revenues, optimize costs and offer superior customer expense. Number four, future-proofing our business by unlocking new revenue streams offering by energy transformation with focus on high-margin EV charging business. Finally, we will continue to grow contribution from existing international operations while exploring accretive inorganic opportunities. In Q1, we achieved one of the strongest sets of results, demonstrating our robust growth trajectory. Our EBITDA and net profit increased at double-digit rates, supported by record Q1 fuel volumes delivered to our customers. In the Retail and Corporate fuel segments, which represents 80% of our business, the 9% increase in gross profit was supported by higher retail fuel volumes and proactive corporate fuel margin management. Nonfuel retail gross profit continued to grow faster than fuel with a double-digit rate of 14%, supported by convenience stores, property management and car wash initiatives. We are on track to deliver on our 2025 guidance. Number one, expanding our network. This year, we plan to add 40 to 50 new stations, including 30 to 40 in Saudi Arabia under a CapEx-light dealer-owned company-operated business model. In Q1, the size of our network increased by 20 stations, including 5 in the UAE and 15 in KSA under DOCO model. Number two, expanding our fast and super fast charging infrastructure. We are making good progress in future-proofing our business. We plan to add around 100 EV charging points at strategic locations, expanding in line with EV adoption, utilization rates and on-the-go charging demand. In Q1, we installed more than 60 additional CS. Number three, investing $250 million to $300 million this year with a focus on organic growth after CapEx of $80 million in Q1. In line with our strategy, we are reallocating capital towards convenience and mobility to transform our stations into a destination of choice. This actually includes adding more property units for rent, car wash and lube change upgrades, investment in technology and innovation, including EV charging infrastructure. Bottom line, we expect nonfuel Retail segment to continue to grow faster than fuel. This will be supported by new look and feel of our convenience stores, improved category management with a focus on food and beverage category, and increase in customer digital offerings through ADNOC Rewards app and our Loyalty Program. AI and digital are core to our strategy. We are using cutting-edge AI cloud technology to analyze 240 million annual fuel and nonfuel transactions, along with external data sources to develop advanced model to create business opportunities, drive operational efficiency and collect customer insights. Let me start with growth. We are implementing an AI-driven initiative to cluster our stores and implement assortment according to consumer needs to drive incremental growth in our convenience stores. The AI-driven initiative is designed to optimize the product assortment of our convenience stores. It also helps to provide a more personalized shopping experience for customers by ensuring that products they are most likely to purchase are really available, increasing the likelihood of purchase. On the cost side, we have implemented several initiatives such as fuel demand prediction model, smart workforce allocation management and finally, global automation. These initiatives help us avoid additional costs, reduce OpEx and optimize inventory management. Finally, on the customer experience side. Fill & Go technology uses computer vision-enabled license plate recognition to enable customers to preorder fuel and convenience store products seamlessly through the ADNOC app. In the EV charging segment, plug and charge system allows customers to plug in their vehicles and get the system under the rest. Charging progress is displayed on customer's phones, in the app, on their Apple Watch and payments are handled automatically. Finally, we are introducing a range of hyper personalization initiatives that are aimed at personalizing customer interactions and experiences contributing significantly to our growth. As you know, we place sustainability at the core of our day-to-day operations by decarbonizing our business and linking our financing objectives to sustainability. We have a target to reduce carbon intensity by 25% by 2030 through a set of initiatives in clean mobility and green building. This includes energy intensity optimization, installing energy efficiency equipment and PV solar panels and finally, use of biofuel in our supply chain. Earlier this year, we announced Phase 2 of our solarization program with panels to be installed at more than 100 service stations across Abu Dhabi or 4x the number of the stations that have been covered in Dubai. Finally, we continue to enhance our ESG scores and are rated above the industry average by key ESG rating agencies, including Sustainalytics, S&P Global, MSCI and FTSE. We also help our customers to reduce their carbon footprint by expanding EV charging infrastructure across our network. In the past 12 months, the number of charging points in our network increased by more than 3x to more than 280. We added 63 CPs in the first quarter alone, and well track to install 100 charging points by the end of the year. We are operating in the regulated market with clear charging tariffs and utility costs. This will help us match fuel business profitability in EV charging, assuming the on-the-go charging captures 20% of EV charging demand. We offer a unique EV charging experience for our UAE drivers. First of all, we have the largest station network in the UAE. In this business, as you know, location is key. Also, our stations are on ADNOC owned land and on long-term leases in Dubai and in Northern West. Finally, we offer a compelling experience through our network that has multiple futures, such as convenience stores, car wash and restaurants. Also, we are addressing the most critical customer pain points for an EV driver, which is range anxiety by covering 8 key strategic corridors across the UAE. Additionally, we provide availability of chargers with minimum 6 superfast chargers per site or dedicated EV hubs with a higher number of chargers. Finally, longer EV charging [indiscernible] times are expected to drive higher conversion rates to nonfuel retail products, further enhancing revenues. What we see today is that EV charging to nonfuel retail conversion is more than 2x higher than in fuel. I will now hand over to our CEO, Bader Lamki, who will walk you through the delivery of our growth strategy. Thank you.

Thank you, Athmane, and good afternoon, good morning, everyone. We are committed to fostering a culture of excellence in health, safety and environment, ensuring that every individual within our operations is protected, empowered and equipped with the necessary resources to perform their tasks. In Q1 2025, we delivered again an industry-leading safety record through ownership by all of our staff and continued investments in our facilities and staff training. Let me speak now in more detail about the progress we have made towards achieving our growth plans. We have delivered a record Q1 volumes to our customers despite a reduction in commercial volumes due to a lower spot market trading activities. I would like to highlight continued strength of our aviation business in Egypt, which increased volume by more than 20% compared to Q1 of 2024. In the first quarter of this year, the UAE market and the Kingdom of Saudi Arabia networks delivered to our retail customers 5% higher daily fuel volumes compared to the same period last year, indicating a strong retail fuel demand momentum. This achievement was also supported by the growth in our network. Last year, we've added a total of 29 new stations. And on top of it, we contracted 30 stations in the Kingdom of Saudi Arabia under the CapEx-light dealer-owned company-operated model. We further expanded our network in the first quarter of this year by adding 5 new stations in the UAE and contracting 15 more DOCO stations in KSA. We have now contracted a total of 45 stations in Saudi Arabia under a DOCO model that enable us to grow market share with minimum allocation of our capital. First, we do not CapEx to rebrand and upgrade. This is performed by a station owner. Second, under the commercial agreements with the station owner, both parties will share the 6 [indiscernible] extra fuel margins as the station benefits under ADNOC distribution brand. It has a 15 [indiscernible] margin versus 9 before. They also share nonfuel retail revenues, resulting in a significant value accretion to our company. We expect to grow in this dynamic Saudi market to continue. We plan to add 30 to 40 new stations under DOCO model in 2025. Nonfuel retail transactions and gross profit continue to grow faster than fuel business. Daily nonfuel transactions grew by 10%, driving a 14% increase in gross profit. Convenience store gross profit was up 20%, supported by higher conversion rate, larger basket size and higher margins compared to Q1 2024. We have been enhancing our offerings, driving more customers footfall in our C-store. In food and beverage categories, growth is driven by coffee volumes and new launches such as gourmet sandwiches, matcha and refreshments. Barista prepaid drinks, which is among the highest margin products increased by more than 20% compared to Q1 2024. Let me speak in more details about our convenience store business under Oasis brand. I'm pleased to announce that ADNOC Oasis is the #1 food FMCG player in the United Arab Emirates convenience market. We continue to gain market share by implementing the following initiatives: enhancing assortments, offer core assortments at all of our stations and improving product availability. We are now taking our convenience store to the next level with the following initiatives: personalization using advanced technology and data. We utilize insights from 2.4 million ADNOC Reward members to deliver highly personalized offers and enhanced engagement. Secondly, we are launching a private label under ADNOC Oasis brand to enhance quality, perception and boost sales. Finally, we introduced dedicated service personnel for fueling customers, driving a 100 basis point increase in conversion. We are also targeting higher earnings contribution from other nonfuel retail verticals such as car wash, lube change, property management and vehicle inspection centers. We are doubling down on our strategy through 3 strategic initiatives: number one, creating a one-stop shop for car care services, offering garage services and introducing spare parts offering. Secondly, upscaling car wash business by upgrading our car wash fleets and launching a higher capacity car wash tunnels. Thirdly, enhancing our real estate returns by attracting more quick service restaurants brand into our network, optimizing tenant mix and sites. Following the strong double-digit growth that we've delivered in nonfuel retail gross profit in the past 3 years, we see further potential and expect it to contribute more to our total earnings in the future. These achievements would not be possible without the ongoing success of ADNOC Rewards loyalty program. It has -- it is a key driver of incremental growth through enhanced customer experience and loyalty. Customers are more likely to make additional purchases when they feel valued and rewarded. The program supports the company's strategy of doubling down on nonfuel retail and transforming service stations into destinations of choice. With 2.4 million members, it now covers more than half of the UAE car park and continue to grow. Over the past 12 months, the number of members increased by 20%, including more than 100,000 in 2025 first quarter alone. I will now hand over to Ali to present the highlights of our financial performance.

Thanks, Bader. Good morning and good afternoon, everyone. Quarter 1 '25 was a strong quarter with record Q1 EBITDA. Our headline EBITDA increased by 11% versus Q1 '24 despite lower inventory gains. Underlying EBITDA excluding inventory gains and one-off items grew by 13%. We achieved a healthy growth of 16% in net profit on the back of strong operating performance and lower finance costs. With this double-digit growth in profitability, coupled with return on capital employed in excess of 30%, we are well on track to deliver our strategy. Turning to key highlights of our operating performance. As mentioned earlier, we delivered the highest ever quarter 1 fuels volume, mainly driven by retail fuels. This was partially offset by lower commercial spot volumes in a declining oil price environment. The overall fuels volume growth was attributable to network expansion, viability, successful customer value proposition as well as sustained momentum in the region's economic. We also achieved strong growth in nonfuel transactions, demonstrating and reaffirming the strength of our offering and success of our loyalty program. Let me now walk you through the gross profit by operating segment. Retail fuel gross profit increased by 5%, driven by the volume growth and partially offset by inventory gains, which were lower by $5 million compared to Q1 '24. Commercial segment gross profit increased by 18% year-on-year despite lower volume as a result of successful margin management. Our nonfuel retail gross profit continued to grow at a much faster rate than retail fuels and achieved a double-digit growth of 14%. This growth stemmed from successful delivery of new initiatives in our convenience stores, property management and car wash businesses, to name a few. Now turning to our operating expenditure. We remain committed to achieve cost efficiency and excellence across all our verticals and cost buckets. Over the past 12 months, we achieved like-for-like OpEx savings of $17 million. Cost increase of 2% versus Q1 '24 was due to revenue accretive costs, mainly driven by network expansion as the network size, excluding DOCO stations in Saudi Arabia, increased by 3% year-on-year. On a unit basis, OpEx was nearly unchanged, benefiting from our efficiency enhancement initiatives. As mentioned before, our underlying EBITDA increased by 13% compared to Q1 '24, supported by higher fuel volume, strong contribution from nonfuel retail and continued focus on costs. This EBITDA growth also reflects robustness of our core business and confirms that we are well on track to deliver the strategy showcased in 2024. All the key verticals contributed to this strong EBITDA growth. Now turning to cash generation. We converted strong EBITDA into cash, but experienced an increase in working capital due to timing of certain payments. Excluding the working capital effects, we generated $279 million of operating cash flow. CapEx spend during the period was $80 million when compares to the full FX plan of $250 million to $300 million. Our balance sheet remains strong with net debt-to-EBITDA ratio of 0.7x and position the company well for funding its future growth aspirations. Let me hand it back over to Bader for closing remarks.

Thank you, Ali. Before opening the floor to Q&A, I would like to reiterate outlook of this year and highlight our key priorities. We are progressing towards our 2028 objectives by increasing footfall at our stations, expanding nonfuel retail offerings, strengthening international operations and scaling up EV charging infrastructure. Supported by a robust balance sheet and confidence in our cash flow generation, we will continue to invest in a disciplined manner in the attractive and growing core UAE market, expand our market in the Kingdom of Saudi Arabia and explore accretive inorganic opportunities. Secondly, we expect growth momentum to sustain in 2025 and beyond. Our track record of solid performance has been reinforced by the strong results in 2024 and continued momentum in the first quarter of 2025. In 2025, we still target 40 to 50 new stations, 100 EV charging points and a CapEx of USD 250 million to USD 300 million. Finally, our priority to deliver higher total shareholders' return through share price growth and guaranteed dividends. In 2025 to 2028, we aim to distribute USD 700 million every year or a minimum of 75% of net profit, whichever is higher, ensuring a sustained value creation and offering upside from the future earnings growth. That concludes our presentation. We are happy to take your questions.

[Operator Instructions] We'll take our first question from Anna Kishmariya with UBS.

I have several questions, if I may. And starting with working capital. We saw in first quarter large working capital build related to the line of -- due to related party. Can you please let us know how do you expect working capital movement into the year? Do you expect some of the reversal? Or should we expect a release of capital or from current levels, it will be stable? My second question would be around commercial volumes. You said that the focus was mostly on the margin side and the spot sales were lower. Wanted to check how does it look so far in second quarter? Did you see a pickup in the spot sales volumes or the margin focus remains the core? And finally, a question around nonfuel retail. The conversion rates in first quarter was slightly lower quarter-on-quarter, but I guess it might be due to Ramadan and what the levels do you expect later in the year for conversion rates?

Okay. Thank you for the question. This is Ali Siddiqi, acting CFO. I'll take the first question, and then the colleagues will take the other one. So on the working capital, the working capital increase, that's purely a function of the timing of the payments for the hydrocarbons, which we purchased. So some of the purchase trends last year was sort of timed such that we had to settle them in the beginning of this quarter. Now working capital levels are essentially a function of the price and the stocks which we carry. So this is not necessarily a permanent structural increase in our working capital. This is purely a timing effect. Otherwise, overall, the balance sheet remains very robust. As you can see, we still hold on to debt and cash levels as before. I'll pass on to Athmane for the question on commercial.

Yes. Thanks for the question. So as you rightly highlighted actually, so your question is about the corporate business, which is 90% of the commercial segment. So we are talking about the gas oil sold to B2B customers, which is not regulated in the UAE compared to the retail gasoline, as you know, and gas oil. So this means that the margins per liter can be, as you have seen over the quarters, volatile and are actually influenced by the market dynamics, so which is obviously demand and supply. So if you look at the volumes were slightly down, so due to lower spot volumes. But the Q1 2025 corporate fuel margin actually was 31 fils per liter, which is the average level that we recorded over -- during 2022, 2024 and much higher actually in Q1 2024. So the reason is actually a proactive corporate fuel management policy that we have put in place. I guess what is important is, again, to highlight that the margin in this business has increased actually by 30% from 24 fils in Q1 last year to 31 fils per liter in 2025. The next question is regarding NFR. Can you just repeat, please, your question?

Sure. Just what development would you expect for conversion rates into the year-end? And if, -- while we are on the commercial segment, what would you expect also into the next quarter? Do you expect higher spot volumes or focus will remain on the margin?

Yes. Thanks for that. I'll build on that. So I'll build on what Athmane said. So essentially spot sales, which Athmane rightly referred to, it's a function of oil price movement, especially when the oil price is on a downward trajectory, we do not sell in spot because of the margin erosion risk. So to answer specifically your question, it will be a clear function of where the international oil prices move in quarter 2. If they move upwards, then we will have a lot more scope to sell those spot volumes and actually make money out of it. If they continue to move downwards or stay balanced, we will have a less opportunity. So at this stage, it will be very difficult to speculate on it. Let's watch how the oil price behaves over the next 60 days or so.

Okay. Can you just repeat the question regarding NFR, please?

Yes, sure. And regarding NFR, what would you expect the move on conversion rates level like into next few quarters? We saw a small drop, which most likely was related to Ramadan quarter-on-quarter for the conversion rates. But do you expect a rebound in second, third quarter?

So I guess what is important is that the conversion rate has increased by 70 basis points versus Q1 of last year, is the way you should compare it. [indiscernible] We are [Technical Difficulty].

We're unable to hear the speakers at this time. Please standby as we reconnect to speakers.

Hi. Can you hear me?

You've reconnected.

Again, Athmane here. So sorry, we had some connection issue. So regarding the NFR, I was just saying that the way to look at it is, first of all, that we have maintained a very high conversion rate that also has increased by 70 basis points in Q1 2025 versus Q1 2024. We are also monitoring very carefully the conversion rate, and we expect anyway high conversion rate, sorry, given we are pushing more footfall in our C-store through F&B products. And also the fact that we are also working aggressively on the hyper-personalization to offer more product available to the customers.

[Operator Instructions] We'll go next to Giuseppe Villari with Morgan Stanley.

We have 3 quick ones, if we may. First one is on the Saudi model. You have, of course, guidance for this year, but we were wondering what kind of level of stations network size of this new model. Can you reach on the longer-term horizon? Then secondly, on the EV market in the UAE, how are you seeing the electric vehicle penetration in the region? And thirdly, if you have any update on inorganic opportunities, if there is some targets that you're looking at right now, if you can give more color on some opportunities that you can -- you could capture maybe this year or in the medium term?

Thank you for the question. This is Bader Al Lamki, CEO. And with respect to Saudi Arabia growth, we are proceeding with this DOCO strategy, a smart growth strategy, capital-light growth strategy, and we are on track to continue to grow in this big market. I think our target is to evolve and grow our portfolio today. At end of quarter 1, we are standing at 115 stations in the Kingdom of Saudi Arabia that we have committed to. And we foresee this momentum to continue through 2026 and with the horizon of reaching up to 300 stations. So that covers KSA. I think when it comes to EV, we are seeing the momentum in this country, in particularly UAE. The uptake of EV continues to be there. The number of cars sold in the UAE -- EV cars sold In the UAE is also growing steadily. And we stand to benefit from this sustainable mobility momentum in the country. We are close to 286 CPs, charging points at the end of Q1, and we will continue that momentum. We should foresee to end the year at around 300 mark charging points. So again, we are looking at fast, super fast EV charging points and benefiting from having the customers in our network. We're also going to double down on the conversion and pushing our nonfuel also offerings to our customers in the EV space. So it's an exciting business opportunity for us. Lastly, I think your question on inorganic growth, we cannot speculate. We do have the financial position to be able to afford the acquisition. But what you are consumed with and committed to is to look at value-accretive transactions, EPS, EPS accretive and making sure that we are able to sustain and grow our retained earnings and make sure that we stand behind the commitment towards our dividend policy. But at this one point in time, there's nothing we can speculate about it. We're always in search for growth, smart growth that is value accretive. Thank you.

At this time, there are no additional questions -- phone questions in queue.

So if no further questions on the audio, we will take questions from the chat. So there are several questions about the new partnerships. Following our recent -- your recent partnership announced with [indiscernible], could you please provide more details about how ADNOC distribution could potentially benefit from it? And the anticipated incremental cost and profit for Distribution.

I think we are excited with this partnership with known minutes in particular. This is an opportunity for us to also extract value directly to home customers. We stand to benefit from this experience. This partnership, known would create dark stores within our stations. We will be able to have our ADNOC Oasis -- our products from ADNOC Oasis on the new platform and our customers will start to receive projects from ADNOC Oasis via known bikers in the comfort of their homes. We stand to also synergize on some of the procurement angles because 2 companies come together to provide convenience to customers, and this is definitely synergistic partnership. So a lot of value to be unlocked and limited investment, nearly no investment from our side. And the customers, both at our stations and at home start to benefit from this partnership. So exciting partnership, and we are happy about it.

Any additional questions from the chat?

Yes. I think there are also a couple of questions about margins. What has caused the increase in gross profit per liter in the corporate segment versus last year?

Okay. So we both, Ali and myself answer this question. But in short, the reason for higher margin has been a more proactive corporate fuel margin management focusing on contracts that are actually higher -- with higher margins, and this is what we have done. Again, this business, which is around 20% of our gross profit is not regulated. This is in contrast with the main business where we are operating, which is the fuel retail business, which accounts for more than 65% of our cash flows where you have clearly, margins per liter that I said and the backstop guarantee by ADNOC. The main and on the top of that, the ability of ADNOC Distribution to record inventory gains. On the commercial business, this is dictated by the supply and demand. So there is no problem margin that is set. I guess what is important is, again, the proactive approach that the commercial team has taken and the opportunity. Again, it was a question of opportunity to focus on this contract.

There is another question about the DOCO model. Does ADNOC Distribution bear Running cost?

So the -- again, there is under this CapEx-light model ADNOC Distribution doesn't cure actually the CapEx to upgrade the station. And the -- all the costs actually are shared through ADNOC Distribution and the owner actually. So we operate the station. And under the commercial terms, actually, the 6 [indiscernible] additional margin actually is shared between both parties.

There is a question about the gross profit per liter. Why the retail gross profit per liter, excluding inventory gains is dropping?

Actually, on the contrary, between quarter 1 '25 and quarter 1 '24 is increased by 1 shelf. So it's well within the acceptable average.

Okay. I think we have the last question. About the financial charges, which appear to have increased in the quarter versus Q4. Is it due to higher borrowings or an element of exchange loss in Egypt?

The exchange loss in Egypt has been well controlled. So there is minimal exchange loss. So on that front, it's very stable. Yes, there have been some working capital-related borrowing movements, which is fixing this, but it's not structural. Thank you.

Okay. Thank you very much, ladies and gentlemen. And I guess this will end the call, and thanks for attending. And the Investor Relations team is available for any further questions or meetings. Thank you very much.

Thank you. That will conclude today's call. We appreciate your participation.