Rubis (RUI) Earnings Call Transcript & Summary

Good day, and welcome to today's Rubis Q3 and 9 Months 2024 Trading Update Call. [Operator Instructions] And now I'd like to hand the call over to Mr. Marc Jacquot, CFO. Please go ahead, sir.

Good evening, ladies and gentlemen. Thank you for joining us today for Rubis' Q3 2024 Trading Update. I'm hosting the call today with Clemence Mignot-Dupeyrot, Head of Investor Relations. So before we dive into our business, let me remind you of the context of this quarter. We faced an extremely volatile oil price due to the escalation of the conflict in the Middle East, and prices fluctuated significantly through the quarter, especially in September and October with a general downgrade trend globally. At Rubis level, the main elements of the quarter are the following. On the distribution side, we saw high volumes compared to last year with 7% increase, and 5% increase since the beginning of the year. But this volume growth was mostly driven by Africa and to a lesser extent, Europe. This demonstrates that Rubis is gaining market shares in these countries and demand for the products, we distribute, is there. However, on the margin, the very sudden decrease in oil prices and the subsequent volatility had a short-term negative impact on our margins with a global picture, which is a bit contrasted depending on the geographies because if you look in the Caribbean, which is less regulated, we were able to pass through the major part of the oil price fluctuations to our customers quite quickly. This area has not really suffered from this volatile context. On the other hand, actually in Africa, which is a much more regulated market with less flexibility in fixing the prices and time lags generated by pricing formulas. So here, we ended with inventories whose value had decreased between the purchase and the sale, that degrading our margins there. When you look at regards Support & Services, the activity of our vessels continued to be dynamic in the Caribbean, and the strong performance was offset by the bitumen trading activity, which lagged behind. 2023 was a record year in a context of high shipping rates. This is why we see Support & Services margin decreasing year-on-year. But as a reminder, to give you a bit of history here, we have been trading bitumen from the Mediterranean to North America when our vessels were back due to the rainy season in Africa or when we had lower in-house activity. And these opportunities generated by market asymmetry became more limited in 2024 and more quickly than expected. And this is the reason why we are shifting to a different geographic approach in the eastern part of the Atlantic. And this switch needs some times to be fully up to speed. When we look at Photosol, things are in line with what was presented in September with the secured portfolio now above 1 gigawatt. And among the important event of the quarter, it is worth mentioning the sale of Rubis Terminal, it is now closed, giving way to the promised EUR 0.75 exceptional dividend that will be paid this Friday. And as you have seen, the pressure on the margins we have just been through, combined with the delay of the adjustment of the pricing formula in Kenya has led us to revise our EBITDA guidance for 2024 to bracket of EUR 675 million, EUR 725 million for the year. Our net income guidance was updated with a midrange, which is in line with what was previously communicated at EUR 340 million, EUR 375 million. And our dividend distribution target remains unchanged. So Clemence will comment on the operational highlights of the quarter.

Thanks, Marc, and good evening, everyone. To dig deeper into the operational highlights of the quarter, I invite you to look at Slide #3, where you can see in more detail Energy Distribution, Retail & Marketing business. Where volume was up 7% over the quarter and gross margin down 1%. This means that unit margin were down 7% compared to last year. On a product-by-product basis, LPG continued to perform well with an increase in volume and margins, which were strong over the quarter in Auto gas in France and Spain, and a continued high level of activity in the ceramic business in Morocco. Portugal was under high competitive pressure during this quarter and had decreasing unit margins. Now looking at the fuel business. Caribbean still performed well with -- let me remind you that 2023 was an excellent year for the Caribbean in the fuel distribution business, and this trend continues. Jamaica and Guyana are ahead of the board with very strong growth, both in volume and margins. In Haiti, margins remain stable, but volume are decreasing. We're still waiting for the UN forces intervention to produce effect. In Africa, we see a catch-up in the demand for products with an increase in volume, but margins are under pressure. This is the outcome of two reasons, which Marc has already mentioned. First reason is the oil price decreased over the quarter in a very volatile context, which has led to inventory depreciation in Africa. And the fact that the prices are very regulated in this area leads us to adjust our prices based on the price of the previous month. So that's the reason why the effect was more important in this part of the globe. The second effect is the Kenyan pricing formula, which was defined in 2018 and which is now completely out of date, and needs to be updated to reflect the increase in the different costs along the value chain. The EPRA, Energy and Petroleum Regulation Authority has ordered a report, which is called COSSOP, cost of service study in the supply of petroleum products, which was supposed to be issued midyear and give way to the adjustment of the pricing formula. The issuance of this report has been slightly delayed and was submitted to the EPRA last week, and the industry is waiting for the outcome and for the subsequent adjustment of the pricing formula. Now if you look at the bitumen business, volume is increasing by 18%. This is underpinned by South Africa, which is very dynamic. Nigeria continues to suffer. Togo and Cameroon are still showing a good performance. Just to give you a bit of history in terms of margins, Nigeria is a country with very high margins. And the fact that Nigeria is decreasing to the benefit of South Africa, where margins are a bit lower, decreases mechanically the global picture of unit margins on the bitumen side. Now turning to Support & Services. I will not stay too long on that topic because Marc has already mentioned this before. But 2023 was very good for the Caribbean activity in the Support & Services, and this continued in 2024. 2023 was also a moment where the freight rates were very high. And what we see now in 2024 is that the bitumen trading activity is decreasing as demand in North America is shrinking. Now look, if you look at Photosol, you can see that the assets in operation and the sales have grown over the quarter. This is perfectly in line with what we had announced during the Photosol Day in September. The secured portfolio is now over 1 gigawatt. And if you wonder why the sales only grew by 6%, while the assets in operation grew by 22%, you need to remember then that Q3 2023 had the benefit of selling part of its electricity production directly to the market at merchant price. I will now hand over to Marc, who will lead you through the updated guidance.

Thank you, Clemence. As a conclusion and to summarize, this quarter was one of strong volume growth with an undeniable pressure on margins, driven by the high volatility of the oil prices, combined with specific operational headwinds. I would like to highlight the fact that the effects we are mentioning on oil prices fluctuation is short term. Going forward, if and when the product prices will go up, we will be more profitable and offset the shortfall observed over the month of September. If the product prices remain in the same area, the heat of the month will not be offset straight away, but this could have eventually a positive impact on consumption because when the cost of the products are cheaper, actually, people have a tendency to consume more. In the context of a very volatile international prices, this is very hard to predict. And this is the rationale behind the revision of our guidance together with the bitumen trading update and the pricing formula issue or delay we have in Kenya. Thank you for your attention. And now we are ready to take your questions.

[Operator Instructions] And our first question comes from Jean-Luc Romain from CIC Market Solutions.

A question on the turnover for renewable electricity in order to understand very well the movements here. Could you detail how much kind of megawatt hours were sold, and the average selling price in this quarter compared to last year to kind of have a better vision of the impact of the starting PPA...

Thank you, Jean-Luc. The electricity production for Q3 2024 was 166 gigawatt hours. I'm not sure I perfectly caught the second part of your question.

The average price of electricity sold last year compared to this quarter. I understand this quarter had more PPAs and last year had more pre-contractual sales.

As you might remember, corporate PPAs and also CRE contracts are 20- to 25-year contracts. So the average price is overall aligned with what was in place last year. What happened last year was that we were able to sell part of the electricity at merchant price. That was the mechanism that was put in place by the -- to offset the beginning of the contracts, which have not had this inflation adjustment component. We were able to sell electricity for 18 months at market price. Is that answer...

Understood. So this quarter, you had 1,066 megawatt hours. And last year, it was...

167.

It was exactly the same quantity of gigawatt hours, more or less, okay?

Yes.

And Jean-Luc, maybe in addition to quantify the effect of the spot effect in 2023, it was amounting to...

EUR 2.2 million.

Yes. EUR 2.2 million last year at the same period.

[Operator Instructions]

We have a question online from Emmanuel Matot, which I will read, and then we will answer the question. Emmanuel's question is, what are the conclusions of the report you mentioned in Kenya that was submitted to the authorities? Are you confident that the pricing formula will change in the near future in that country?

So Emmanuel, this is a point on which Clemence already elaborated during the speech. The pricing formula has not changed since 2018, and this is something that is well known in the industry, and this is a discussion that has been ongoing for a while. And actually, major milestones have been reached. Typically, the cost of state was key, so it means the cost of service study is a major milestone that didn't happen in the past. And today, the Energy and Petroleum Regulatory Authority in Kenya is reviewing this study. So definitely, some milestones have happened. It took more time than expected, but we are confident that it will happen by the end of the year or eventually next year, we cannot, of course, commit on that, and we have already been disappointed, but we see some good movement there.

The second question from Emmanuel was, why did you produce less electricity in Q3 despite more production capacities? The reason behind, Emmanuel, is that there are several effects. The first one, if you look at the increase in operational capacities as such, you are right, they have increased compared to last year. Q3 2023 was not as sunny as a normal Q3, I would say. And as we had mentioned already during the Photosol Day, and I think during our H1 results call is that we have suffered some damage on some underperforming panels in some older solar plants, which are under recourse with the different providers. And this is the main reason why the electricity production did not grow exactly in line with the capacities.

And also important to mention is this kind of small impacts actually when you look at a single quarter or the capacity with an installation with 500 megawatt install of course, it's very sensitive to those kind of elements. Of course, when the business will grow, we will absorb those more easily.

Maybe we can take the question from Auguste, who is on the line -- on the phone.

Hello, do you hear me?

Yes, we can hear you.

So yes, my question is, so this year, your net income will be artificially high, thanks to the effect of the divestment of Rubis Terminal, so for a bit more than EUR 80 million. So given that this effect will not be present next year, should we expect a drop in net income for 2025?

Thank you for your question, Auguste. Well, first of all, it's a bit early to talk about 2025, of course. However, mainly what we can say about 2024 is that the year has been impaired by a few elements like what we mentioned in H1 about the compensation-related items, IFRS 2, which were higher than historically. Also what you saw in the margin pressure in Kenya is not how we see the business going forward. And the inventory effect following the volatility in the oil price also is not something we expect to see again. This is what I can tell you about 2025. After -- in addition, keep in mind that Rubis is looking for M&A targets and wants to be active on this side. It doesn't mean we have something in the pipe, but this is something you have to consider as well. And this is what I can tell you about 2025 at this stage. But based on the account of 2024, we will provide you with a more detailed guidance.

And just if I may, a second question. So you expect the net income for next year to be mainly driven by M&A or easier comps rather than the growth of your existing activities?

No. What I'm telling here is that we see both actually possibilities. So first, again, 2024 had a lot of negative effect that we mentioned. But my point was to say that we were looking for M&A opportunities that it could be an upside in the future.

We have from Nicolas Royot, who is asking, can you quantify the various effects of the decline in the unit margin, in particular, the inventory effect? The second question was about the pricing formula in Kenya, but I think we already covered this point with Emmanuel's question.

What we can say the decrease in oil price is not the only reason that the EBITDA guidance downgrade down, of course, the volatility of the swings is the key factor and quantifying the impact on our inventory for today and the rest of the year is complicated. However, here, let's be clear, we are not talking about major hit, but big enough to make that we were less comfortable to reach the guidance.

Yes. We have another question online from [ Thomas Trotter ], who is asking about the drivers of the strong performance of bitumen in South Africa. South Africa is a market we have penetrated with bitumen maybe 2 years ago. At the time, we did not have any specific storage facilities. So we needed to rent storage facilities to feed the market there. And we were only using our vessels. It was more difficult to address this market. Since 2023 and 2024, we have acquired a few tanks in different harbors along the coast of South Africa. And we are now ready to address the market, which is a growing market where they have an important need for infrastructure. And the road contractors who are mainly multinational companies are very confident in doing business with us. This is the strength of Rubis in the whole bitumen distribution business because we're able to guarantee the sourcing of the products, which is a strong guarantee for potentially European or other listed companies. And we are also able to deliver the product hot, which is not necessarily the case of our competitors who are delivering barrels of bitumen, which need to be heated to be able to use them. So that's our key competitive advantages in the bitumen business, and that's why the South African market, which is a recent one for us, is growing quite significantly.

And I take the opportunity of this question as well maybe to come back on Auguste point about the net income for next year, I was referring to, of course, compensating the one-off of 2024 to improve the performance of 2025. I was referring to M&A. But also when I talk about M&A, I include also some eventually some geographic diversification in the bitumen business because this is something we know how to do and Clemence just mentioned it. We may have other opportunities in other countries. And of course, this is something that we look at. But too early to talk about it, or too early to commit about anything that is for sure. But for sure, this is part of the growth driver.

And it appears there are currently no further questions on the phone and no further questions on the webcast. With this, I'd like to hand the call back over to our host for any additional or closing remarks.

Thank you for your time, and we are very happy to have those discussions with you. Please feel really free to call us should you have any follow-up questions or if you need any clarification, we'll be more than happy with Clemence to answer to your questions. And we wish you a very good evening.

Thanks all of you.

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