Saudi Aramco Base Oil Company - Luberef (2223) Earnings Call Transcript & Summary

Hello, everyone. I'm Ahmed Aljiffry, Luberef's Investor Relations Manager. And today, I would like to welcome you all to our audio webcast. We'll be discussing our first quarterly results. It gives me a great pleasure to be joined by our CFO, Mr. Mohammed Al-Nafea. Our webcast will consist of a presentation highlighting our Q1 2024 performance, followed by a Q&A session. I would like to remind you that this webcast is being recorded. Before we dive into the presentation, I would like to draw your attention to our cautionary statement. During today's presentation, we may make forward-looking statements and refer to estimates and plans and expectations. Actual results and outcomes may differ materially due to factors stated in the slide. Now with that out of the way, I would like to hand over the call to Mohammed.

Thank you, Ahmed. Ladies and gentlemen, thank you for joining us today at our first quarterly earnings call for 2024. We are happy to switch to quarterly earning call format to enhance our investor engagement. This will allow us to provide more frequent updates on our performance to our investors. Moving on the subject of our call today. In the first quarter, we have laid a strong foundation for a strong 2024 and the year to follow. Our commitment to the safety and reliability of our operation has been solid, evidenced by our industrial-leading Total Recordable Incident Rate and top quartile mechanical availability. We have successfully completed the hydrocracker catalyst replacement safely and within the allocated time. This will ensure that our Group II facility in Yanbu will meet the growing demand of our customers for high-quality Group II base oils. We also made a significant progress laying the groundwork for successful 2024 and beyond. A key achievement is the signing of the heavy VGO agreement with SAMREF, which expand our Group II base oil portfolio with a premium heavy grade. These grades typically command SAR 50 per ton premium over the [ lighter ] Group II grades. Work in the HVGO line is progressing well and commissioning is expected in July. Upon the successful completion of this initiative, our product mix will be enhanced and our utilization rate will see an increase from around 92% to around 95%. Moving to the Growth II project, the detailed engineering is nearing completion and field work has started. We remain on track to deliver the project by the second half of 2025. This project will give our facility in Yanbu the flexibility in producing Group II and Group III base oils, which will allow us to adjust our offering slate based on the best available [indiscernible] in the market. We are also preparing to launch our Group III products approval program by producing the required samples in our Yanbu facility. This will ensure we can extract full value for the high-quality products we are planning to produce when the Growth II project is commissioned. Moving beyond the Growth II project, as the adoption of high-quality Group III base oils accelerates, it is critical that we adapt to market trend and ensure we are prepared to meet customer needs. As such, we have initiated a study to identify the optimum location for production of Group III and Group III+ base oils, utilizing the advantaged feedstock available within Saudi Aramco. It should be noted that this project CapEx is relatively modest ranging between SAR 300 million and SAR 400 million. This investment will significantly improve our product portfolio by adding high volume from 500,000 to 700,000 ton and high margin Group III and Group III+ products. Furthermore, we have made progress in the development of the LubeHub. We have signed an MoU to appoint Jabeen as a work manager. Jabeen is an arm under the royal commission and will work with the National Industrial Development Center to identify and support potential investors in the process of establishing their facility in the LubeHub. The LubeHub will play a major role in growing local demand for base oils as it will focus in targeting base oil related product which is currently not being produced in the kingdom. Looking at base oil crack margin, in Q1, our normalized crack margin came at around SAR 1,800 per ton, which is within few percentage points of the historical average. The impact of imported feedstock on the reported crack margin was approximately SAR 185 per ton resulting reported figure of SAR 1,600 per ton. Looking at our Q1 numbers, sales volumes are similar to last year's first quarter at 270,000 ton. Truck margin for the quarter were lower as spread have normalized from the comparative period. Revenues for the quarter are higher on a comparative basis mainly due to higher by product prices. As a result of lower truck margin, EBITDA and net income dropped by 42% and 46% respectively. ROACE at 29% remain industrial leading despite being lower than last year. Operating cash flow has been impacted by timing element. We will detail later. Sustaining CapEx higher than the comparative period primarily due to spending related to the new catalyst and ongoing transformation related CapEx. While both the timing of certain operating cash flow items and higher CapEx have negatively impacted our free cash flow and cash conversion rate in the short term, this impact is expected to be temporary. Before we move to the next slide, I would like to highlight, we maintain a robust balance sheet with a gearing ratio of negative 3%. Looking at the quarter-on-quarter comparison, we can observe the impact of lower crack margin for base oils on the net income. Higher volumes from by product sales had positively impacted the overall net income. To mitigate the impact of lower crack margins, we are focusing on increasing volumes of the right product utilizing our advantaged position in term of cost, production and unique feedstock available to us. Had we maintained our volumes similar to the same level as the previous quarter, our net income would have been higher by around SAR 90 million. This will be our plan in Q2 to operate our assets safely and reliably at their design capacities, utilizing our allocated feedstocks. Walking through the rest of the elements of the waterfall chart, our OpEx was slightly higher due to timing shifts in the expenses. Zakat was lower mainly due to lower net income. Moving to cash flow analysis, 2 factors impacted our operating cash flows. A slight delay on receivable payments and build up in our feedstock and semi-finished products as a result of the hydrocracker shutdown. Receivable has been settled and the buildup inventory will soon be converted into base oils. This will post our second quarter cash flows. Additionally, we have completed loan repayment, which will result lower Zakat expense for the rest of the year. In conclusion, we have laid strong foundation for the successful 2024 and beyond. Our focus in safety and reliability and strategic initiatives like the HVGO agreement and the growth project are set to drive substantial value creation and growth for our company. We are well positioned to deliver increased volumes in the coming quarters and we are determined to keep enhancing our performance. Now, I will hand over to Ahmed to start off our Q&A session.

[Operator Instructions] [ Mr. Mohammed Athania ] you can proceed to ask your question.

I have couple of questions. The first one is related to the frequency of Yanbu refinery shutdowns, and the frequency also of changing and replacing of the [indiscernible] Luberef. And maybe if you can shed some light on the upcoming shutdowns, if any.

Okay. So it's a 3-part question. The first is regarding of the frequency of Saudi Aramco Yanbu, our suppliers shut down the durations. The second question is regarding to the catalyst life cycle and what's the change around time, and then what's our upcoming scheduled shutdown.

Thank you, Mohammed. So typically, refinery, they do their shutdowns, total shutdown each 5 years. This is what's come to supply side. Now catalyst replacement, there are multiple catalysts in the plant, so we have in the iso de-waxing units. Usually we do it each 5 years. Now for the hydrocracker, which is the one that was replaced and caused the shutdown is happening each 2 to 3 years. So you do one of the turnaround cycle, you do second one with the turnaround cycle. Now for the last part of your question related to the next shutdown, it should be next year 2025. We will, as always communicate in the guidance our plant shutdown timing duration. And we would like also to align the shutdown next year with the project timeline for the Growth II project. Now for [ Jeddah ] we had our turnaround last year in the first quarter.

And now we'll move on to Mr. Ildar.

Just a quick question about domestic sales. What was the trend in the first quarter? I mean, what was the increase or decline year on year? And maybe you could remind us why the domestic sales volume actually declined in 2023.

So the question is the trend for the first quarter and then what was the trend towards the year end or the whole all of last year? I guess all of last year is what we go for.

So for the first quarter, I would say, it's similar to last year. Now when it comes to second quarter, usually second quarter is -- there are more demand for finished lubricant in general, because driving season other factors that imply the overall demand. So we'll see if the demand improve in general, but what we saw in the first quarter in line with the last year. Now, your question regarding last year. So I think there was a lot of supply issues in 2022 and that really, I mean, peso supply issues because of the high refining margin. So a lot of, I think a lot of finished lubricant buyers, they go and move and buy and build their inventory. And that's, I think inflate the 2022 demand significantly because we have seen 7% increase. Typically you don't see such percentage in the finished lubricant. So I think it's -- 2022 demand was artificially high. And that's why you see adjustment, we will -- let's start withdrawing from inventory in 2023. And that we see the same trend is continuing in 2024. Now we are very active and trying our best to improve the local demand through multiple initiatives. Some of it demonstrate for export initiative, that we're encouraging blenders to basically blending kingdom and export. And we were doing this part of our domestic for export initiative. In addition to that, we have the LubeHub. The LubeHub is also progressing well. You saw in the highlight that we had Jabeen as assigned as a [ BARC ] manager and hopefully it will not only improve the local demand but also will improve the mix quality with more industry and more production in the kingdom. And we are also looking at opportunity to integrate with Aramco finished lubricant business [indiscernible] and so that's hopefully if they go ahead and establish blending facility in kingdom, it should be used to blend and export in the region. That will also improve the local demand.

Now we'll move on to the next question. Mr. [ Amir ] kindly unmute yourself and ask your question.

Hello, I have one question related to the future expansions. I believe you mentioned in the call that you are, if I'm not mistaken, that you are currently studying a future expansion. Could you please reconfirm the CapEx and the size of this project as well as the timeline?

So I guess the question clear for me, you don't have to repeat it. So it's about our future growth expansion beyond Growth II. So we highlight -- we start doing the optionality study now. Typically we look at available feedstock and potential demand. Today if you look at prices for Group III and future outlook and even supply/demand balances for Group III and Group III+ you see massive opportunity. Now, not all of the base oil producer, they have the access to the quality feedstock that we have and also not only the access but also the scale of those potential increments. That's why we're looking at opportunities inside Saudi Aramco system. We look at multiple locations. What will happen typically when you plan to produce Group III and III+, you look at installation of iso de-waxing unit. Iso de-waxing unit, it's [ dependent ] now we are in the early stages, it's hard to tell -- estimate, but it's typically lighting [indiscernible]. So we're talking about SAR 300 million to SAR 400 million plus or minus and then you will be able to produce high-quality base oil Group III, Group III+ when we talk about 500,000, 700,000 that potentially goes to 900,000 if you utilize the maximum feed available. This is the element of CapEx and what the thinking. Now timeline, in the Growth II, we had accelerated engineering work so we managed to get the FID quickly. In this case, maybe we're looking at some work in the optionality study, you have to look at allocation from source of supply and case Saudi Aramco and we need to work that out depending on what [indiscernible] engineering is required. So maybe next year FID, if this project will go on, commissioning startup, if we start, yeah, in maybe '27, '28 timeframe, this is the overall picture.

We'll now move on to the next question, Mr. Ricardo.

Hello, I guess 2 follow-ups on the discussion of this potential Group III and Group III+ plus project. The first is what sort of returns do you see in this project? And then the second one is, how do you see the overall supply outlook for Group III and Group III+ projects in the coming years?