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

[Foreign Language] Hello, everyone. I am Saleh Alghamdi from the Investor Relations department at Luberef. It is my pleasure to welcome you all to today's audio webcast where we will be discussing our performance for the first half of 2025. I'm also pleased to be joined today by our Chief Executive Officer, Mr. Samer Al-Hokail; and our Chief Financial Officer, Mr. Saud Kamakhi. Our session will begin with the presentation, highlighting Luberef's H1 2025 performance, followed by a Q&A session. Please note, this webcast is being recorded for future reference. Before we dive into the presentation, I would like to draw your attention to our cautionary statement. During this presentation, we may make forward-looking statements that refer to estimates, plans and expectations. Actual results and outcomes may differ materially due to factors stated in the slide. With that out of the way, I will now hand over the call to our CEO, Mr. Samer Al-Hokail.

Thank you, Saleh, and good day, everyone. Welcome to Luberef's earnings call for the first half of 2025. This quarter, we implemented several transformation initiatives, maintained focus on growth to project and strategically positioned Luberef to capitalize on future opportunities. We are proud to share that our continued commitment to safety and operational excellence has delivered an outstanding results. We recorded a total of 40.1 million man hours without lost time injury, 0 total recordable incident rate and achieved a mechanical availability of 98.4% year-to-date. In parallel, we continue to strengthen our internal capabilities. A key milestone this quarter was a successful implementation of the internal control of our financial reporting, ICFR program. This accomplishment reflects strong cross-functional collaboration and leadership commitment. With robust monitoring controls now in place, the program enhances our governance and compliance framework. As previously guided, HVGO supply was successfully resumed in Q2 after overcoming the majority of the technical challenges. As a valuable intermediate stream, HVGO contributes significantly to the base oil production efficiency. Looking ahead, we plan to sustain HVGO supply while actively assessing other intermediate streams that can further maximize refinery utilization and support overall operational performance. As part of our broader transformation, we strengthened our place in the domestic market and continue to expand our downstream footprint. We implemented an approach to prioritize local demand and enhance sales within the Kingdom, reinforcing our commitment to long-term sustainable growth. We are also closely monitoring positive developments in the LubeHub initiative with growing investor interest and visible progress across the platform. These efforts further strengthen Luberef's role in advancing the Kingdom's industry and mobility sector. The upcoming wave of Saudi Arabia mega projects represents a transformative opportunity, driving demand for advanced infrastructure and mobility solutions. Luberef is well prepared to meet this demand by providing the base oils and specialty lubricants essentials to support the Kingdom's economic and industrial development under Vision 2030, where it plays a vital and enabling role. These strategic efforts have also allowed us to place greater focus on the domestic markets where we introduced targeted incentives to drive local sales. Our logistics performance remained strong this quarter supported by proactive risk management and diversified contracting approach. Despite ongoing geopolitical challenges in this region, we maintain smooth and reliable operations. A fixed rate shipping agreement was signed during this period, contributing to a reduction in freight cost quarter-over-quarter. This helped us normalize logistical costs and reduce exposure to market volatility. This stability not only ensures uninterrupted supply to our customers and support market demand, but also enable us place greater focus in the domestic market. Luberef's growth strategy extends beyond our current endeavor in Yanbu. While the expansion in Yanbu marks our entry into the Group III base oil market, we are also laying the groundwork for an even more advanced initiative, our perspective of Group III+. We are in the early stages of evaluating this idea and more information will follow suit in a couple of months. Growth II project continue to move forward this quarter with the progress across key work streams as we worked through earlier procurement-related delays, as typical with projects of the scale, we encountered material delivery challenges that temporarily impacted the time line. In response, our team are implementing recovery plans aimed in minimizing disruption and supporting alignment with the upcoming milestone. While movement during the procurement phase was slower than the initiative planned, progress is being made. With procurement initiatives now nearing completion, we expect the pace to increase and the project transition into a more construction-intensive pace in the second half of the year. Our CapEx reflects continued progress on the Growth II project. with a total spending reaching SAR 113 million as the first half of 2025. This figure is expected to rise further as we move into the more constructive intensive phase in the coming quarters. Our full year complex plan remains firmly on track, maintaining our forecasted spending range between SAR 250 million and SAR 350 million for 2025. The upcoming turnaround is a key focus area, and preparations are underway to ensure seamless coordination with the mechanical completion of growth, too, reinforcing our commitment to safe and high-quality execution while progressing towards project completion. Base oil crack margins in the first half of 2025 was SAR 1,828 million per metric ton, representing a 6% increase compared to the crack margins recorded in first half of 2024, but notably exceeding our 10-year historic average. Looking ahead, our growth in new future initiatives remain a priority. With a solid operational foundation, a clean road map and a strong momentum across key markets, Luberef is well placed to continue enabling industry growth, both within the Kingdom and globally. We remain motivated to creating long-term value for our shareholders through consistent execution and focused leadership. With that, I'll now hand it over to our CFO, Mr. Saud Kamakhi who will walk you through the financial results.

Thank you, Samer. I extend a warm welcome to you all, and I'm delighted to guide you through our H1 2025 financial results and provide insight into our guidance for the remaining financial year. During the quarter, we uphold our commitment to safety and operational disciplines even as we navigated several operational challenges. This approach led us to take precautionary measures resulting into 2 unplanned shutdowns at our Jeddah Yanbu facilities, respectively. While these events impacted production, resulting in a slight decline in sales volume compared to the first half of 2024, our team responded promptly by restoring operations and minimizing further impact. Consequently, we have updated our base oil production guidance for 2025 to 1.05 million metric tons compared to the earlier guidance of 1.2 million metric tons. Turning to our financials. The decline in revenue during H1 2025 was mainly driven by low base oil and byproduct sales volumes. This also impacted EBITDA and net income as a weaker byproduct crack margins were the primary contributor to the drop in profitability. It's worth highlighting that our base oil crack margin improved during the period. This was primarily driven by an increase in base oil selling prices and decrease in feedstock costs. In H1 2025, free cash flow was impacted by a combination of working capital movements and a planned step-up in capital spending, increases in inventory and prepayment, along with a reduction in payables, influenced the timing of operating cash flow. At the same time, we made a strategic investment in our capital program, reflecting our commitment to long-term growth and operational resilience. While these factors affected free cash flow this period, they represent foundational moves that position us strongly for sustained value creation in the periods ahead. As a result, our cash conversion ratio moderated this period. However, with a very low gearing ratio, our balance sheet remains robust and provide ample financial flexibility to support ongoing investment and future growth initiatives. As discussed earlier, 2 key factors contributed to the decline in our net income for H1 2025 compared to the same period last year, a drop in byproduct margins and a reduction in base oil volumes, leading to a 13% decrease. Looking at the other components of the waterfall chart, operating expenses were slightly higher and Zakat and tax were lower, reflecting the decline in net income. Let me now walk you through our cash position at the end of H1 2025. We began the year with a cash balance of approximately SAR 1.2 billion. Over the first half, our operations generated SAR 459 million in cash. We continue to invest in our growth journey, allocating SAR 220 million to wood capital expenditure. At the same time, we reaffirmed our commitment to shareholder returns, distributing SAR 580 million in dividends for the period of second half of 2024. In addition, we recorded SAR 92 million in outflows related to loan repayments and finance costs. After accounting for all these movements, our closing cash balance for the first half of 2025 stood at SAR 1,850 million, a decrease of SAR 372 million from the start of the year, In line with our planned activities and capital allocation priorities. Let me now share our updated guidance for the rest of 2025. Our 2025 base oil production forecast has been revised to 1.05 million metric ton due to unplanned shutdown for urgent maintenance. Despite that, we remain fully committed to meeting customer demand and maintaining operational continuity. In parallel, we are committed to expand our domestic footprint and to continue targeting for local sales to account for approximately 30% of total volume, supporting our strategy to enhance value capture and reduce exposure to external market volatilities. As previously guided, we have resumed HVGO supply from Samref in quarter 2, and it would continue contingent on compatible feedstock availability. This supports our base oil production and reliability and enhances our operational flexibility going forward. For H1 2025 performance, the declared cash dividends for the period returned to shareholders is SAR 168 billion with all other elements and guidance remain unchanged. In summary, Luberef remains focused on delivering operational excellence, disciplined execution and long-term value creation. The first half of the year brought some operational and financial challenges. However, we responded with agility and maintained progress across our key initiatives. Entering the second half of 2025, we are confident in our strategy and the dedication of our team to advance Luberef as a leading player in the global base oil and especially lubricants market. With that, we will now open the floor for your questions and hand it over to Saleh to lead the Q&A session.

Thank you, Saud. [Operator Instructions] We would like to read a couple of questions that are written for the CFO to answer. Question number one, why is the CapEx range so wide? It is currently SAR 250 million to SAR 350 million Wouldn't you have more clarity on it given the proximity to completion at halfway?

Thank you, Saleh. For this question, I think the range is around SAR 100 million, approximately less than SAR 30 million in a project like SAR 200 million as an except to a range. As we are in halfway that we so far spent around SAR 113 million in our growth project. We are -- in these kind of projects, as we are accelerating also our work in progress in that project, some payments we are expecting maybe to come at the end of this year. Otherwise, maybe it will come at early 2026. For later, we can give more closer range, but this is what we are reaffirming and reiterating our -- what we mentioned in our guidance at the beginning of the year.

Thank you, Saud. The second written question is what was the working capital outflow in the second quarter of 2025? Would you expect the rest of the year to have similar working capital outflow? I see that you have distributed 70% of your free cash flow as dividends, wouldn't it be more sensible to pay close to the top range, which is 80%, given the net cash balance sheet?

Okay. This is a good question. Luberef continue to have its own dividend policy that is performance linked, and we are committed so far to that policy. And just going -- again, with all -- or our previous distribution, it also was around at 70%. So we are continuing our current distribution with the same. And in the growth phase that we are -- where we are right now, where we are seeing that it's reflected clearly in our capital programs, we could have also going 60%. So the target between -- our policy between 60% to 80%. However, we returned back to our shareholders at this time 70%.

Now we have answered the 2 written questions. Moving to Mr. Jonathan Chung from Morgan Stanley.

I've got 2, please. First one on your byproduct business. Why were volumes and margins weaker? And could you give us a bit more color on what the trading momentum going into second half? And my second question is around your production cost for the quarter. It seems a bit higher on a per ton basis. Could you give a bit more comment, please?

Okay. For your first question, you are talking about the by-product we have encountered a positive impact in our byproduct from the feedstock area. But despite that, we have higher prices in our byproduct product mix. So therefore, we are having a negative byproduct margin during this period. That has impacted our byproduct for this period. So for your second question, cost of production.

Yes.

Can you repeat that again? Sorry.

Yes. So it looks like your cost of production per ton, it's a bit higher in the second quarter. Could you give us a bit more comment?

I'm not sure how much you have the cost -- I'm not sure we shared the cost of production so far. So we have -- the cost of production usually comes with -- in our cost of sales. But these are -- we see it at a normal stage right now. We don't see any fluctuation in that regard.

Okay...

Quick just follow-up, Jonathan, this is the CEO. On the byproducts, there's a tremendous pressure on some of the byproducts we have at a global stage. So there are actually negative crack margins, roughly $28 per ton, which is equivalent to SAR 105 per ton. So that kind of tamped down. That's why Q2 tamped down the overall net of the company itself. But needless to say, of course, the crack margins of the base oil is on the upside, which is more important.

We have [Alder].

Any chance you could give us a color in terms of -- on the difference between crack margins based on VGO and HVGO? That's my first question. And secondly, could you please elaborate on the nature of the shutdowns at Jeddah? Should we expect this to continue? Or this has been resolved already?

So thank you, Alder. Just to repeat your question, the first one was about the difference between the HVGO. Could you repeat the first one, please, just to make sure I grasped your idea correctly?

Yes, it's correct. So I wanted to understand better the difference between VGO-based and HVGO margins? Are they very different or not?

Yes, Alder, That is something that I think we are working on in order to find different mechanism to have that different crack margin for different VGO stream and to be shared later with you and with all other analysts. So this is -- we want to continue that. Currently, we have very positively continued HVGO that are coming from Samref. And that is starting initiative, come back again in Q2, which is now we are looking at, and we will ensure that we have that segregation in the future.