Good day, and welcome to The ADNOC Distribution Q1 2023 Earnings Call. Today's conference is being recorded. At this time, I'll hand the conference over to Hassan. Please go ahead.
Good afternoon, ladies and gentlemen, and welcome to the ADNOC Distribution First Quarter 2023 Earnings Conference Call. I'm Athmane Benzerroug, Chief Strategy, Sustainability & Transformation Officer. Joining me today is Wayne Beifus, our Chief Financial Officer. Our Chief Executive Officer, Bader Al Lamki, is not present today. In today's call, I will start with the key highlights of the first quarter and also speak about company's outlook. Our CFO will then discuss in detail delivery of our growth strategy and the Q1 operating and financial results. After the presentation, we'll turn to Q&A. Before we begin, I will quickly reiterate our cautionary statement regarding forward-looking statements. The 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 IPO prospectus and 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. I would like to start with highlighting ADNOC Distribution unique value proposition supported by cash flow visibility and strong balance sheet. The company is operating under a robust regulatory framework in the UAE, and benefits from predictable industry-leading retail fuel margins. The company has successfully renewed its five-year supply contract with ADNOC, including the margin backstop for its retail business. Our focus is on delivering smart growth through efficient capital allocation, future-proofing our business, and unlocking additional value from OpEx savings.
The company generates strong free cash flows, supporting its new dividend policy to pay minimum $700 million for 2023 and minimum 75% of distributable profits onwards. ADNOC Distribution management priority is to create incremental shareholder value through efficient capital allocation and leadership in sustainability. In that capacity, as one of the leading UAE-based companies, ADNOC Distribution has a key role to support the decarbonization and energy transition that is led by the UAE government. Let me start with our decarbonization agenda. During Q1 2023, we unveiled our sustainability roadmap, including a commitment to reduce the carbon intensity of our business by 25% by 2030. We are progressing towards its implementation. We aim to cut emissions through a set of identified initiatives, including installing solar panels at service stations, use of biofuels to power our fleet of vehicles, and other energy optimization initiatives.
ADNOC Distribution announced last week partnering with Emerge, a joint venture between Masdar and EDF, to install solar panels across its service station network in Dubai as a part of the company's phased approach to UAE-wide solar rollout. ADNOC Distribution is also exploring opportunities offering the energy offered by the energy transition to future-proof its business and create new revenue streams. We are leveraging on our extensive network to promote EV charging and clean energy to further enhance customer experience. In the EV space, we announced a partnership with TAQA to create a new mobility joint venture, E2GO, with the intention to provide mobility and charging solutions to our customers in a public and private sites across Abu Dhabi and the wider UAE.
At the recent general assembly meeting, our shareholders have approved amendments to the dividend policy to set a minimum dividend of $700 million for 2023 compared to 75% of distributable profits as per the previous policy. After 2023, the dividend is set equal to at least 75% of distributable profits. ADNOC Distribution new dividend policy recognizes the company's strong financial position, its growth prospects, and ability to generate long-term and sustainable returns for its shareholders. That ability has been reaffirmed by a successful renewal of the supply contract with ADNOC for a five-year term, as I mentioned earlier. The contract secures predictable fuel retail margins with a downside protection provided by the margin backstop, at the same time offers upside potential in a rising oil price environment. Moving to Q1 key achievements and outlook.
In Q1, 2023, we completed the acquisition of TotalEnergies Marketing Egypt LLC and consolidated it in our financial statements from February. All figures in this presentation include contribution from this entity, unless stated otherwise. Regarding the key achievements, ADNOC Distribution had a positive start of the year, delivering solid operating performance and underlying profitability, driven by a 10% increase in our network, UAE network, 8% volume growth in the UAE and KSA, and a double-digit growth in non-fuel transactions in the UAE. We achieved encouraging like-for-like OpEx savings of $9 million, demonstrating a significant progress towards target of OpEx savings in excess of $25 million in 2023. Worth mentioning is that we achieved the highest convenience stores conversion rate in three years at 24%, coupled with a larger basket size.
This is a result of revitalization of our convenience stores and digitally enabled customer journey, improved category management, and in-store experience. Regarding the outlook, we are making good execution progress on our smart growth strategy and expecting positive outlook for both fuel and non-fuel businesses in 2023 and beyond. We are on track to open 25 to 35 new stations in 2023. Non-fuel business growth will be driven by our continued focus on improved category management, fresh food, and hot beverages. We invest in offering our customers a modern and engaging retail experience in our convenience stores as we continue our refurbishment program after renovating 193 convenience stores over 2020, 2022. We continue to pursue organic and inorganic growth opportunities.
Our 2023 CapEx plan of $250 million-$300 million is focused on growth, including network expansion and revitalization of our convenience stores. Following the successful acquisition of 50% stake in TotalEnergies Marketing Egypt, ADNOC Distribution will continue to explore opportunities in high-potential international markets. I will now hand over to our Chief Financial Officer, Wayne, who will walk you through the ongoing delivery of our strategy.
Thank you, Athmane. Good afternoon, everyone. Thank you for joining us on this call. I'll walk you through the progress we've made towards achieving our growth plans. Let me begin with the first pillar of our growth, the fuel business, which includes retail and commercial. We recorded the strongest ever first quarter volume, with an 8% increase in the UAE and KSA, driven by a 6% growth in retail volumes and 13% in the commercial business. This was driven by new contracts with our corporate customers. We have also benefited from the expansion of our retail network and positive momentum in economic activity. We opened seven stations in the UAE and KSA in the first quarter. Including the consolidation of TotalEnergies Marketing Egypt, our total fuel volumes increased to L3.1 billion , representing an increase of 28%.
This contributed an additional 240 stations, bringing our network to 814 stations on a consolidated basis. The second pillar of our growth strategy is the non-fuel retail business, which continues to demonstrate consistent solid performance across the board. Our focus is on delivering a modern, digitally enabled shopping experience and an attractive customer proposition in our convenience, lubes, car wash, and vehicle inspection centers. Our focus has been on enhancing customer experience and loyalty through innovation, a more personalized reward experience, smart marketing, and the C-store renovation. This has resulted in the number of non-fuel transactions increasing by 11% year-on-year in the first quarter of 2023, after growing by more than 15% in the prior year. Along with the sharp increase in footfall, higher conversion-And an increased basket size.
This has all in turn translated into increased gross profit of the non-fuel retail business by 9% year-on-year. At ADNOC Distribution, we are committed to putting the customer at the heart of what we do to help accelerate the mobility revolution and redefine the experience at our service stations. Convenience, service offering, digital experience, price, and loyalty are all key to our approach in differentiating ourselves in the market and cementing our position as a destination of choice for our customers. In February, we pioneered an innovative ADNOC Fill & Go technology at our service stations. The AI-backed solution utilizes the latest innovation in computer vision technologies, comprising machine learning models, allowing computers to recognize vehicles and offering a hyper-personalized fueling experience. This step reaffirmed ADNOC Distribution's leadership position in the UAE's fuel and convenience retail sector.
We believe customers seek a personalized experience and want to be recognized and rewarded as individuals. Our loyalty program and ADNOC app are rewarding customers who choose ADNOC Distribution stations as their destination of choice. During the quarter, the total number of members exceeded 1.6 million for the first time. I'll now present the highlights of our financial performance. In Q1 2023, we continued to demonstrate strong underlying performance. In the fuel business, our retail volumes increased by 5.5% compared to the first quarter of 2022, excluding Egypt. Daily retail fuel volumes increased by 2.2% compared to Q4 2022, indicating the ongoing improvement in fuel demand. We continued to record strong growth in commercial fuel volumes, which increased in Q1 by 13% year-on-year.
This was driven by a 21% growth in corporate volumes, supported by new contracts, but offset by lower aviation volumes in the UAE. In the non-fuel business, our convenience store conversion rate increased from 22% prior year to 24% in Q1, 2023. Finally, our gross basket size in our convenience stores increased by 2.5% compared to the prior year. Turning to the key financial highlights, our underlying profitability at ADNOC Distribution reflects the strength of our operations. In the first quarter, we saw growth in underlying EBITDA and net profit, excluding inventory movements, while on a supported basis, those metrics demonstrated a reduction due to material inventory gains of more than $40 million in the same period last year, and inventory losses of $4 million in this quarter.
Revenues increased by 19%, supported by higher selling prices, growth in fuel volumes, and a higher contribution from the non-fuel business. In addition, we consolidated the Egypt business from the first of February. Our gross profit fell by 13% compared to the prior year as we cycled over the inventory gains of Q1 2022. This was partially offset by growing fuel volumes and higher non-fuel business contribution. Excluding these inventory gains, our underlying EBITDA increased by 8% to $215 million, supported by a company-wide efficiency drive. The reported EBITDA decreased by 12% to $211 million. Adjusted for inventory gains and losses, the net profit increased by 5.5% due to the higher underlying EBITDA. The reported net profit was $146 million, a 20% reduction year-on-year.
Free cash flow of $285 million remains strong, and our net debt EBITDA ratio is 1.06 x at the end of the first quarter, offering room to invest in growth while sustaining attractive dividends. Let me now walk you through the performance of gross profit by operating segment. Total first quarter gross profit decreased by 13% year-on-year. As I mentioned before, this reduction in gross profit was mainly the result of inventory movements. This factor was partially offset by higher fuel volumes as well as growth in the non-fuel business. Fuel retail gross profit fell by 9% despite the higher fuel volumes, principally as a result of inventory movements year-on-year. Non-fuel retail gross profit increased by 9% year-on-year in the first quarter, driven by our customer-centric initiatives, which have translated into higher number of transactions.
Our commercial segment gross profit declined by 30% as a result of the inventory movements and increased pressure on our margins, offset by higher volumes from the new corporate contracts. The performance of the commercial segment was also negatively impacted by the decline in the aviation business due to the lower volumes, which are reflective of the reduced military aviation activity in the area. Turning to operating expenditure. We have reduced our OpEx, excluding depreciation, by 9% year-on-year, despite an increase of nearly 11% in our network size. On a per-station basis, cash OpEx decreased by around 20% year-on-year. Staff costs, which account for approximately 70% of the total OpEx, reduced by 18%. In the first quarter of 2023, we achieved like-for-like OpEx savings of $9 million, demonstrating significant progress towards our full-year OpEx savings target.
In the first quarter of 2023, we generated a reported EBITDA of $211 million, a reduction of 12% year-on-year. The underlying EBITDA of $215 million increased by 8% year-on-year, which was mainly the result of efficiency improvement measures across all our operations and businesses that I've already highlighted. Retail EBITDA, excluding inventory gains and losses, increased by 16%, while commercial EBITDA, excluding inventory gains and losses, was 10% lower on the year. Looking at cash generation. The company reported free cash flow of $285 million in the first quarter, supported by positive underlying profitability. In line with our plans to continue the expansion strategy, during the period, we've invested CapEx of $57 million.
Our financial position remains strong, with a net debt to EBITDA ratio of 1.06 times, compared to 0.78 at the end of 2022. During the quarter, we made a cash payment for the 50% stake of TotalEnergies Market in Egypt. In addition, we distributed the final dividend payment of $350 million. I'll now hand back to Athmane for closing remarks.
Thank you, Wayne. Before opening the floor, to Q&A, I would like to reiterate our outlook and priority. ADNOC Distribution continues to offer a compelling investment story. We had a positive start to the year and expect momentum to sustain in 2023, driven by both our fuel and non-fuel businesses. In Q1 of this year, we saw growth in both retail and commercial fuel volumes in our home market of the UAE and expect this positive trend to sustain in 2023, while also focusing on our network expansion and delivering higher non-fuel retail contributions. During this period, we progressed towards delivering of our 25 to 35 new stations target for 2023. We are reinforcing non-fuel retail offering to transform ADNOC Distribution stations into a destination of choice for our customers.
As we implement various initiatives to improve the efficiency across all operations and businesses, we aim to further optimize our operations to become a leading cost-efficient fuel retailer. We are also placing sustainability at the core of our day-to-day operations, reducing the carbon footprint and future-proofing our business. We continue to seek growth opportunities and new revenue streams, including electric vehicle charging. We remain committed to pursue our expansion plans and allocate capital towards growth in a disciplined manner, delivering an enhanced customer experience and generating incremental value for our shareholders. This concludes today's presentation. We are happy to take your questions. Thank you.
If you'd like to ask a question via the phone, please press star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question. Once again, that's star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll go to our first caller.
Hi, this is Faisal Azmeh from Goldman Sachs. Congrats on the strong start for this year. Maybe three questions on my end. Maybe starting with the non-fuel retail. The number of C-stores declined in this quarter. If you can shed some light on what's driving some of these closures. We've seen a good increase in the number of stations. We're just trying to gauge what's driving that trend. My second question is relates to the acquisition in Egypt. If you can just shed some color on how the devaluation of the currency is actually impacting you, or how it impacted you in Q1 and how it is impacting you today.
Then finally, maybe if you can add a bit as well on what the contribution from Egypt is towards fuel versus non-fuel. Maybe if you can shed some color on, on that aspect as well. Then finally, if you can also provide us with an update on whether the $1 billion target EBITDA is attainable this year. Thank you.
Thank you very much for your question. In terms of the C-stores themselves, our C-stores, we have closed quite a few C-stores, I think it was approximately 20. Important to remember that, in fact, all of those C-stores were connected to our On the go offer. These were small C-stores, and we have an ongoing program to increase our footprint where it makes sense, but also to drive for efficiency where it doesn't make sense. As part of that, we've taken a decision to close a few C-stores in the last quarter. With regard to the question on Egypt, this is a question on everybody's mind. There is an ongoing, there has been in the last quarter, devaluation in the Egyptian pound, and there continues to be a risk of devaluation in the Egyptian pound.
The business that we've acquired is to some extent insulated from this devaluation risk. Roughly two-thirds of that business is U.S. dollar denominated. There's a very strong aviation segment as part of the business, as well as the lubes, local domestic lubes, together with a lubes export part of the business. The main part of the Egyptian business that's exposed is the NFR and the network. There is somewhat an exposure in that business. However, our investment case factored in an ongoing devaluation. At this stage, we're very pleased with the performance of the business, bearing in mind it's only two months that we've been consolidating Egypt into our numbers. I think in terms of the final piece, the $1 billion question, let me hand over to Athmane for that.
Thank you very much, Wayne. Yeah. We, we maintain our 1 billion EBITDA target for 2023 on the back of organic growth initiatives and inorganic opportunities, such as domestic volume growth and market share gains supported by network expansion. Customer-centric marketing campaigns to drive higher footfall in our stations and market share gains in the commercial business. Also focusing on sweating our assets, including reinforcing the non-fuel retail offering in our stations. Also focusing and laser focus on OpEx optimization after the AED 9 million OpEx savings on a like-for-like basis that we achieved in Q1 2023. The last bit is the international with growing contribution from TotalEnergies Egypt and also potential impact of new potential amenities.
Just maybe a follow-up question, maybe if you can provide us with a split between what the revenue contribution was for the Egyptian business on the retail versus corporate side of things. Thank you.
Sorry. Could you just repeat that part of the question, please?
How much is the contribution from the acquisition to retail fuel and retail non-fuel? If you can give us the same split, if that's possible. If not, maybe we can take it, we know what the exact, what the total number is, but if you can give us the contribution to the different segments, that would be great.
The vast majority of the income from Egypt is related to fuels, primarily aviation and traditional fuels as opposed to non-fuel. We don't at this stage break out Egypt as a separate reporting item in our segment reporting.
All right. Thank you.
Thank you for your questions.
We'll go to our next caller.
Yes. Hi, this is [audio distortion] from HSBC. I just have one question, please. We've seen reports about the launch of Etihad Rail last year, and I think they've signed a few contracts already. Can you tell us maybe, could you talk about the sort of impact on the operations and demand from the launch of the Etihad Rail? I mean, is that a downside risk or maybe it's actually quite the opposite? Is that an upside risk? You know, should we expect maybe the trade activity to increase? Is this company your customer now? Any color would be appreciated. Thank you.
Okay. Thank you. Thanks for the question. Let me try to provide some bits. First of all, there is limited publicly available data. We are still assessing the overall impact, but we still believe that the impact will be really minor on us. Based on the available data, Etihad Rail intends to purchase 45 locomotives, and each locomotive can target up to 100 rail cars. Therefore, there could be some impact just on the commercial diesel. Okay.
However, we believe that this may potentially be offset by an increase in diesel demand from the rail's diesel electric engine as well as increased road freight activity around the rail connection hubs. On the consumer gasoline demand, we expect negligible impact on the number of vehicles on the road, given the enduring requirements for a vehicle in the UAE.
Thank you very much.
Once again, that's star one for questions. At this time, there are no further questions from the phones.
Let us look at some questions we have from the web, and please let us know if there is further questions. Just give us a second.
Okay. We've got a question on Egypt's fuel margin to try and understand the retail margin. We can share that Egypt's fuel margin is approximately $0.01 a liter. It is low. It's lower than our margin that we enjoy in Saudi and definitely lower than the margin we enjoy in the UAE. Important again to remember that the Egyptian business is that the network contribution of the business is a relatively small part of the overall profit pool. The majority of the profit pool in the Egyptian business is coming from a combination of the aviation segment and the lube segment. With regard to the retail margin itself, there has been over the last four or five years, a strong drive by the Egyptian authorities to maintain the foreign currency equivalent of that margin.
There have been increases over time with devaluation. I trust that answers the question best that we can.
We do have a question from the phones if you'd like to take it.
Yes, please. Thank you.
Caller, your line is open.
Hi again. This is, this is Hilda from HSBC. Just one more question, please, about the Saudi expansion. Can I just ask you know, whether you are sort of happy with the pace of expansion so far? Would you like you know, the company to grow faster there? Opportunity is still great. You know, do you expect or maybe do you have a pipeline of projects which actually could lead to, you know, to, a faster network expansion in this country? How do you view this market, at this point? Thank you.
Okay. Your question, [audio distortion], is regarding Saudi. Am I right?
Yes, correct.
Okay. Okay. Okay. Saudi is still for us, a priority market. I'm sure that you recall that we have been working very hard for the past one year on integrating the stations that we had, that we included in our network perhaps eight months back. The focus that we had is refurbishing the stations, and we have refurbished more than 60% of the stations. The volumes today are growing at a very high double-digit level. Our focus is to make sure that all these stations meet the kind of fuel and non-fuel revenues that we expect as per our investment criteria. What we want is to build a very solid network from volume and cost efficiency perspective, i.e., the 60+ station.
We will further increase our network. Again, we will increase our network and any potential inorganic activity is based on the fact that we fulfill our commitment in terms of profitability. We don't want to sacrifice actually the margins versus the volumes. This is a high priority for us, that all investments done by ADNOC Distribution are value accretive for the shareholders.
Understood. Thank you.
We'll go to our next caller.
Sorry, I could not hear you.
Hi. Hi, this is [audio distortion] .
Yeah, go ahead.
Thank you for the call and presentation. Just to follow up on the Saudi business, wanted to confirm two things. First, do you require as per license to maintain your current margin, the fuel margin to have 750+ stations by 2030? Hello?
Okay. Just a quick question from my side. What is the 750 stations that you are mentioning? Sorry.
I heard that in one of call of your competitors that, I just want to make sure if I heard them correctly, is, I heard that, Again, if I heard it correctly, that as per the requirements of the new margin, so the new margins that qualified fuel stations receive, they have to have a ramp up of stations, and by 2030 the number of stations have to be 750+ in the network. I just want to make sure, is that the case or I misheard that number?
Okay. We cannot confirm this. We are not not aware of this number. What we can tell you is that this market has over 10,000 stations. Bulk of the market is months and plus. The top three players account for less than 15% of the market. This is what we can tell you.
But part of your license, you don't have anything that stipulates that you need to.
No.
A minimum number of stations.
No, no. No, no.
Okay. Then related questions in terms of the new margins, because there were talks, I think last year you mentioned that there's potential there could be an increase in the margins, the Saudi market. Is there an update on that?
What we heard, and I'm sure that this is in the public domain, what we saw in the press is that the government might consider increasing margins, which will be beneficial for all the players and the organized players first. We're talking about the top players, including ADNOC Distribution. What we heard was 23 Halala versus 15 today, so quite major increase. This is what we read like everyone in the press. That's just what we can say. Anyway, today, the level of margins are low. Of course, the margin increase will improve all customer related CapEx in the country. Will be beneficial for the entire sector.
Okay. Thank you. Thank you very much.
We'll go to our next caller.
Hi, this is Afaq from International Securities. I just have a couple of questions. Firstly, on the Egyptian business, I believe that, and please correct me if I'm wrong, that the Egyptian business is not, you know, it's not, it's still prone to inventory losses. As you mentioned that the commercial business saw inventory losses this quarter, did you see on any inventory losses on the Egyptian business also, particularly on the retail side? That's one. Second, on your overall OpEx, we've seen a considerable decline in your OpEx costs. Just to get an idea, and this is despite the consolidation of Total Energy.
Just to get an idea of what is the sustainable level we should be looking at, maybe in terms of percentage of revenue or whatever metric, you feel comfortable. Thank you.
Yes. Okay. Let me take the second question on the OpEx optimization. I guess that as you know, we are very much focused on optimizing our expenses since the IPO. We have for the past three years cut more than $100 million. In the first quarter, another $9 million. Our target is for this year a minimum $25 million. This is the kind of guidance we can give you. In Q1, we have already realized roughly 40% of the annual target. May I ask you perhaps to repeat the first question. We could not hear you properly.
Yes, sure. I was just asking, did you have any inventory losses on the Egyptian business, particularly on the retail side? Since your commercial business generally saw inventory losses this quarter. Just wanting to understand the mechanism that you have in place in Egypt, and if the retail segment there is also protected against inventory losses.
Okay. Let me answer the question. The Egyptian business doesn't really care, carry inventory. There is a very minimal impact on the stock changes.
Okay. Thank you.
At this time, there are no further questions from the phones.
Okay. Do we have any further question, operator?
Not at this time.
Okay. Thank you very much for participating to this Q1 earnings call. Please feel free if you have any further question to reach me and the IR team. Thank you. Have a good day. Bye-bye.
Thank you, everybody.
This does conclude today's conference. We thank you for your participation.