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 a 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 this 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 II 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 outstanding results. We recorded a total of 40.1 million man-hours without lost time injury, zero 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 the successful implementation of the Internal Control over 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 a diversified contracting approach. Despite ongoing geopolitical challenges in this region, we maintained smooth and reliable operations. A fixed-rate shipping agreement was signed during this period, contributing to a reduction in freight costs 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 supports market demand, but also enables us to 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 prospective 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 continues 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 this scale, we encountered material delivery challenges that temporarily impacted the timeline. In response, our team is implementing recovery plans aimed at minimizing disruption and supporting alignment with the upcoming milestone.
While movement during the procurement phase was slower than initially 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 phase in the second half of the year. Our CapEx reflects continued progress on the Growth II project, with total spending reaching SAR 113 million as of the first half of 2025. This figure is expected to rise further as we move into the more construction-intensive phase in the coming quarter. Our full-year CapEx 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 II, reinforcing our commitment to safe and high-quality execution while progressing towards project completion.
Base oil crack margins in the first half of 2025 were SAR 1,828 per metric ton, representing a 6% increase compared to the crack margins recorded in the first half of 2024, notably exceeding our 10-year historic average. Looking ahead, our growth and new future initiatives remain a priority. With a solid operational foundation, a clean roadmap, 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 create 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 am 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 upheld our commitment to safety and operational disciplines, even as we navigated several operational challenges. This approach led us to take precautionary measures, resulting in two unplanned shutdowns at our Jeddah and 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 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 a 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 strategic investments 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 provides ample financial flexibility to support ongoing investment and future growth initiatives. As discussed earlier, two 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 the Zakat was 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 continued to invest in our growth journey, allocating SAR 220 million toward capital expenditure. At the same time, we reaffirmed our commitment to shareholder returns, distributing SAR 518 million in dividends for the period of the 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 1,815 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 tons due to unplanned shutdowns for urgent maintenance. Despite that, we remain fully committed to meeting customer demand and maintaining operational continuity. In parallel, we are committed to expanding 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 Q2, and it would continue contingent on compatible feedstock availability. This supports our base oil production reliability and enhances our operational flexibility going forward. For H1 2025 performance, the declared cash dividends for the period distributed to shareholders is SAR 168 million, with all other elements in guidance remaining 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 specialty 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. As it is the usual with receiving the questions, please state your name, your question, and your working address. But prior to that, 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-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 $100 million. It's approximately less than $30 million on a project like $200 million is an acceptable range. As we are in halfway, we so far spent around SAR 113 million in our growth project. In these kinds of projects, as we are accelerating also our work and progress in that project, some payments we are expecting maybe to come at the end of this year. Otherwise, maybe it will come at the end of 2026. For later, we can give a more closer range, but this is what we are reaffirming and reiterating 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 continues 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 for our previous distribution, it also was around 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 in our policy is between 60% to 80%. However, we returned back to our shareholder at this time of 70%.
Now we have answered the two written questions. Moving to Mr. Jonathan Cheung from Morgan Stanley.
Hi. Thank you for taking my question. I've got two, please. First one on your byproduct business. Why were volumes and margins weaker? And could you give us a bit more colors on what the trading momentum going into the second half? And my second question is around your production costs 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 questions, you are talking about the byproduct. 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 crack margin during this period. That has impacted our byproduct for this period. For your second question, cost of production?
Yes.
Can you repeat that again? Sorry.
Yeah. 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 of production. I'm not sure we shared the cost of production so far.
Okay.
We have the cost of production usually comes with our cost of sales, but these are we see it at the 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 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 are on the upside, which is more important.
Understood. Thank you.
Thank you, Jonathan. Okay. We have Elder.
Yes. Hi. Thank you so much. 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 together? Should we expect this to continue, or this has been resolved already? Thank you.
So thank you, Elder. 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 grasp your idea correctly?
Yes, correct. So I want to understand better the difference between VGO-based and HVGO margins. Are they very different?
So yes, Elder. That is something that I think we are working on in order to find different mechanisms to have that different crack margin for different VGO stream and to be shared later with you and with all other analysts. So we want to continue that. Currently, we have very positively continued the HVGO that are coming from SAMREF. And that is starting an 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.
So just a little bit of clarity on the HVGO, Elder. That is a stream that is embedded directly to the hydrocracker. So it means it bypasses some of the pots and pans, hence making it less. It actually came down the operational cost of the whole facility because you're not going through different equipment. You're going directly to the hydrocracker, which we have envisaged to do that, and we continue to do that. It's quite beneficial to the company itself. Now, on the shutdown, I think you're referring to the Q1 shutdown, and that took place because of catalyst change-out on that, and then also an exchanger we had, some of the equipment. But that's what I understood from your question.
Thank you. Maybe I'm confused a bit, but I think on this call today, you've downgraded your full-year guidance from, I think, 1.221, 0.05. Could you explain again why it happens, what's driving this? Thank you.
Yes, Elder. Apologies for not understanding your question properly the first time. Basically, two ESD shutdowns we encountered in the second quarter: one in Jeddah Refinery, the second in Yanbu Refinery. Both were to address matters related to our integrity and safety. As a result of the Yanbu, let's begin with Jeddah so the Jeddah shutdown was fully successful, and we addressed the matter that we went into shutdown for, but for Yanbu, while we mitigated this issue, it will still continue until November, and because of that, because of those two shutdowns combined and other production-related matters, the guidance has been revised to 1.05 million metric tons rather than 1.2, which was originally accounted for.
Thank you.
If I may, yeah, this may impact us in a very short term, but this is very important from our team effort to assist any potential risk, and that is very important to recognize this to ensure the safety and integrity of our assets.
To finalize from my side, Elder, while we successfully addressed our shutdown in Jeddah, from an operational perspective, when an emergency happens, it happens, but we are confident today when we say we addressed those issues, and Jeddah Refinery is back on track. Yanbu is still facing minor difficulties due to which we have revised our guidance for the rest of the year.
Thank you.
Any more questions, gentlemen? Elder again.
Thank you again. Yes, maybe just to make sure I understand the timeline correctly for the Growth II, has there been any changes to your understanding of when approximately you expect this facility to start operating and producing actually Group III? And any chance maybe you could give us some guidance in terms of what kind of CapEx we should expect for 2026 as well? Thank you so much.
Elder, good question. The project is actually scheduled to be part of the turnaround. The turnaround is the last month and a half of the year, which is about 45 days, whereby the scheduled turnaround takes place. There are other activities in addition to the project hookup, which currently, as we mentioned, there were some procurement delays that we're gearing up. We have geared up to put them back on time. Now, once that is all done, production will start in January of that facility. That facility itself has the ability to produce Group II fully or also part of it, Group III. That mix will come later on in the guidance, how much of a mix we want to do in terms of three or two.
If we would produce more Group III, that means it's going to be on the expense of Group II and the expense of the catalyst severity, whereby it will require more change-out. So there is an optimum operation model that we will give guidance window to the analysts. And that's going to come soon.
There's another question about the CapEx for 2026, Mr. Saud.
The question, I recall, how much is the growth expected? So far, within our guidance and where we are seeing it, we are expecting for the growth CapEx for next year will be around between $100 million-$120 million at that range in order to have remaining around 10%-15% in 2027. And that is usually related with insurance and the guarantees of the facilities once it's fine. So these will be the expected for next year.
Okay. Moving on to one written question by Mr. Ajay Singh. Yanbu will face an issue. Yeah. Yanbu will face an issue implying Group II is much higher in crack margin. Will this impact the crack margin for the second half of 2025? To answer you in a couple of points, the first one, we don't usually provide an outlook statement regarding the finances. However, let me answer you in terms of what the outlook says about the prices of each side of the equation. So for the base oil prices, they're expecting to remain the same for the year 2025, for the second half of the year.
While on the other hand, due to the current geopolitical situations and the pressure generated by the OPEC+ decision to increase the production, are expected to put pressure on the prices of the high sulfur fuel oil. We look at this positively and working to capture the opportunity of gaining from the higher spread between the two prices. Next question by Mr. Hisham Kabbani. What's the update on the Jeddah facility closure in 2026? Any chance it will get extended?
Hi Hisham. Good question. Jeddah is a very important facility for us, but also it has challenges as it's a very old facility as well. So therefore, a lot of assessments, and not only assessment for operation, but environmental assessments, permit assessments, and discussions, online discussions and dialogues, face-to-face dialogues with the owners and the land and what have you. So this will take its own, this will take its own toll on that, and then soon we'll be coming back with an official statement on the fate of Jeddah facility.
Moving to Mr.
But again, let me just actually remind that, as you say, any chance it will be extended? So I mean, regardless whether it does or not, I think the message here is the company is at a growth stage. And what's coming from Growth II and beyond that, as we mentioned in the statement, will actually trump Jeddah facility in the next five or four or five years, meaning that it will overcome and some of these projects are actually at multiples to Jeddah's income on that that is coming. So that's the idea on whether Jeddah is there or not. But definitely, in the meantime, we are working to come to an agreement if that will be extended or not.
Thank you, Mr. Samer, for the extended detail. A couple of questions from Mr. Fawad Khan. First one, what aspect of plant operation in Yanbu has led to lower production and sales guidance? As answered previously, it was a matter of integrity and safety. We don't compromise safety when it comes to our operations. Hence, our teams took immediate action to address this issue, which we were able to address, Alhamdulillah. But with that in mind, we had to revise our calculations for the rest of the year. Another question from Mr. Fawad Khan. What are the reasons for the increase in working capital in the second quarter?
Actually, the working capital is, if we look at the period, we have a decrease during this period comparing to before. But for us, we have faced some inventory valuation. We have AP payments that have been done during this period and settling of some of our payables. So we are facing a decrease in that area.
For Growth II project, has the secured UCO stream to fully optimize production? If I understand your question correctly, Mr. Fawad Khan, you are referring to whether or not we have secured the UCO. UCO is currently under technical evaluations. We are evaluating different options from a variety of facilities, both within the kingdom and outside the kingdom. But it did not go to commercial yet. On behalf of our Asset Optimizer Department and Technical Engineering, we are in a technical evaluation stage.
But I mean, for that, Fawad, I think we demonstrated in the past to source UCOs globally. That was, I think, two years ago or a year and a half ago. And that's whereby to continue our agenda. So that's the capability of importing and processing UCO is well in hand.
To highlight, in addition to what our CEO mentioned, we do have a lot of experience when it comes to sourcing and manipulating different streams and different stages of our process. So a couple of years back, it was the alternative feed for Jeddah Refinery. We have a successful example of the heavy vacuum gas oil, HVGO. UCO is another attempt that we have experience with. Another written question, why was the market not informed about the shutdown? We do our own internal assessment to check the materiality of the impact and measure it against the financial statements of the previous year. We assure that we have, we assure that we looked into all these angles and did our own internal assessment to make sure that this is worth, this is worth highlighting or not.
The materiality was not reached, and the decision was not made to go live with such information in that case.
Pretty much, it's a slowdown on the volume that took place because of a duty in the exchanger that has been currently mitigated, and hopefully, we are approaching to the target volumes. If yes, that's going to be good. If not, then we will sustain the same target that we have mentioned.
With that, we answered all the written questions for now. Any further questions, both verbal or written? Gentlemen and ladies. If no further questions are here, thank you for attending and thank you for your valuable participation. For any backup questions, feel free to reach Investor Relations at Luberef, and this recording will be uploaded as usual for your future consideration. Thank you.