Everyone, this is Ahmed Aljiffry , Luberef's Investor Relations Manager , and I would like to welcome you today to our nine-month 2024 results quarterly call. It is a great pleasure to be joined today by our new CFO, Mr. Saud Kamakhi, who is going to be hosting this call. I would like to remind you that this webcast is going to be recorded. We are going to have a highlight on our session. If you are joining us utilizing a mobile phone, I would advise that you tilt it sideways to make sure you could see the slide deck properly. Before we dive into the presentation, I would like to draw your attention to our cautionary statement. In today's presentation, we may be giving some forward-looking statements and referring to estimates and expectations. Actual results may differ based on the materiality to the factor stated in this slide.
With that out of the way, I would hand over the call to Saud.
Thank you, Ahmed. Ladies and gentlemen, thank you for joining us today at our earnings call, covering our performance for the first nine months of 2024. With high tensions in the region and volatile markets, we maintained our focus on delivering excellence in our operations to ensure the creation of shareholder value, even in such market environments. We remain committed to the safety of our facilities and operations, and it has been proven that a strong safety performance would result in high reliability and execution as well. This can be seen in our outstanding total recordable incident rate of zero, which played a critical role in achieving our industrial leading mechanical availability of 99.6%. Our commitment to excellence does not only reside in our facilities. It also expands to the communities around us.
To highlight that commitment, we are proud to announce the release of our first sustainability report, which is available on our website. We continue to target unique opportunities, which will position us at an advantage to the competition by targeting advantaged base oil feedstock. As such, we are progressing with a potential Group III+ project as our board has authorized us to proceed with the pre-FEED phase. Progress has also been made in lubeHUB initiative with APAR signing a conditional investment agreement with Park Manager Jubail. If all goes well, we hope APAR to break ground next year and become our first customer in the lubeHUB. Finally, with the challenges we are facing when it comes to the freight rates, we have signed an MoU with Bahri Chemicals to evaluate a different strategic approach.
One of the options under evaluation is to fully charter a ship and utilize Bahri to operate the ship and leverage their commercial arm to ensure the ship is utilized during backhaul operations. This collaboration can lead to optimized freight costs. In summary, while markets are quite volatile and regional tensions are impacting some aspects of the business environment, we are maintaining focus on the elements we have control over. This is to maintain an excellent operational track record and to focus on identifying new opportunities that are unique to us and would place us in an advantage position to the competition. Moving to base oil crack margins, spreads appear to have stabilized around 10 years average, with a normalized year-to-date average coming at SAR 1,781 per ton.
Most consultants seem to believe this is a good price range for the rest of the year. Moving to our year-to-date performance numbers. Starting off with our base oil sales volumes. Sales volume are slightly higher than last year, coming at 929 KT. Crack margins so far this year were lower as spreads have normalized from the comparative period. Revenue for the period are higher on a comparative basis, mainly due to higher by-product prices. As a result of low crack margins, EBITDA and net income dropped by 37% and 38% respectively. We still maintain a strong ROACE of 24% in normalized environment. Operating cash flow is coming at a healthy level of around SAR 1.2 billion. Moving to CapEx.
Overall is lower compared to last year, with sustaining CapEx higher, mostly due to the spending on the new catalysts area this year and ongoing transformation-related CapEx. Our cash conversion is 106% as the positive working capital changes carried over from last quarter unwinds. Before we move to the net income analysis, I would like to highlight we are still maintaining a robust balance sheet with a negative gearing ratio of - 5%. Looking at our year-to-date performance in comparison to the same period last year, we can observe the impact of the lower crack margin on both base oils and by-products on the net income. However, higher volume had a slight positive impact. Walking through the rest of the elements of the waterfall charts, our OpEx remain at the similar levels of our comparative period once last year's bad debt reversal is normalized.
Zakat and tax are lower mainly due to lower net income and a lower Zakat base, which has resulted from paying down the debt earlier this year. Moving to the cash flow analysis, we were able to maintain a healthy level of cash generation, which has resulted in a healthy cash balance even after paying down our loan earlier this year. For the rest of 2024, we'll remain focused on our core principles of safe and reliable operation, and we will continue to explore and identify opportunities that will create a unique value proposition to our shareholders. Now, I will hand over to Ahmed to start off our Q&A session.
Thank you, Saud. We will start off our Q&A session. Everyone can ask a question with one follow-up, and then we will ask you to give way for the remaining participants. Kindly raise your hand to ask a question. I do not see any hands up. Very good. Mr. Fawad, you can unmute yourself and proceed to ask your question.
As-salamu alaykum. This is Fawad Khan from from Alinma Investment . I have a few questions regarding the third quarter performance and obviously some questions on the company's latest update on the MoUs. I will start with the MoUs. There are two MoUs the company have signed. One is conditional. If you can shed some light on what are the conditions and what are the expected timeline, if any, on the, let us say, MoU being converted into some tangible investment going forward. Number two, the second MoU that you have signed with Bahri. If we can have some colors on the potential saving in the logistic cost for the company's export, that would be helpful.
The first question is regarding the MoU between Jabeen and APAR, and the timeline, which can benefit Luberef in terms of the implementation of the lubeHUB initiative. The second question is related to the potential value being realized with the Bahri. You can proceed.
Thank you for this question. This is to highlight recent signed APAR during iktva in the first quarter with Jabeen, which is the park manager to establish the industrial facility to transfer oil and waste oil on the lubeHUB. Expectation is to hopefully that will break ground next year. APAR would be our first customer in the lubeHUB. This supply agreement is still under negotiation and potential volume 100,000 tons per year that will be supplied locally to APAR. For Bahri, also that memorandum of understanding have been signed with Bahri, and this is just as mentioned during the presentation, where situation of Red Sea remain tense. Our logistic team developed a good understanding of the landscape and environment and trying to manage and mitigate any of those tense situations.
Currently, company have not been materially affected so far, and we are expected that for nearing any expected to have a gross margin of currently SAR 40 per ton when compared to prior year. This will include also cost related to testing of any mitigation plan. This is [MPK]. We are expecting to have half of that is probably around half to be saved if everything goes well.
Sorry. You said you have expected savings around $20 per ton, if I understand correctly?
Around that, maybe.
Yes. Obviously, this is going to be covering the volumes which the Bahri agreement covers, which are not yet finalized.
When do you expect to finalize the agreement, if possible?
If we have any update news on that, we will keep you posted.
Fawad, just to give you an idea, the agreement for Bahri to engage in is going to require long-term agreement. The team in finance are trying to make sure that the saving is material over the whole period of the agreement. Because if the situation goes back to normal, we will be committed to an agreement that could be a higher freight rate. There is a risk assessment which the finance team is covering to make sure that when we go in, we generate real value from the engagement, basically with Bahri.
Sure. Thank you. Just to follow up on the first MoU, you mentioned 20,000 tons per annum supply to APAR?
For APAR, 100,000.
Oh. 100,000 per annum.
Potential volume up to 100,000.
Sure. Thank you.
Thank you. Thank you very much for this question.
Next, we are going to move to Mr. Mohammed [inaudible]. Unmute yourself and proceed to ask your question.
Thank you for having us on the call. Just a question regarding, I believe you mentioned that you are progressing with the pre-FEED [inaudible] for Group III and Group III+ project. Can you summarize on that, please?
This is regarding the project issue communicated earlier in Q1? This is the update as of today.
Are you saying to Jazan?
Sorry.
Are you saying to Jazan?
We have question.
Yeah, sure.
Yeah. The location is not finalized. It is a Group III+ project.
Mohammed, as we mentioned, we are trying to leverage our strategic partnership with Saudi Aramco here. This project is, we are trying to target the streams, which is ideal for our Group III and Group III+ base oil. We concluded the optionality studies. We are proceeding now with the pre-FEED study. Just to be FID. However, the project has passed the visibility of optionality. After it is moved from pre-FEED, then it will go to a second gate of FEED. It will go to the final investment decision, FID, and then to the EPC. The board just approved, recently what we mentioned as the pre-FEED stage. Just to be clear on that.
Okay. That is very clear. Thank you very much.
Thank you.
Okay. Next, we will go to Mr. Aakarsh Tomar . You can unmute yourself.
Hi. Thank you for the opportunity to ask the question, and thank you for the call. I have a question on the Yanbu expansion of 175,000 tons for next year. Can you give us more color on when can we expect the project next year? Will it be first half or second half? Any update on this project. Thank you.
I think you are referring to our Growth II project here. As of now, we are progressing as planned, and it is targeting to be in 2025. The company will always be providing updates from the next annual call, going forward.
Just to highlight, it is the end of 2025, Aakarsh.
Okay. Thank you. That is it. All the best.
We have a written question from Mr. Matthew. I would like to know the reason for the volume weakness in Q3 2024, and do you see an impact in Q3 from logistic cost increase?
This is a good question. While our sales volume are slightly higher than last year, if we are comparing year to date of 929 KT, comparing to 918. Also, as we mentioned during the presentation, our quarter sales maybe did not meet the expectation as recorded on around 322 KT. The lower than expected sales volume was mostly attributed to the fact that we were operating in a very low inventory, which meant we had to maintain a very tight operation at that point when it comes especially to ship arrivals and project production scheduling. This is mainly the reason in that. Thank you.
The second element of the question is regarding the impact of freight in Q3. Matthew , freights have increased and as highlighted by the CFO in the Bahri question. We thought we're nearing the threshold of SAR 40 per ton that we estimated. Most of the impact is coming probably due to recent escalations. That's why we take it upon ourselves in every call to identify opportunities for reducing the freight cost or optimizing it, as well as making sure that we have the right mitigations in place in the event that the situation can get worse.
We had the Bahri MoU. Previously, we had the agreement with Daelim Tanker. As we communicated previously, we have other alternatives in place, like the DHL arrangement and looking at alternative storage facilities. This is ongoing activity because we believe that increase in freight, if resolved, will immediately translate to improvement in crack margins that the company realizes.
I hope that covers the question. Do you want to add?
No, this is a continuous management commitment to all that freight cost optimization project.
Yes, Matthew. On a year-to-date basis, the increase in a per ton basis for the export volumes is nearing SAR 40 per ton. Differential competitive, I think. Are there any remaining questions? Please raise your hand if you would like to ask a question. Mr. Fawad Khan, you can unmute yourself and proceed to ask the question.
Hi. Thanks for the opportunity. I just wanted to ask a question on the overall outlook for the margins, both Group I and Group II. If we can highlight the update on the margins on the Group III products, how it has behaved for most of this year, and how you expect the Group III margins to behave going into 2025 and beyond.
Just a general question on the outlook starting from our products and then regarding the products that could potentially be produced from [inaudible]
Generally, we do not provide output from ourselves. However, we saw some statistics and some consultants provide certain output. We are looking from those analysts that a stabilized price on the upcoming period of the year. Those are related for the groups of base oil.
Okay. This is covering one and two. Generally speaking, Fawad, we do not spend a lot of time on Group III just yet. However, a recent high-level check that came to us is that it still maintains a SAR 300 per ton premium. That is why whenever we talk about the Group II project, we highlight one of the important factors is the flexibility. Because sometimes that SAR 300 per ton is not worth all of the diesel that you produce. It might make more sense to produce more Group II and have less diesel as a byproduct. When you talk about Group III, you are assuming a drop of volume of around 60%, 33% from Group II levels to 40%, to generate that SAR 300 per ton. Sometimes it might not be worth it.
The asset optimizer will maintain focus on making sure that we generate the best net backs.
Overall, the break-even level for the Group III margins is around SAR 200 per ton, if I understand correctly.
Yeah.
From switching from Group II. Okay, sure. Thank you. That is quite helpful. Thank you.
Okay. Do we have any remaining questions on the call? Okay, we have a written question from Matthew. Does diesel crack margin weakness create an incentivized mechanism for diesel refining units to convert to base oil? How is it for that conversion in terms of CapEx?
Yeah, I can take that. So, usually what we see in that is the incentivized between the base oil and diesel. Usually, it comes in when it reached to $35- $50 spread between both of them. To convert that maybe does not require that much of CapEx for refineries. However, it takes a lot of requirements to switch the production. From a technical perspective, I think maybe Ahmed can elaborate on that, from switching from diesel to base oil.
Okay. To shed a technical light on it, Matthew, first you need to have the unit in place and the right catalyst in place. So it's not an immediate switch. You have to have the unit already designed for that production. The second aspect is you have to have the right feedstock. So for an integrated facility, base oil is typically around 5% at maximum of their production volume, typically it's around 1%. But they need to look at the whole site economics, because typically advantage base oil feedstocks are usually more expensive than the regular feedstock that you would target for production of other fuels. So it's not an easy switch. They need to secure the feedstock, change the refinery crude diet for the facility. And then obviously have to have the asset in place and ready to operate.
One thing to always emphasize on, whenever you have this flexibility, it means you have lack of utilization in a unit. When you have flexibility, it means that there is unutilized assets. This is something we do not experience in Luberef. We always push our units to run at 100% as much as we can. That is why we look for intermediate feedstocks so the subsequent units are filled and to ensure that we have the lowest cost of production when we compare us to our peers. I hope that covers the question, Matthew. If anyone has any additional questions, you could take them on. Okay, Mr. Fawad, you can unmute yourself and proceed to ask your question.
Thank you for the opportunity. Can you hear me now?
Yes.
My question is on the company guidance on the volume. I was just looking at the first quarter and second quarter presentation, and there was a guidance of single mid-digit volume growth for this year, 2024. With these nine months already in the bag, what kind of growth or volume we should expect for the remaining 2024?
That is a good question, Fawad. It is regarding the volume against the guidance in terms of growth. We guided for mid-single- digit. That is giving the number of around 4%-6%. I think it is going to be a stretch for us to achieve the 4%. There is going to be growth. We are hoping to deliver the target as much as we can.
We are working in the last quarter now to try to maximize our efforts in order to achieve that guidance and, hopefully, by the end of this year, when we report our final numbers, that achievement is there. We are doing our best to achieve that target and the guidance.
Sure. Thank you.
If anyone has any remaining questions, they can proceed to ask them now. Mr. Matty, it's a follow-up question on the previous question. In the context, what is the likelihood of global diesel refineries comparing to base oil and reduced base oil crack margins, as base oil crack margins have really held up strongly in face of global sell-off in Singapore complex refining margins. I think, just a minute, I need to Okay. That's the end of the question. Okay. You have to look at base oil, Matty, from a global perspective because there's a lot of regional differences. In terms of Asia, diesel margins have been weak for quite some time, and we follow the Asian index. Yet base oil spreads have held strong.
You would assume that if anyone had the facilities in place, they would have started access to this data. Currently, the analysts are forecasting that if there are any future pressures in prices, it's most likely going to be in Europe and the U.S. because there is a premium over there compared to Asia. Additional volumes will target the Europeans and the U.S. markets. I hope that covered it off when you mentioned Singapore or are you referring to something else? Okay. That's clear for Matty. If anyone has any remaining questions, kindly raise your hand or you can type them in. With no remaining questions, I would thank you all for joining our call.
If you have any follow-up questions, please do reach out to us through one of our IR portals, whether it is via personal email or in one of the one-on-one engagements that are coming up. Thank you again for joining us.
Thank you.
Bye-bye.