Hello, my name is Ahmed Aljiffry. I'm the Investor Relations Manager for Saudi Aramco Base Oil Company, and I would like to welcome you all to this audio webcast, where we will be discussing our first half results for the year of 2024. I'm glad to be joined today by our CEO, Mr. Samer Al Hokail, and our acting CFO, Mr. Nasser Gama. Our webcast today will consist of a presentation highlighting our H1 2024 performance, followed by a dedicated Q&A session. I would like to remind everyone that this webcast is being recorded. Before we dive into the presentation, I would like to draw your attention to our cautionary statement. In today's presentation, we may make forward-looking statements that refer to estimates, plans, and expectations. Actual outcomes may differ materially due to factors stated in this slide.
With that out of the way, I will hand over the call to Samer.
Thank you, Ahmed. Ladies and gentlemen, thank you for joining us today at our earnings call, covering our performance for the first half of 2024. Our focus on operational excellence has enabled us to generate shareholder value, even in a normalized base oil margin environment. We remain steadfast in our commitment to safety and operational excellence, as evidenced by our industry-leading Total Recordable Incident Rate of 0.0 and a mechanical availability of 99.6%. This unwavering focus has been recognized by Saudi Aramco in Saudi Aramco's President's Affiliate Award, where Luberef has won the award for the best performance in safety and best performance in maintenance and reliability. Our transformation journey continues to yield positive results. The HVGO line is progressing as planned, with pre-commissioning underway and expected online date in mid-August this year.
This project will not only optimize our Group II offering slate, but also will enhance the utilization of our Group I train in Yanbu. We are excited about our growing partnership with Valvoline, as we are currently meeting 80% of their base oil requirements in the Middle East and Africa. We further enhance our collaboration through the signing of an MOU to construct a blending plant in the LubeHub. Moving to technology, we have signed a research agreement with KAUST's spin-off company, Emerging Solutions Commercial Company, to evaluate the utilization of our groundbreaking uODS technology in the base oil-related applications. This technology has the potential to generate some unique opportunities for Luberef.
To address rising freight costs, we have signed strategic agreements, including an agreement with DHL, to leverage Etihad Rail for faster and more efficient deliveries to the UAE, and a long-term agreement with Uni Tankers to secure competitive freight rates. Looking at base oil crack margins, our normalized crack margins in the first half of 2024 was approximately SAR 1,800 per metric ton, which is within the 3% of historical average. While there was no impact for imported feedstocks in the second quarter, higher feedstock costs pressured base oil margins. We remain committed to our core principles of safety and reliability operations, while diligently managing costs to maintain our position as a low-cost producer. We are closely monitoring market conditions and will continue to adapt our strategies accordingly.
In conclusion, Luberef delivered strong operational performance in the second quarter, characterized by a steadfast commitment to safety and efficiency. Our strategic initiatives, including the HVGO project and strategic partnership, position us for continued growth and value creation. While market conditions remain dynamic, our focus on cost management and operational excellence enables us to navigate challenges effectively. We are confident in our ability to deliver sustainable value to our shareholders. I will now turn it over to our Acting CFO, Mr. Nasser Gama, who will provide a detailed walkthrough of our financial results and additional insights. Thank you for your attention.
Thank you, Mr. Samer. I extend a warm welcome to you all, and I'm delighted to guide you through our H1 2024 financial results and provide insights into our guidance for the rest of the financial year. We will wrap up with a dedicated Q&A session to address any questions. Looking at our H1 numbers, sales volume are slightly higher than last year's first half, at 607,000 metric tons. Crack margins for the first half were lower, as spreads have normalized from the comparative period. Revenues for the period are higher on a comparative basis, due to higher by-product prices. As a result of lower crack margins, EBITDA and net income dropped by 37% and 40%, respectively.... Our ROACE at 25% remains industry leading in a normalized environment, despite being lower than last year.
Operating cash flow is coming in at a healthy level of SAR 959 million, supported by working capital changes. Overall, CapEx levels are at similar levels to last year, with sustaining CapEx higher than the comparative period, primarily due to the spending of the new catalyst and ongoing transformation-related CapEx. Our cash conversion is 224% because of a positive working capital change. Before we move to the net income analysis, I would like to highlight that we are still maintaining a negative gearing ratio even after paying healthy dividend of SAR 5 per share for the second half of last year. Looking at our 2024 H1 performance in comparison with the same period last year, we can observe the impact of the lower crack margin for both base oil and by-products on the net income.
However, higher volumes had a positive impact. To mitigate the impact of lower crack margins, we are aiming to increase our volumes, utilizing our advantage position in terms of cost of production and unique feedstock available to us. With the commissioning of the HVGO line, we aim to improve the utilization of our Group I train in Yanbu, as we optimize our Group II offering slate. Walking through the rest of the elements of the waterfall chart, our OpEx remained lower than the comparative period. The CapEx was lower, mainly due to lower net income. 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 a healthy dividend for the performance of second half of 2023 and paying down half of our loan.
For the remainder of 2024, our primary focus will be on meticulous cost control and maximizing asset utilization. Through operational excellence, we aim to sustain and enhance shareholder value. Now, I will hand over to Ahmed to start off our Q&A session.
Thank you, Nasser. Now, to start off our Q&A, before you ask a question, kindly state your name and where you're coming from, and proceed to ask your question. Please raise your hand and start to ask question. Giuseppe, you can proceed to ask yourself. Kindly unmute yourself. Giuseppe, I think you need to unmute yourself.
Hi, good afternoon. I'm from Morgan Stanley, and thank you for letting me ask the question. So I have two, if I may. The first one is about diesel cracks that declined recently, and normalization is expected to continue. How would base oil crack margins behave in such an environment? And then second one is about margins for Group I. We have spoken a lot about margins for Group II and Group III, and what are your expectations for Group I margins going forward?
So the question-
Okay, I think-
Go ahead, Abdulaziz.
Thank you, Giuseppe, for the question. Well said. I'll just briefly probably give the dynamics of the crack margins versus what we see in diesel cracks. Usually, it lags. There is a lag between what you see in the fuels, especially maybe crude oil as well, with the base oil margins. I know in recent reports, some of the consultants are forecasting base oil margins to become a bit more flat, slightly maybe declining for the rest of the year. But we... I think what we need to focus is the feed costs, stocks that have been rising over the past first half, which we will see now it's actually in decline. More details can be weighed by the CFO.
Nasser, if you have additional information on that, please, convey them.
Yes, Abdulaziz. Actually, the base oil recent report, consultants are forecasting for base oil price to be flat, to slightly decline for the rest of the year, as mentioned by Samer. However, the severity of the recession in the region will be higher when compared to our region, as the premium of diesel is much higher in the U.S. and Europe. However, it remains to be seen how this oil markets will react to the recent market volatility. With regard to the high sulfur fuel oil, consultants were expecting a drop around $60-$70 per metric ton as observed in the first quarter. However, the current market dynamic has already resulted in a drop of around $50-$70 per metric ton. This was mostly due to lower importation from China.
more tenders coming out of the region. Yeah.
Thank you, Nasser. If anyone else would like to ask a question, kindly raise your hand. So that the Hayyan, kindly unmute yourself and proceed to ask your question.
Hello?
Hello, sir. Go ahead.
Hello, sir. Yes, this is Hayyan from Merak Capital. Thank you for the presentation and congrats on second quarter results. I have a question regarding your dividends payout during the first half of this year. As you can see, as you mentioned, the announcement that your net debt was relatively about $480 for the first half of this year. While if you compare it to the previous half, second half of 2023, it was relatively the same, yet the dividends per share decreased from 5 to 3.6. And on your announcement, there is an available net cash of roughly 1.64 SAR per share. Can you elaborate more on that, and how should we look at dividends into the second half of this year?
The question is mostly about the recently announced dividend and how does it follow with the dividend policy, since the announcement is lower despite similar financial results.
Okay, Sure, thank you for the question. As you are aware, the framework is 60%-80% of free cash flow, as well as, that, this is more of an annual base rather than a semi base. So the expectation is the crack margins and the feedstock costs is reduced, then the crack margins, of course, hopefully at the end of the year, slightly above. Then yes, we will, we will go back to, 80%, but the framework still is there, 60%-70%. It's a performance-linked dividend policy. And one, two, I think, which is very important, is, we're always committed to create value for the shareholders and continue distributing products to ensure achieving the optimal balance actually, between meeting shareholder needs and investing in the company for growth.
So, there is a growth engine that is being played now and looked at at the board level and at the shareholder level. That's hopefully at end of H2, we will proceed with that. So it's more of a balance between healthy dividends and then growth. Nasser, if you have additional information, please share it.
Yeah. The dividend for the first half of 2024 is an interim dividend. We remain committed to create value for shareholders and continue distributing profit to ensure, you know, achieving the optimal balance between meeting shareholders' expectation and investing in the company's growth.
Okay. Thank you, Nasser. We have a written question from Murthy. I think Murthy is from Al Waha Capital. I'll read it out. "I see that your margins have been weak in Q2. Did you import fuel oil from overseas in the second quarter of 2024? The reason I'm asking this is you expected SAR 50 million in Q1 due to fuel oil imports, due to the Rampish shutdown. And in the second quarter, net income improved only by SAR 60 million quarter to quarter, while sales was much higher. So there is definitely some increase in cost unexplained by margin evaluation. So emphasis on the crack margins for the second quarter when compared to the first quarter.
Ahmed, you can take this question.
Okay. So there was no impact on the, no imported feedstock in the second quarter. However, when you look at the feedstock costs, Q1 to Q2, the majority of the, price increase in feedstock costs happened to in, from the middle of March onwards, and they sustained all the way through Q2, and that's why you had a pressured, impact. Otherwise, there is no impact, and the volume increase quarter- to- quarter, as you highlighted, this is 25%. And you see that in net income, where you have a 25% increase in net income as well as revenue, you compare sequential quarter- to- quarter. So if there is no follow-on from you, Marty, if anyone is willing to ask a question... We have Elder. Kindly unmute yourself.
Yes, hello. Thank you very much. A couple of questions from me, please. First, I think you mentioned in the past that there may be other avenues for growth beyond Group II project, you know, if you find feedstock within Aramco system. Has there been any updates about that? Do you have any ideas of what that could be potentially? And then secondly, when talking about dividend policy, you know, you don't have much of a leverage at the moment. Is it possible that you might deviate from that policy if, let's say, you know, for whatever reason, you don't have enough free cash flow to maybe sustain the same level of payouts in the future?
Is that possible that you might, do that, you know, deviate from the policy, maybe pay a bit more? Thank you.
So the first question is regarding the other opportunities we have to improve the utilization of the assets from alternative feedstock to Saudi Aramco. And the second question is, you can just clarify, do you mean deviate on the higher or lower side? What type of deviation are you thinking of, Elder? On the high side, of course.
Okay. Thank you, Elder. Maybe, on the first question, yes, we are looking at Aramco system, tremendous always, and iterating on that. There is currently a look project of actually a feasibility study that has been launched on a certain project within the Aramco system, that is geared more to Group III. And the feasibility study and the economic study will come in, I hope, within the next couple of months, for it and the location of it. So these type of projects are ongoing. Pretty much the growth is more of a sequence of projects within the Aramco system, and we are looking also outside, as well. So on that case, for the growth, and maybe Ahmed can elaborate more on the current project.
On the dividends policy, we have no, absolutely no intention to deviate from the 60%-80% for the next at least couple of years from now. At least for this year.
Thank you, Elder. We have a typed question from Abdullah Al-Wahhabi: Do you witness any curtailment from Aramco during the first half of 2024? I'll take that on. The only curtailment that we face is due to the facility in Yanbu being shut down, which we highlighted, and we covered by the importation of feedstock. Otherwise, Saudi Aramco has always been a consistent and reliable supplier, and supplies have always been delivered on time. Anyone else would like to ask a question, please raise your hand. Mr. Fawad Khan, kindly unmute yourself and ask your question.
Hi, this is Fawad Khan from Alinma Investment. I have a couple of questions. Number one, you mentioned about the projects being outside in KSA or outside the current regime. So what kind of projects are you looking at? Whether it's going to be just a blending facility or some other kind of project you are looking at. Number two, if you can give us some colors on the local demand of a base oil this year and the outlook for the next few years. Thank you.
So the first question is regarding other opportunities outside of Kingdom of Saudi Arabia, and then you have a second question regarding local demand for base oils.
So thank you, Fawad, for the question. Basically, our strategy is to look at a higher capacity production within the Aramco system and outside the Aramco system. So if there's a production with storage facility that we are looking at, then, yes, that might be actually a great idea because it's closer to our clients and customers. Group III, Group II are the focus. Group I is very well ingrained in our facilities here between Jeddah and Yanbu. So that's the answer. And there are some maybe supply agreements that we are able to study and find if there's materiality there. So these are the type of project.
Now, blending facility you mentioned, I think the LubeHub is worth mentioning that you have seen. LubeHub is where we would localize in Kingdom, the industry itself, and part of it there is a blending facility. And there might be an opportunity there to have some stake within that LubeHub there. We're still looking at that as well. In terms of the demand, maybe, Ahmed, you can answer this question or not.
Yeah. With regards to the domestic market, the domestic market is stable, and we produce and sell 30% of our production to the domestic market. And we aim to, you know, enhance and increase the domestic market after launching the LubeHub.
Hope that covers the question. So we have another question from Mr. Akarsh Tomar. Kindly, unmute yourself and proceed to ask your question.
Hi. Thank you. This is Akarsh from SICO. I had a question on your shutdown. So you deferred the Yanbu shutdown to 2025. Is that still the case? Are you planning to bring it forward or delay it? Just any update on that shutdown, and how long will the shutdown be? Thank you.
The question is around the Yanbu turnaround, which we announced to be pushed towards the middle part of next year.
Do you want to take this one?
Okay, I'll take this one. So the turnaround is still planned for the middle of next year, and we aim to optimize the number of days to make sure we execute a lot of the project scope for growth too, and minimize the overall number of shutdowns we have over this coming period. Now, the shutdown days currently are penciled in at around 45 days. However, the team is working proactively to try and optimize and minimize these number of days for Russia now.
Plus, I think I might add, Akarsh, what a well-crafted question. We do have within Luberef storage, emergency storage in case of the embargo going down, but not for that amount of time. So what we do is if that prolongs, then, yes, we can import these and leverage it with our storage capability within Luberef. And there might be also a project of looking at enhancing that storage capability to give us more longer time, if needed.
So we have a written question from Abdullah Al-Mihiwi: Can you shed some light on the realized premiums between different regions? Generally speaking, Abdullah, we don't give specific disclosures on different regions because we have different agreements with different customers. We have different metrics and within the formula. Generally speaking, we follow the Asian Base Oil Index for export sales, and this is why we publicize it on our website in our Base Oil Index. So this will give you the best idea of how prices are within our region. When we face pricing pressures, we have recently started the Africa strategy, where we started to shift some volume from India, where we saw some price sensitivity to Africa. However, as we enter Africa, we try to be careful because of financial risk.
So the way we penetrated Africa is through two approaches. The first one is we deal with IOCs. So we deal with the majors who have facilities in Africa. And the second approach is that we deal with renowned traders, who we would sell at full export price, and they would sell it in the region at break bulk. This way we get. Since they have a good financial credit rating, we would get our netback in full, and they would make the break bulk premium. Even though within these contracts, if their break bulk premium exceeds a certain range, there is a profit sharing arrangement in there within that agreement. Hope that covers your question. Does anyone else would like to ask a question? Kindly raise your hand. So we have no further questions.
With that, I would like to thank everyone for joining us. We will have this recording available on our website, hopefully by tomorrow at the same time. We'll be looking to meet you all in any of the coming in investor engagement conferences. Thank you.