Hello everyone. I am Ahmed Aljiffry, Luberef Investor Relations Manager, and today I would like to welcome you all to our audio webcast. We'll be discussing our first quarterly results. It gives me great pleasure to be joined by our CFO, Mr. Mohammed Al-Nafea. Our webcast will consist of a presentation highlighting our Q1 2024 performance, followed by a Q&A session. I would like to remind you that this webcast is being recorded. Before we dive into the presentation, I would like to draw your attention to our cautionary statement. During today's presentation, we may make forward-looking statements and refer to estimates and plans and expectations. Actual results and outcomes may differ materially due to factors stated in this slide. Now, with that out of the way, I would like to hand over the call to Mohammed.
Thank you, Ahmed. Ladies and gentlemen, thank you for joining us today at our first quarterly earnings call for 2024. We are happy to switch to quarterly earnings call format. To enhance our investor engagement, this will allow us to provide more frequent updates on our performance to our investors. Moving on to the subject of our call today. In the first quarter, we have laid a strong foundation for a strong 2024 and the year to follow. Our commitment to the safety and reliability of our operation has been solid, evidenced by our industry-leading total recordable incident rate and top-quartile mechanical availability. We have successfully completed the hydrocracker catalyst replacement safely and within the allocated time. This will ensure that our Group II facility in Yanbu will meet the growing demand of our customers for high-quality Group II base oils.
We also made significant progress laying the groundwork for successful 2024 and beyond. A key achievement is the signing of the Heavy VGO Agreement with SAMREF, which expands our Group II base oil portfolio with a premium heavy grade. These grades typically command $50 per metric ton premium over the lighter Group II grades. Work in the Heavy VGO line is progressing well, and commissioning is expected in July. Upon the successful completion of this initiative, our product mix will be enhanced, and our utilization rate will see an increase from around 92% to around 95%. Moving to the Growth II project, the detailed engineering is nearing completion, and fieldwork has started. We remain on track to deliver the project by the second half of 2025.
This project will give our facility in Yanbu the flexibility in producing Group II and Group III base oils, which will allow us to adjust our offering slate based on the best available netback in the market. We are also preparing to launch our Group III product approval program. By producing the required samples in our Yanbu facility, this will ensure we can extract full value for the high-quality products we are planning to produce when the Growth II project is commissioned. Moving beyond the Growth II project, as the adoption of high-quality Group III base oils accelerates, it is critical that we adapt to market trends and ensure we are prepared to meet customer needs. As such, we have initiated a study to identify the optimum location for production of Group III and Group III+ base oils, utilizing the advantaged feedstock available within Saudi Aramco.
It should be noted that this project CAPEX is relatively modest, ranging between $300 million-$400 million . This investment will significantly improve our product portfolio by adding high volume from 500,000-700,000 metric tons and high-margin Group III and Group III+ products. Furthermore, we have made progress in the development of the LubeHUB. We have signed an MOU to appoint Jabeen as a bulk manager. Jabeen is an arm under the Royal Commission and will work with the National Industrial Development Center to identify and support potential investors in the process of establishing their facility in the LubeHUB. The LubeHUB will play a major role in growing local demand for base oils, as it will focus on targeting base oil-related products, which are currently not being produced in the Kingdom.
Looking at base oil crack margin, in Q1, our normalized crack margin came at around SAR 1,800 per metric ton, which is within a few percentage points of the historical average. The impact of imported feedstock on the reported crack margin was approximately SAR 185 per metric ton, resulting in a reported figure of SAR 1,630 per metric ton. Looking at our Q1 numbers, sales volumes are similar to last year's first quarter at 270,000 metric ton. Crack margins for the quarter were lower as spreads have normalized from the comparative period. Revenues for the quarter are higher on a comparative basis, mainly due to higher by-product prices. As a result of lower crack margin, EBITDA and net income dropped by 42% and 46% respectively. Our ROACE at 29% remained industry-leading despite being lower than last year. Operating cash flow has been impacted by timing elements we will detail later.
Sustaining CapEx higher than the comparative period, primarily due to spending related to the new catalyst and ongoing transformation-related CapEx. While both the timing of certain operating cash flow items and higher CapEx have negatively impacted our free cash flow and cash convergence rate in the short term, this impact is expected to be temporary. Before we move to the next slide, I would like to highlight we maintain a robust balance sheet with a gearing ratio of -3%. Looking at the quarter-on-quarter comparison, we can observe the impact of lower crack margins for base oils on the net income. Higher volumes from by-product sales have positively impacted the overall net income. To mitigate the impact of lower crack margins, we are focusing on increasing volumes of the right product, utilizing our advantaged position in terms of cost production and unique feedstock available to us.
Had we maintained our volumes similar to the same level as the previous quarter, our net income would have been higher by around SAR 90 million. This will be our plan in Q2 to operate our assets safely and reliably at their designed capacities, utilizing our allocated feedstocks. Walking through the rest of the elements of the waterfall chart, our OPEX was slightly higher due to timing shifts and expenses. Zakat was lower, mainly due to lower net income. Moving to cash flow analysis, two factors impacted our operating cash flows: a slight delay on receivable payment and buildup in our feedstock and semi-finished products as a result of the hydrocracker shutdown. The receivable has been settled, and the buildup inventory will soon be converted into base oils. This will boost our second quarter cash flows.
Additionally, we have completed loan repayment, which will result in lower zakat expense for the rest of the year. In conclusion, we have laid a strong foundation for the successful 2024 and beyond. Our focus on safety and reliability and strategic initiatives like the HVGO Agreement and the Growth Project are set to drive substantial value creation and growth for our company. We are well-positioned to deliver increased volumes in the coming quarters, and we are determined to keep enhancing our performance. Now, I will hand over to Ahmed to start off our Q&A session.
Thank you, Mohammed Al-Nafea. And now we're going to proceed to the Q&A session. If you'd like to ask a question, please raise your hand. Mr. Mohammed Al-Thunayyan, you can proceed to ask your question kindly and mute yourself.
[Foreign language]. Thank you, Luberef management, for having us on the call and the impressive presentation, as always. I have a couple of questions. The first one is related to the frequency of Yanbu refinery shutdowns and the frequency also of changing and replacing the hydrocracker for Luberef. Maybe if you can shed some light on the upcoming expected shutdowns, if any.
Okay, so it's a three-part question. The first is regarding the frequency of Saudi Aramco Yanbu, our supplier's shutdown durations. The second question is regarding the catalyst lifecycle and what's the turnaround time, and then what's our upcoming scheduled shutdown.
Thank you, Mohammed. Typically, refineries do their shutdowns, total shutdown, each five years. This is when it comes to supply side. Catalyst replacement, there are multiple catalysts in the plant, so we have in the Isodewaxing units, usually we do it each five years. For the hydrocracker, which is the one that was replaced and caused the shutdown, it's happening each two to three years. You do one of the turnaround cycle, you do the second one with the turnaround cycle. For the last part of your question related to the next shutdown, it should be next year in 2025. We will, as always, communicate in the guidance our planned shutdown timing duration. We would like also to align the shutdown next year with the project tie-in timeline for the Growth II project.
Now, for Jeddah, we had our turnaround last year in the first quarter.
Thank you, Mohammed. And now we'll move on to Mr. Ilter. Ilter, kindly unmute yourself and ask your question.
Hello, thank you. Just a quick question about domestic sales. What was the trend in the first quarter? I mean, what was the increase or decline year-on-year? And maybe you could remind us why the domestic sales volume actually declined in 2023. Thank you.
The question is the trend for the first quarter, and then what was the trend towards the year-end or all of last year? I guess all of last year is what we'll go for.
For the first quarter, I would say it's similar to last year. Now, when it comes to second quarter, usually second quarter is there is more demand for finished lubricant in general, because driving season, other factors that imply the overall demand. So we'll see if the demand improves in general, but what we saw in the first quarter aligns with last year. Now, your question regarding last year, so I think there were a lot of supply issues in 2022. And that really, I mean, base oil supply issues, because of the high refining margins. So a lot of, I think, a lot of finished lubricant buyers, they go and move and buy and build their inventory, and that's, I think, inflates the 2022 demand significantly, because we have seen a 7% increase. Typically, you don't see such a percentage in the finished lubricant.
So I think 2022 demand was artificially high, and that's why you see adjustment. People start withdrawing from inventory in 2023, and we see the same trend is continuing in 2024. Now, we are very active and trying our best to improve the local demand through multiple initiatives, some of it domestic for export initiative that we're encouraging. Blenders to basically blend in the Kingdom and export, and we were doing this part of our domestic for export initiative. In addition to that, we have the LubeHUB. The LubeHUB is also progressing well. You saw in the highlight that we had Jabeen assigned as a bulk manager, and hopefully it will not only improve the local demand, but also will improve the mixed quality with more industrial, more production in the Kingdom. And we're also looking at the opportunity to integrate with Aramco finished lubricant business, Valvoline.
That's hopefully, if they go ahead and establish a blending facility in the Kingdom, it should be used to blend and export in the region, and that will also improve the local demand.
Thank you, Mohammed. Now we'll move on to the next question. Mr. Amir, kindly unmute yourself and ask your question.
Hello, thank you so much for taking my question. I have one question related to the future expansions. I believe you mentioned in the call that you're, if I'm not mistaken, that you're currently studying a future expansion. Could you please reconfirm the topics and the size of this project, as well as the timeline?
Yeah, sure. Yeah, if you can maybe start with a quick intro as to the size. So I guess the question is clear for me, you don't have to repeat it. So it's about our future growth expansion beyond Growth II. So we start doing the optionality study now. Typically, we look at available feedstock and potential demand. Today, if you look at prices for Group III and for future outlook, and even supply-demand balances for Group III and Group III+ you see massive opportunity. Now, not all of the base oil producers, they have the access to the quality feedstock that we have, and also not only the access, but also the scale of those potential increments. That's why we're looking at opportunities inside the Saudi Aramco system. We look at multiple locations.
What will happen typically when you plan to produce Group III and Group III+, you look at installation of isodewaxing units. Isodewaxing units, it's dependent. Now, we are in the early stages, it's hard to tell an estimate, but it's typically light CapEx. So we're talking about $300 million-$400 million, plus or minus, and then you will be able to produce high-quality base oil, Group III, Group III+. When we talk about 500,000-700,000 metric tons, but potentially goes to 900,000 metric tons if you utilize the maximum feed available. This is the element of CapEx and what the thinking. Now, timeline, you know in the Growth II, we had accelerated engineering work, so we managed to get the FID quickly. In this case, maybe we're looking at some work in the optionality study.
You have to look at allocation from source of supply and in case Saudi Aramco, and we need to work on depending on what type of engineering is required. So maybe next year, FID, if this project will go on, commissioning, startup, if we start, yeah, maybe 2027-2028 timeframe. That is the overall picture.
Okay, thank you, Mohammed. Now we'll move on to the next question to Mr. Ricardo. Ricardo, kindly unmute yourself and ask your question.
Hello, thanks for taking my question. I guess two follow-ups on the discussion of this potential Group III and Group III+ project. The first is, what sort of returns do you see in this project? And then the second one is, how do you see the overall supply outlook for Group III and Group III+ projects in the coming years? Thank you.
Okay, so question regarding the project returns based on our current assessment and supply-demand dynamics around Group III in terms of outlook.
So let me start with the supply and demand picture. I think if you look at the market today, there is significant demand in Group II and III, and you see this shift is happening also down the road. If you look at the coming 10 years, there will be around 4-5 million metric tons of Group II and III needed. Now, there are some announced capacities, like Shell recently announced 300,000 metric tons in Europe. But we don't think it's enough. If you look at the requirement, it is much significant than so supply-demand, I think there is demand for such quantity. Now, we've been through actually a very interesting exercise when we have done Group II, where we market more than 700,000 metric tons. So we have the expertise, we can go ahead and market those products with the relationship with the customer and formulation.
So I think demand is there. I think prices we see today are healthy, but also if you look at the last 10 years, it's healthy. If you look at forecasts by IHS, Argus, and other consultant houses, it's healthy. Now, when it comes to return, we don't really disclose returns for our project, but you can easily look at it. It's a very lucrative project. It's not only because of return. Return is one element. If you look at CapEx portfolio, you look at how many metric tons that we are producing, and if you assume that the whole project is funded from our cash, we're talking about more than, I think, 40% IRR. So even if you take conservative price assumptions, it's a very lucrative project. But what we like about this project, it's in the core business. This is one.
It's moving with the market trend and upgrading the quality. And you are now in the synthetic more specialty, you have better pricing power in that. It's inside the Aramco system, so the complexity of execution is not there, which is, I think, a very good, important advantage. We have built a similar unit, actually, in Group I, so we know the technology, we have the know-how, which is the Isodewaxing unit. And also, as I mentioned, the market trend is there, and we have the capability to execute such a big project with a good marketing plan.
Thank you, Mohammed. Now we'll move back to Ilter again for a second question. Go ahead, Ilter. I guess Ilter has put his hand down, so we'll move on to Mr. Saud Al-Dahiyan. Saud, you can unmute yourself and ask your question.
Hello.
We can hear you.
Yes, this is Saud Al-Dahiyan from GIB Capital . Thank you, Luberef's management, for the informative presentation, especially on the normalized crack margin. I just have one question regarding the LubeHUB on the local demand that is expecting to come in the upcoming future. So what kind of products are you targeting? So which group is it?
So you're looking at the LubeHUB in terms of volume of demand and type of grades of base oil to be sold within the LubeHUB.
Yeah.
Shukran, Saud, for your question. Now, we're targeting industrial applications. So, for example, certain products like 70N will be used in an industry like white oil, transformer oil. We also look at some specialty products like wax and other to be used. Also, we're considering a blending facility for finished lubricants, so multiple applications, really, from automotive to industrial. We're thinking even if recycled oil is one option that we're looking at. So we have an initial study. We have multiple applications. I think we shared it in one of the engagements with Investor, I think, in the early look, sorry, in the roadshow presentation, I would say. But we keep refreshing those applications based on demand, based on investor appetite. And if you talk about size, yeah, we were talking, so for your consideration, we'll provide you each year the guidance when it comes to the percentage.
But the aspiration is to basically reach maybe 200,000 metric tons in that bulk. So we're talking about 370,000-400,000 local demand, additional 200,000 of potential demand in the LubeHUB. But this is, again, an aspirational target, what you should consider, what we communicate in the guidance.
Thank you, Mohamed. Now we'll go back to Ilter. Kindly unmute yourself and ask your question.
Yes, thank you. Sorry, I accidentally pushed the wrong button previously. Yes, so Mohammed, I have a follow-up question about the new growth projects, but potential ones. You mentioned when answering one of the questions saying that you are looking at multiple locations within the Aramco system. What do you mean exactly by that? I mean, are you looking to potentially invest at locations which are different from Yanbu, or it's something else? Thank you.
So the question is regarding the potential future growth and the scope of the location, and what do we mean by it in terms of placement? So for us, it's like any projects. We look at optionalities, and this optionality, we look at available feedstock in the system, quality. So we don't want to only produce Group III. We want to produce Group III+. We look at scales, so we don't want to install the units basically where you have a small quantity. And the uncommitted oil is available on multiple sites inside the Saudi Aramco system. So we're evaluating what is the best, where is the best feedstock for our project? This is step one.
Step two, should we install this unit close to that project, or install it in Yanbu and basically ship the feedstock to Yanbu site? So it's freight plus logistics plus CapEx required plus feedstock quality. This is the evaluation that we are going through now.
Thank you, Mohammed. So I have no hands up. Please, if you have a question, please raise your hand. Okay, Mr. Amir, you can unmute yourself and ask your question.
Well, thank you. Just one follow-up on the LubeHUB project. Can you provide more details regarding the location of the project, the CAPEX that you might need, or the financing for this project? How would it look like?
Okay, so the question is regarding the LubeHUB, where is it located? And how do we plan to structure the CapEx and financing for the project itself? Excellent question. Thank you for that. So the LubeHUB is actually next to our facility in Yanbu. So it's around 1 million square meters of land, part of the Royal Commission. It's in the light industrial part. And basically, the structure today is we are trying to encourage investors to go and blend or produce those products in the LubeHUB, but we are open. If we see, for example, a project with a good IRR that meets our requirements and it makes sense for us from a strategic point of view, we are willing to inject equity in those investments. But the overall, it's not significant. A blending facility costs $20 million, $30 million.
If you're going to inject, for example, equity is maybe $5 million-$6 million. So in a nutshell, it's not going to be CapEx-intensive things. Potential return is also aligned with the investment. But what is important for us is to secure a market next door in the Kingdom with a good premium. This is the main objective.
Thank you, Mohammed. So if anyone has any questions, please raise your hand. As we have no questions, we will proceed to close the call. If you have any further follow-ups, you can reach us through our IR platform communication channels. And also, if you would like to request one-on-one engagements, we can do those remotely, or you can meet us in any of the coming investor conferences. We plan to be in the coming Tadawul Conference in Hong Kong. And with that, I will end the call and thank you all for joining us today. Goodbye.