Good afternoon, everyone. This is Iyad Gholam. On behalf of SNB Capital and Luberef, I would like to welcome you to a conference call with Luberef management regarding 2022 earning results of the company. As usual, please take note of page two of the earnings presentation, which provides important information regarding today's discussions and disclosures, including the use of forward-looking statements. With us on the call today, Mr. Tareq Alnuaim, President and CEO, and Mr. Mohammed Alnafea, CFO. We will first listen to the management feedback. Following this, we will open the floor to questions. Luberef management, please begin with your feedback.
Thank you, Iyad. Good afternoon. It gives me great pleasure to welcome you all to our first earning call. Year 2022 was a great year for Luberef. Our results highlight our uniqueness as an investment opportunity, and they also showcased our continuing efforts to generate additional value for our shareholders. It is a year of achievements. We have leveraged our unique market position as the only provider of Group I, Group II, and Group III base oils in the region. We achieved record sales, both in terms of volume and value, with an overall growth of more than 6% above 2021 levels. Our domestic sales growing at a higher rate of more than 7% above prior year levels. Growth in sales is supported by healthy [GDP] growth in the end markets we target.
We continue to maintain our standard of operational excellence with a top quartile mechanical availability of 99.7%, and maintain an above-industry average utilization of 89%. We continued our ongoing ESG efforts by maintaining our excellent safety record of 0 total recordable incident rate, and further reducing our flaring by 70% when compared to our 2021 performance. We continue to progress our transformation initiatives as we have tested our Yanbu facility to operate at a capacity of 50 MBD of feedstock, up from 45 MBD. Now we are in discussion with Saudi Aramco to increase our feedstock allocation to match our new capacity. Even though we are going through an inflationary environment, we have essentially maintained our cost of production at [SAR 459] per metric ton.
Our uniqueness can be observed in our financials as we have recorded our highest ever net income of almost SAR 2 billion, 32% higher than year 2021, and an EBITDA of SAR 2.5 billion, 20% above 2021 levels. With this strong performance, we were able to reduce our balance sheet gearing to 3%. With our strong performance, we delivered a dividend of around SAR 840 million, 50% above our guidance, supported by a free cash flow of SAR 2 billion, and we maintained a high ROACE of 39%. Now I will turn it over to our CFO, Mohammed, to walk you through our financials.
Thank you, Tareq. Welcome, everyone. I am glad to walk you through our 2022 financials, followed by our guidance for 2023. Then we will conclude our earning call with a Q&A session. 2022 was a great year for Luberef as we leveraged our unique position as a high-margin downstream player and maximized our returns. Luberef benefits from an advantaged value position which results strong financial performance. We take low-value feedstock, an average cost of around SAR 1,800 per metric ton, operate at low costs, and produce high-value base oil at an average realized prices of around SAR 4,300 per metric ton, resulting in crack margin of around SAR 2,500 per metric ton. This is equivalent to more than $88 per barrel. It is worth highlighting that historical base oil crack margin for Luberef has averaged around SAR 1,900 per metric ton in the last 10 years.
In 2022, we generated around SAR 10.6 billion of revenue and record net income of around SAR 2 billion as a result of healthy price environment and incremental volume growth. This translates to earnings of around SAR 11.7 per share. Our free cash flow figures have been improved as a result of higher cash from our operations and low CapEx. We remain focused on our growth story, and we view that as a key lever to create value for our shareholders. Luberef has been successfully able to grow its asset base with the most recent Yanbu expansion project, bringing around 700,000 metric ton for Group II production. On illustrative value add at 2022 average crack margins of approximately SAR 2,500 per metric ton, this 700,000 metric ton from growth project indicatively generate margin of around SAR 1.8 billion for Luberef.
Taken into account an investment cost of SAR 5.6 billion, this translates into attractive ROACE for the company. Also, in 2022, we continue to strengthen our balance sheet and our financial position. Our 2022 strong income growth is attributed to two factors. Higher crack margins, which amount to a gain of around [SAR 450 million], and higher volumes resulting a gain of around [SAR 150 million]. It is worth highlighting that Q4 results were improved by the impact of two factors. The reversal of 2021 and 2022 deferred tax liability of around SAR 200 million, as we have converted to a Zakat-based entity after our listing in the stock exchange. The second factor was receiving feedstock credit note relating to Luberef Jeddah plant. The note has value around SAR 188 million and cover the whole 2022 operation.
It is important to highlight these are not one-time events and are actually part of our normal business, with exception of the 2021 reversal of around SAR 60 million. Moving now to cash flow. We had a strong cash flow from operations, and with our low sustaining CapEx, we were able to generate significant free cash flow, which will support our planned dividend distribution. When it comes to free cash flow, Luberef is a unique company as we are focused in selling high-value product and have low sustaining CapEx. To guide our investors, we run multiple high-level scenarios for Luberef at various crack margins based on SAR 1.3 million metric ton of production capacity. With a crack margin of SAR 1,700-SAR 1,900 per metric ton, we can generate a free cash flow of around SAR 1.4 billion, which is equivalent to SAR 8 of free cash flow per share.
Considering the current crack margin environment, we have the potential to generate SAR 12 per share of free cash flow. Now, I will take you through our 2023 guidance, which summarize our view of operational and financial performance. In terms of base oil volumes, in 2023, we expect high single digit percentage growth versus 2022, mainly driven by transformation activities. Domestic market expect to account for around 30% of total base volume sales. Moving to the base oil prices and crack spread. Product prices are calculated using benchmark prices and adding premium with the key benchmark used for product pricing as follows. Domestic Group I Europe exports, Group II Asia FOB, and Group III, the Asian market. For export, it is based on destination. Domestic price premiums of base oil products expected to be in the range of SAR 375-SAR 750 per metric ton.
Company intends to maximize price premiums for exports. Feedstock prices expected to continue to be in line with the high sulfur fuel oil cost. Moving into CapEx. Our Luberef Jeddah facility has started its turnaround last week, and it is expected to conclude by early March. Turnaround CapEx is estimated to be around SAR 75 million. Expected maintenance CapEx is in the range of SAR 40 million-SAR 55 million annually. Growth CapEx for Yanbu Growth II project is estimated at SAR 750 million, with this spent across 2023-2025. Working capital is expected to remain stable overall and to mainly move in line with the prices and volume. As we are now listed, we have converted to pay Zakat instead of income tax. For the fiscal year of 2023, Luberef intend to declare and pay minimum dividend of SAR 1,125 million. Payments to be made in October 2023 and April 2024.
2022 was a record year for Luberef in many ways. We look forward to the future with the confidence and with a clear objective: to safely deliver high returns to our shareholders. Now I will hand over to Iyad to start off our Q&A session.
Thank you so much, Mohammed. Before we move to the Q&A session, I would like to ask Mr. Tareq regarding today's announcement. Can you please shed some light about the announcement that you made today about project II expansion in Yanbu?
[audio distortion], Iyad. Yes, we made an announcement today for awarding the EPC contract for the Growth II project. The value of the contract is SAR 555 million, and the objective is to expand our refinery in Yanbu to accommodate the production of Group III when the project is completed in year 2025. The total investment, as I said, or as we had communicated in the prospectus, is between $150 million-$200 million. The bids came within that range. Let me give you a little bit of more details about what we are trying to achieve as part of this project. We are expanding the three major units in the refinery: the VDU, the vacuum distillation unit, the hydrocracker, and the ISO-dewaxing unit. With that expansion, we would be able to produce Group III and additional Group II, based on market demand at that time.
The target is to serve high growth domestic, regional, and international demand with the additional Group II and Group III base oils that will be produced. This is an important project as part of the growth strategy we have established in the company. The FID for this project was approved before we went public, and now this is a major milestone to award the contract or the main contract to Petrojet. With that, I will turn it over to you, Iyad.
Thank you so much. Ladies and gentlemen, we will now start the Q&A session. If you wish to ask a question, please raise your hand. Thank you for holding until we have our first question. The first question comes from the line of [Akarsh Kumar]. [Akarsh], please go ahead. You can unmute yourself.
Okay. Hi, can you hear me?
Yes, we can. Please go ahead.
Hi. Congratulations on a good set of results. For me, the first question is, in your prospectus, you said the spreads were $599 for 2021, and for the first half of 2022, they were $494 per ton. But full year came to be around $660. Why the reversal in the second half? Can you please explain and w here were the spreads in the second half of 2022? Thank you.
Thank you. Thank you for your question. We started the year with high oil prices, and as mentioned before, usually base oil prices lag the increase in oil prices. We start the year with a low crack margin ranging from $400-$500. Then we start seeing significant growth in Q2, Q3. We saw $800, $700 in a few months. And then crack started to decline to a level, like for example, in January, the crack margin was around $615. We started low in Q1. This went up Q2 because of the lag between base oil prices. This is the key reason, is this lag in Q1. Your question about the credit that we mentioned in Q4.
Typically, in Luberef Jeddah facility, the agreement with Saudi Aramco is to have the pricing on a monthly basis, but each quarter we look at the average, and they adjust the prices based on the average. It is usually you get credit. Now there are some time differences in the credit, so you may get SAR 2 million or SAR 3 million credit, but if there are strong volatility between months, you get a significant credit. This was mentioned in the presentation as around SAR 190 million of credit that impacted Q4, but it is for the rest of the year. It is a matter of calendarization.
Thanks for that answer. Just a follow-up on that. Can you give an idea where you are exiting the year in terms of spreads?
It was close to SAR 700. In January, the crack is SAR 615. We expect slight reduction in February, but we start seeing increases in the prices this week, especially for two. In the Asian market, China is reopening, so we expect to see a strong and healthy, basically, crack margin for March.
Okay, thanks. That is really helpful.
Thank you so much. Ladies and gentlemen, I would like to remind you, if you have any question, please raise your hand. The next questions that come from the line of [Suhaib]. [Suhaib], please go ahead. You can unmute yourself.
Yeah. Thank you so much for the call. Luberef team, congratulations on the IPO and recent performance. The first question I have is on feedstock. Any potential changes within feedstock prices? We've heard multiple talks over and over.
No. We have agreements with Saudi Aramco and no, there is no intention to review the prices at the current times. The feedstock.
The agreements are five, six, seven years or?
Well, our agreement in Jeddah is going to expire in the year 2026 and the agreement for Yanbu is going to expire 2038. It started 2018 for 20 years, so the agreement will expire year 2038.
Okay, that is great.
This is for the baseline feedstock level, which is 40 MBD in Yanbu and 25 MBD in Jeddah.
Okay.
We might be impacted by sales gas. You know, sales gas is a regulated product and if there is a change, it is going to come from the Ministry of Energy. But our consumption of sales gas is actually minimal. So even with increases in the prices of sales gas, the impact on us is going to be minimal because gas for us is not a feedstock. We use it for energy purposes. Our feedstock is linked to fuel oil or high sulfur fuel oil, as we have stated in our presentation.
Very clear. The CFO presented the breakdown of CapEx. Is it fair to assume that cash from operations minus CapEx for 2023 will give us the residual and that will be fully distributed by dividends?
So, dividend discussion is something that we usually have after the end of each period. After H1, we will have our meeting with the board to discuss the financial result and look at multiple things. We communicated the framework. Framework is target certain level of gearing 25%-35%. We are way below that. We also outline our CapEx profile so it is not that significant. So most of the excess cash will go to dividend distribution, and we communicated this during the roadshow and we deliver. For H2 2022, we went to the board, present multiple scenarios, look at the growth opportunity, evaluate the situation. The answer to your question will happen really after our receipt of-
Is the first half.
Yeah. How we perform. But the company is really intent to share upside with the shareholder and this is very clear in what we deliver. In fact, we deliver 50% higher than the guidance was communicated for H2.
Are you part of any Shareek potential programs endeavors or not really?
No, we are not.
Okay, good. Thank you.
Thank you, Suhaib. The next question comes from the line of Sarita Daultani . Sarita is from Emirates NBD. Sarita, your line is now open. Please go ahead. You can unmute yourself. Sarita? I think we have a problem with Sarita's line. Okay, until Sarita fixes her line, I have a question regarding the expansion and the feedstock allocated to that. The feedstock from Luberef Jeddah will be allocated to the expansion, to Growth II Expansion project. Is there any discussion with Aramco to keep the allocation of Luberef Jeddah as is so you have a pure expansion in Yanbu or would you still have a plan to close down Luberef Jeddah completely?
To be absolutely on the conservative side, we have communicated that plan to shut down Jeddah, but this is not certain.
There is this possibility of getting feedstock to the expansion in 2025 while keeping Jeddah operational. The discussion is happening on continuous basis, but there is no commitment from Aramco for the additional feedstock. So there is this possibility for Jeddah to continue, but, as we speak, there is nothing firm on that regard. It all depends on the availability of suitable feedstock from Aramco's side.
Okay. Thank you so much. The next question come from the line of Mohammed Alaswad from Jadwa. Mohammed, please go ahead.
[Non-English content]. Thank you, Iyad, for having us on the call, and congratulations, Luberef, for the great set of results. My question is related to the guidance of high single digit percentage growth in volumes for next year, and that happening despite the turnaround maintenance which Jeddah started already. Could you shed some light on that front?
We are, as we mentioned, Mohammed, in the discussion that we tested Yanbu to process 15 MBD. An additional 5 MBD basically will give you approximately 100,000 metric ton of additional base oil production. What we are trying to do, we are trying to negotiate with Aramco and discuss and try to allocate additional 5 MBD, and that will help us to meet our target of 7% or more, 8% growth.
That is very clear. One last question. Could we know what was the domestic realized premium during 2022? With the recent reopening of China, is it having some sort of a positive impact on Luberef domestic volumes?
Well, we do not usually disclose specifically the premium in the domestic market for marketing-related reason, but it is above the minimum range that is communicated in the guidance.
Well, thank you very much. That is very helpful.
Thank you.
Thank you, Mohammed. Ladies and gentlemen, a reminder, if you have any further questions, please raise your hand. The next question comes from the line of [Sherif Farid]. [Sherif], please go ahead.
Thank you, Iyad, for the call and thank you for the management team. Just a question on taxes. Looking at the difference between full-year operating profit and net income, seems like the gap is only SAR 200 million. Just wondering if there were any tax benefits in Q4 because this narrow gap is much smaller than what we've seen in the third quarter. Were there any reversals in taxes in Q4?
Yes, you are right. There are deferred tax liability that we booked during the year for especially Q1, Q2, Q3. In Q4 after listing, we convert to the Zakat entity because we used to pay tax for Aramco 70% ownership, and now we will be subject to the Zakat, going forward after listing. That really, the reversal has had in Q4. That is why you see higher net income in Q4 specifically.
Perfect. Can you quantify what was the benefit, the size of it?
SAR 136 million in Q4 for 2022.
Right.
SAR 60 million related to deferred tax liability for 2021.
Going forward, you will be subject to normal Zakat rules, just like any other company in terms of the calculations. Is this correct?
Absolutely.
Correct. Yes.
Perfect.
This year, we will not book basically deferred tax liability like what we were doing in 2020 and will reverse. On top of that, we will be also saving SAR 25 million- SAR 30 million or so depending on net income tax related.
Perfect. Just a long-term question in terms of the margin and the spread. You mentioned that historically, the average spread you would realize is close to SAR 1,800. We are currently obviously operating on a much higher spread. How long do you think it would take for the company for margins to revert to this historic average? If at all, d o you think post-COVID and the supply shortages we are seeing across some parts of the lube space, we are not going to that SAR 1,800 or we will eventually revert back to that average?
We actually look at, I think 2023 is going to be another strong year. If we look at the forecast published by IHS [Markit], they are forecasting really strong year for 2023 and 2024 as well. We expect, at least in the short term, the coming two years, we will have a very strong crack margin environment. One thing that I would like to put emphasis on, for a good reason, we highlight the forecasted free cash flow for Luberef. It shows clearly even at historical crack margin, we can deliver almost SAR 8 of free cash flow or more without growth, without upgrading the margin, because we will be producing Group III from Yanbu facility if we see demand for it. That will help also margin to be upgraded.
We are doing a lot of initiatives to upgrade our product mix, sell basically wax, extract, and try to maximize premium, go to higher market with netback. I think all of those initiatives together, plus what we will see in the coming two years with strong environment, will allow us to deliver strong result. Hopefully we can deliver strong dividends in the coming two years.
Perfect. Thank you very much.
Thank you so much. The next question comes from the line of [Sefikan Şelikkoru] from Morgan Stanley. Please go ahead.
Hi. Sorry. I had a couple of questions. Thanks for taking mine as well. I was just wondering if you could expand on the pricing seen for different groups of base oil, either over the second half or [3Q], and also the current levels. I just wanted to understand particularly the pricing dynamics you're seeing for Group I bright stock, which has been quite strong in the first half. I was just wondering how that has been progressing and where we are currently. The other one I wanted to check from a financial perspective, what level of gearing are you comfortable with? Arguably, it has come down quite a lot, so I was just wondering, do you see that increasing or decreasing over into 2023 as you embark on the CapEx program? Also, what level are you still comfortable with in order to affect your dividend decisions? Thanks.
For bright stock Group I, prices started to decline in Q4. We saw a strong decline in Q4. But still, it is very strong and healthy level. I think what happened in the European market is just basically significant increase in the prices in Q2 and Q3 because of what happening between Russia and Ukraine. Then we saw a significant reduction in the prices in Q4, but it is still healthy level above historical number. Which come to Group II, we price our product based on the Asian market, and it was really stable and no significant increase last year. We started to see some increases, especially this week and the last week, driven by China is reopening. This is general about the prices. Now it is come to gearing. I think our target level, as mentioned, 25%-35% through the cycle.
We always target to have a level of debt around $ 800 million based on the current balance sheet. We are below the target level if you look at from net debt point of view. But we are looking at the Yanbu Growth II funding. This is one. It is not significant, but we are looking at other opportunities, and we will put together a funding strategy for those things, and we will communicate to the market in the due course.
Thank you.
Thank you so much. Ladies and gentlemen, if you have any further questions, please raise your hand. I have two questions that was sent to me from Abdulaziz Almansour from AlJazira Capital is asking, t he first question is, can you elaborate on the transformation initiatives that should drive high single digit growth in volumes? Does it include additional allocation of feedstock?
What-
Yeah. Okay, go ahead. And the second question is, in 2022, volume increased by 6%, yet the average cost of production only declined by $ 1 per ton. Should we expect cost of production, excluding feedstock, to be at this level even with 78% increase in production?
Okay. Let me try to answer the first question on the transformation initiatives. The whole objective of what we are trying to do is to enhance the profitability of the company. There are many initiatives, many ideas we are pursuing to achieve higher level of profitability. One of the main initiatives, as we have highlighted, is trying to produce more. This is why we successfully tested our Yanbu refinery at a higher rate of feedstock throughput of 50 MBD, but our allocation today is 45 MBD. So we have requested Saudi Aramco to give us or to allocate 5 additional MBD for us. When that happens, we will be able to produce more and sell more in year 2023 in comparison to the previous years. This is not the only initiative we are working on.
Again, there are other initiatives that collectively try to achieve higher profitability in the company. There are streams we want to upgrade without spending a lot of capital. This is one important point about our efforts to improve our performance as a company. So this is on the transformation. The second question is around-
Unit cost
unit cost. I leave you, Mohammed.
Regarding unit cost, I think what's been accomplished really is really great last year. We saw inflation as really significant. Freight cost was really also another significant element. With that being said, we managed to maintain healthy level of OpEx. I know the reduction is not equivalent to increase in production, but maintaining this level in the current environment is really a great success. Also, I want to point out that we are actually in very good position when it comes to cost structure. We are at the top quartile. In fact, if you look at benchmark, we are 60% lower than the average peer group. So we have a really strong cost structure. If you really have strong cost discipline, it's not easy really to move things down significantly.
I want to say also one thing, that we are doing a lot of initiative to reduce costs. Recently we tapped to third party or independent power provider in Jeddah. This, for example, will reduce our cost of utility by almost half. So this is just example of the initiative that we are trying to do. We're pushing very hard to reduce OpEx, to either reduce the absolute number or reduce unit cost by producing more from the existing assets.
Thank you so much. The next question is from Sarita Daultani from Emirates NBD. Please go ahead.
Thank you, Iyad. I hope you can hear me well this time.
Yes, we can.
Congratulations to the team for such an excellent set of results. I have two queries. First, if you would like to comment on any potential changes in sales mix that we should expect 2023 amid China reopening, and what impact it can have on the price margins this year. Second would be related to the premium that Luberef commands. I assume it is something close to $200 million premium that the company commands in terms of selling price. Is this sustainable? Thank you.
We think the premium that we communicated is sustainable because we have been extracting this premium in the last years with our customer. It is a secured premium because we are pricing our product compared to imported product to the Saudi market. I think SAR 100 million-SAR 200 million is a safe assumption for premium, especially in the local market. When you go outside your local market, your premium is impacted, and this goes down to the benchmark. I did not get your first question. I am not sure. You were asking about selling it to China?
No, I was trying to understand if China reopening would have some impact on the sales mix in this particular year.
I do not think it will have a significant impact to sales mix. What is happening in the past, because of the lockdown in China, there are a lot of ships come from China to our region. It is impacting the supply in our region. We always target local market, then GCC, then we go to India and Africa. It is a regional market. We are regional market focused. What was happening in the past, China is shipping access base oil to our region, and it is impacting the price in the region. We think reopening will reduce the supply from China and will help to improve the prices in our region.
Thank you so much.
Thank you so much. The next question is from the line of Ildar Khaziev from HSBC. Please go ahead.
Yes. Thank you very much. I have a few questions, please. First, on the base oil sales volumes in the Q4 of the last year. Could you please disclose that volume? Then if we look at 2023, should we expect flat volumes from quarter- to-q uarter, or there should be some seasonality, maybe? That would be very helpful. Secondly, if you could please disclose the by-products contribution to EBITDA in Q3 and Q4, that would be great too. Lastly, I think if I am not mistaken, the freight cost seems to be coming down now as we speak. Would you expect lower freight expenses in 2023 if we take basically the current spot quotations? Thank you.
Regarding, first of all, the sales. Our sales of base oil in the Q4 was around 287,000 metric tons. It is lower than Q2 and Q3. It is driven mostly by two weeks of shutdown for Yanbu facility because we had to shut down Yanbu facility to upgrade to 50 MBD. This is update regarding sales in the Q4. Now, seasonality is there, especially Q1 and Q4 is usually lower sales than Q2 and Q3. There are some few exceptions, but generally, this is the trend. Q2 and Q3 usually stronger than Q4 and Q1 term of sales. Regarding by-products, now the margin is, when you look at overall impact of additional margin impacts for the full year, we highlighted it is around SAR 450 million. It is come to net income if you compare year-over-year.
The impact of, I would say, other by-products is really limited. It is less than 25% has come to the margin. Because overall, when you look at volume that we produce, only a small amount goes to by-products with a specific application. You look at diesel, naphtha, it is a small volume compared to the base oil that we sell compared to other by-products.
Can I follow up on this, please? When you talk about crack spread, do you mean that you include the byproduct contribution in that number for the full year or it is separate from the byproducts?
The number that we showed to you in the presentation was base oil crack for the base oil.
Okay.
Because if you remember during the workshop, the previous discussion, we highlighted that byproducts does not really contribute a lot to the business. If you want to model the business, you look at base oil because it is the area that we generate significant value. Even the free cash flow chart that we showed business capacity, it was only for base oil, assuming no change in byproducts.
That is very clear. Thank you. On freight cost was my last question. Would you expect the freight cost to go down this year?
We start seeing the freight cost, it's going down as we speak. We always pass the cost of the freight cost to the customer. So we think it's really gone down, and it's going to go down further maybe in the short term.
Thank you very much. Thank you.
Thank you so much. That was our last question. I will hand over now to Tareq Alnuaim for the final remarks.
Okay. I would like to thank all of the analysts for joining us in our call. If you have any follow-up questions, you can reach out to us through our IR portal or meet with us in our future engagements, which we're announcing in our financial calendar on the website. With that, I'd also like to thank you for hosting our call, and I hand over back to you.
Thank you so much, SNB Capital. We would like to thank Luberef management for taking the time to conduct this call. We would like also to thank all participants for attending. We wish you a pleasant day. Thank you.