U.S. Markets closed

Edited Transcript of ADNOCDIST.AD earnings conference call or presentation 12-Feb-20 1:00pm GMT

Q4 2019 Abu Dhabi National Oil Company for Distribution PJSC Earnings Call

Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Abu Dhabi National Oil Company for Distribution PJSC earnings conference call or presentation Wednesday, February 12, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ahmed Al Shamsi

Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO

* Athmane Benzerroug

Abu Dhabi National Oil Company for Distribution PJSC - Chief IR Officer

* Mohamed Al Hashemi

Abu Dhabi National Oil Company for Distribution PJSC - COO

* Mohamed Al Hashimi

* Petri Pentti

Abu Dhabi National Oil Company for Distribution PJSC - CFO

================================================================================

Conference Call Participants

================================================================================

* Faisal Al Azmeh

Goldman Sachs Group Inc., Research Division - Research Analyst

* Ildar Khaziev

HSBC, Research Division - Analyst

* Taher Safieddine

Citigroup Inc, Research Division - VP

* Wael Atta

* Nada Amin

EFG Hermes Holding S.A.E., Research Division - VP of Consumer and Retail

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the ADNOC Distribution Q4 and Full Year 2019 Analyst and Investor Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nada Amin. Please go ahead.

--------------------------------------------------------------------------------

Nada Amin, EFG Hermes Holding S.A.E., Research Division - VP of Consumer and Retail [2]

--------------------------------------------------------------------------------

Thank you, Lisa. Hello, everyone. My name is Nada Amin, I'm part of EFG's consumer and healthcare team. It's our pleasure today to be hosting ADNOC's conference call. On line from the company's management, we have Mr. Ahmed Al Shamsi, CEO; Mr. Mohamed Al Hashemi, COO; Mr. Petri Pentti, CFO; and Mr. Athmane Benzerroug, Company's Chief Investor Relations Officer. Please go ahead, gentlemen.

--------------------------------------------------------------------------------

Athmane Benzerroug, Abu Dhabi National Oil Company for Distribution PJSC - Chief IR Officer [3]

--------------------------------------------------------------------------------

Hi, everyone. Good afternoon, and good morning, and welcome to the ADNOC Distribution conference call for the fourth quarter and full year 2019 results. This is Athmane Benzerroug, I'm the Chief Investor Relation Officer. I'm pleased to welcome the team for this call. The purpose of this call is to take you through our full year 2019 results and Q4 2019. We will start with a brief overview of our results, strategy and our outlook for 2020. We will then discuss in detail our strategy update and the financial performance for the fourth quarter and the full year 2019. And finally, move to the outlook for 2020. We will then answer questions you would have. So before handing over the call to Ahmed, please allow me to reiterate our cautionary statement regarding forward-looking statements. This presentation includes forward-looking statements relating to our business. Important factors that could cause actual results to differ materially from our expectations are detailed in the international offering memorandum relating to our IPO and in our other investor communications, all of which are available on our website. So I direct everyone to our website to read the full text of this disclaimer and these other matter. I will now hand over to Ahmed, who will start by presenting the key highlights for the full year and Q4.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [4]

--------------------------------------------------------------------------------

Thank you, Athmane. And good afternoon, and good morning, everyone. Thank you for joining us today. I'm pleased to be hosting my first call with you. I humbly recognize the responsibilities placed and need to drive the business to new heights. Somebody coming from -- somebody coming in from outside ADNOC Distribution, I hope to bring fresh perspective how to create further value. Placing our customers and our employees at the heart of everything we do.

In short, my 2 key objectives are driving further growth and delivering solid shareholder returns. For those who don't know my background, my expertise is in asset optimization and marketing products on an international scale in the downstream industry. I was also very much involved in a number of large-scale and successful transformation initiatives within Borouge, my former company. I'm looking forward to interacting with you in the coming months. Today I want to run you through a solid full year performance and further progress on our growth strategy. I would like to reiterate that safety remains a core value to our business. We continue to enhance and invest in safety solutions evidenced by extremely low lost time injury frequency and total reportable injury during 2019. I will provide key highlights of our fourth quarter and full year 2019 performance. We saw a solid operational performance in both fuel and nonfuel businesses. Our net profit increased by 11.3% to USD 135 million in Q4 2019 for the first times since the IPO. In Q3 2019, we witnessed growth in retail fuel volumes, which represents around 70% of our total volumes. We saw this continue in the fourth quarter of 2019, representing a 1.2% year-on-year growth. For full year 2019, net profit increased by 4.2% and to USD 604 million compared to 2018.

We continue to adapt to our customers' needs, offering them innovative solutions, a seamless digital experience and smart payment solutions. Our recent offering of free assisted fueling recently unveiled innovative next-generation fuel as well as retail stations ADNOC on the go, new loyalty program ADNOC Rewards, and our next-generation ADNOC Oasis convenience store, reflect our true commitment towards our customers. These initiatives would also position us to effectively tackle competition with superior customer offering, faster, more efficient deployment to our fuel stations while optimizing Capex.

Finally, the company generated strong free cash flows of USD 635 million in 2019, increasing by 16.4% compared to 2018, which supports our progressive dividend policy. Our board recommended yesterday a cash dividend of USD 325 million or 9.55 fils per share, for the second half of 2019, taking full year 2019 dividend to USD 650 million a 62% increase over the previous year, demonstrating confidence in our ability to generate cash and our strong financial position.

Finally, for 2020, our priorities are creating superior customer experience and delivering on our accelerated expansion plan to drive profitable earnings growth and returns to our shareholders.

I will now let Mohamed give you an update and more color on our strategy.

--------------------------------------------------------------------------------

Mohamed Al Hashemi, Abu Dhabi National Oil Company for Distribution PJSC - COO [5]

--------------------------------------------------------------------------------

Thank you, Ahmed. Two things I want to point out that we are focused on now. One, delivering on our ambitious strategy and two, building long-term shareholder value through our next phase of growth. So first off, I'm going to start off by giving you an update on the first strategic pillar of our business, which is the fuel segment. Total fuel volumes have increased by 2% in the fourth quarter of 2019 compared to fourth quarter of 2018. Now, this was driven by an improvement in our core Abu Dhabi market as well as market share gains in the Northern Emirates following the implementation of free assisted fueling for all our customers. We also saw an increase due to the contribution from new stations in Dubai as well as new marketing campaigns and growth in our corporate business. So throughout 2019, we introduced a series of customer-focused initiatives. All of these initiatives were introduced to enhance the overall customer experience and offer superior customer services.

So 3 marketing campaigns were launched in the summer. One was Good Morning UAE, the second one was Fuel Up & Fly Off, and the third one was Hello Summer. The intention here was to drive higher traffic to the ADNOC Distribution service stations. Now, these marketing campaigns were a huge success. They generated growth as far as retail fuel volumes. But also, they allowed us to gain really good insight into our customers' needs. So based on the feedback from this extensive customer engagement program, and from our customer behavior following the 3 marketing campaigns, we began offering free assisted fueling to all our customers from the 3rd of November 2019. This has been very, very well received by our customers. It's driven growth in retail fuel volumes, which have grown by 1.2% year-on-year in Q4 2019. Now, this was in line with our guidance to the market. Q4 2019 retail fuel volumes growth reflect positive impact of free assisted fueling for 2 months. Now we expect the full benefit of volume growth to be visible starting in Q1 2020. Coming back to our network expansion, our UAE network has now reached 382 retail fuel stations as of December 31, 2019.

In 2019, we've opened 6 new stations in UAE, of which 3 were in Dubai, bringing the total number of fuel stations we operate in Dubai to 6 as of December 31, 2019.

Now in our third quarter 2019 results conference call, we indicated that our domestic network expansion would accelerate starting 2020. After obtaining necessary approvals as well as awarding construction contracts last year, we're now in a position to accelerate deployment of our network plan, as guided earlier. So in our corporate business, we also witnessed strong growth across all our products on the back of dynamic product pricing strategy as well as increase in our market share in Dubai and the Northern Emirates.

On the international expansion front, our strategy is in full execution mode with the establishment of legal entities and ongoing discussions with several players. Now we will announce in due course to the market, more updates in line with our commitment to best disclosure standards and regulatory compliance.

Moving onto nonfuel retail, the second pillar of our strategy. Our UAE network increased to 264 convenience stores as of December 31, 2019, with the addition of 14 new convenience stores in the UAE in 2019. Our convenience store revitalization program offers our customers a very improved shopping experience. Now, this is underway and has already started contributing to strong convenience store performance. Our convenience store gross profit increased by 20.6% year-on-year. And we also witnessed a significant uplift in average basket size by 5% in 2019 compared to 2018. In the fourth quarter of 2019, we unveiled our next-generation ADNOC Oasis convenience store with a fresh look and feel, upgraded amenities and a family-friendly environment. The new stores also offer fresh food choices, premium coffee and on-site bakery and convenient digital payment options. So far, we're very encouraged by positive results from our newly refurbished store.

Last but not least, I'm going to give you an update on our cost efficiency initiative, which remains the third pillar of our strategic plan. So we achieved a reduction of USD 46 million in like-for-like operating expenditure in 2019 compared to 2018. So during 2018 and '19, it brings the total to approximately USD 100 million in like-for-like operating expenditure savings. This is fully in line with our guidance to the market. In terms of capital expenditure, we've spent USD 138 million of CapEx in 2019, which is slightly lower than our guidance before. However, as we pointed out, we expect acceleration in CapEx in 2020, which reflects our ambitious new network delivery schedule.

So at this point, I will hand over to Petri to present the highlights of our financial performance.

--------------------------------------------------------------------------------

Petri Pentti, Abu Dhabi National Oil Company for Distribution PJSC - CFO [6]

--------------------------------------------------------------------------------

Good morning, good afternoon, everyone, and many thanks, Mohamed. As Ahmed already mentioned, we delivered solid financial and operational performance in Q4 as well as in 2019. Q4 net profit increased by 11.3% to USD 135 million compared to USD 121 million in Q4 2018. This was driven by growth in the total fuel volumes, strong results in our nonfuel business as well as successful customer initiatives and cost optimization efforts. 2019 net profit increased by 4.2% to USD 604 million compared to USD 579 million in 2018, driven by recovery in fuel volumes, growth in our corporate business, continued momentum in our nonfuel business and reduction in operating costs, which were partially offset by lower inventory gains in 2019.

The underlying EBITDA, which is measured by EBITDA excluding inventory gains in 2019 was USD 740 million, representing a 7.2% increase compared to 2018. Inventory gains, as mentioned, well over at USD 33 million compared to 2018 when we reached USD 65 million in inventory cash.

We continue to make good progress in rationalizing our Opex, achieving the USD 46 million savings in like-for-like OpEx, representing a 7.4% reduction on a like-for-like basis. On the CapEx side, in 2019, we've been focusing on defining a network expansion allocation and strategy. Our network rollout is scheduled for operational deployment in the first half of 2020 and beyond. Our CapEx in 2019 was USD 138 million. And finally, we generated very strong free cash flow, measured as EBITDA minus CapEx. Free cash flow increased by 16.4% year-on-year to USD 635 million, driven by strong cash flows from operations as well as lower CapEx.

Let me now briefly walk you through the key operational highlights for 2019. As already mentioned earlier, total fuel volumes sold increased by 0.7% compared to 2018, driven by growth in corporate and aviation fuel volumes and growth in retail fuel volumes in the second half of 2019. We are very pleased to report that we have now recorded 2 successive quarters of growth in our retail fuel volumes, which grew by 1.2% in Q4 2019. As Mohamed already pointed out, the benefits of implementing free assisted fueling are not fully reflected in Q4 2019, as this decision only came into the effect on 3rd of November, i.e., for less than 2 months of the quarter. Our core retail market here in Abu Dhabi, continued to show growth, while we also gained market share in the Northern Emirates as well as in Dubai.

On the corporate segment side, volumes increased in 2019 by 6% compared to '18, driven by higher sales of diesel, LPG, lubricant and base oils. Our aviation segment volumes sold to strategic customers increased by 3.8% compared to 2018.

And finally, in the nonfuel business, as mentioned, we continue to see very good momentum throughout the year with strong increase in transactions as well as an uplift in average basket size.

Now let me make a few comments and remarks on gross profit performance by segment. Fuel retail gross profit decreased in 2019 by 5.9%, driven by lower volumes as well as lower inventory gains, as mentioned. However, retail fuel volumes started to grow beginning Q3. And fuel retail gross profit increased by 6.7% in Q4 compared to Q4 2018. This was also a result of higher margins following the renegotiation of our fuel supply contract effective November 2019. As we see a continued pickup in volumes in 2020, we are expecting to see further improvement in retail fuel gross profit.

Gross profit for nonfuel retail, mainly C-stores or convenience stores continued to show strong momentum and increased by 11.8% year-on-year in 2019. This is reflecting our diversification strategy towards nonfuel retail as well as implementation of new initiatives to improve customer shopping experience including also a much more focused stores revitalization program.

In the corporate segment, gross profit increased by 10.8% year-on-year on the back of the increase in volumes as well as higher margins. And finally, aviation gross profit decreased by 2.7% year-on-year.

Moving onto EBITDA per segment. Our retail segment EBITDA increased by 3.4%, mainly driven by higher operating efficiencies as well as better nonfuel performance despite the lower volumes as well as lower inventory gains, as mentioned. In the corporate segment, EBITDA increased by 10.2% year-on-year, driven by higher volumes, margins as well as cost efficiency. I'd like to note that corporate segment EBITDA actually declined in Q4 despite higher gross profit. This was mainly due to the presence of one-off receivables recovery that we recovered in Q4 2018. Aviation EBITDA increased by 7.7%, driven by higher cost efficiencies.

At this point in time, I would also like to highlight that from Q1 2020 onwards, we will introduce new segment reporting structure, which is based on a natural characterization of our businesses into 2 buckets of retail, B2C as well as commercial B2B segments. As a reference, we've included as an appendix to the 2019 management discussion and analysis report, the quarterly as well as full year results of 2019 as per the new segment reporting structure.

Finally, looking at the cash movements. Net cash generated from operating activities has increased mainly due to robust cash flow from operations, partially offset by negative movement in working capital, mainly as a result of reduction in payment terms under the principal retail fuel supply agreement from 60 days to 30 days, as disclosed already in our Q3 2019 results. Strong cash flow generation has resulted in a very low net debt-to-EBITDA ratio of 0.26x at the end of the year as well as the cash position of approximately USD 1.3 billion.

Now let me hand it back over to Ahmed for the closing remarks.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [7]

--------------------------------------------------------------------------------

Thank you, Mohamed and Petri. As mentioned during today's presentation, we have delivered solid underlying results in 2019. For 2020, we are focusing to deliver on our accelerated expansion plan in both fuel and nonfuel businesses to drive profitable earnings growth and returns for our shareholders. After a 7.2% year-on-year underlying EBITDA growth in 2019, we are focused on continuing to grow EBITDA across our businesses, to pursue cost optimization and margin improvement initiatives and to maintain growth momentum.

Coming to further details on our guidance. Starting with fuel business, we are targeting to open at least 60 new stations, including a mix of traditional and ADNOC on the go stations. In Dubai, we plan to open between 20 to 25 new stations, most of which will be traditional stations. We have made good progress on the awarding of contracts for these stations, which gives us confidence in achieving our targets. We anticipate our Dubai expansion will bring market share gains and contribute to higher growth in retail fuel volumes starting in 2020.

We expect overall fuel volume growth of low single digits in 2020. Retail growth is expected to be driven by market growth, recovery of volumes and the Northern Emirates and gain in market share in Dubai. In commercial business, we have signed new contracts with our corporate clients and thus expect to sustain volume growth in 2020.

In nonfuel business, in 2020, we will accelerate our convenience store revitalization program to 100 of our stores with a focus of refurbishment and a refreshed look and feel. We will also continue to enhance and improve the overall customer experience with further improvements on category management, introduction of new fresh food and great coffee products with high margins. We will also add further enhancements to our customer-centric offerings with more benefits expected under our new loyalty program ADNOC Rewards as well as on the back of station optimization across our network, which will focus on enhancing the use of space to maximize revenue potential. For cost efficiency, in line with our previous guidance, we are targeting to realize further like-for-like OpEx savings of approximately USD 100 million over 2020 to 2023 period, of which up to USD 25 million is expected in 2020. In terms of Capex, we plan to spend USD 300 million to USD 400 million of CapEx in 2020, which is significantly higher than in 2019, reflecting our ambitious new stations delivery schedule.

For 2020, we expect to pay USD 700 million in dividend as per approved dividend policy and subject to Board and shareholder approval. Half of this dividend would be paid in October 2020, and the second half would be paid in April 2021.

Before concluding, I would like to reiterate our commitment to our shareholders. We continue to transform ADNOC Distribution into a world-class, customer-focused, commercially-driven company with a determined focus on driving profitable growth. As we sharpen our focus on customer experience and pursue growth opportunities, both domestically and internationally. We will expand all our distribution channels to reach larger market segments and sustained volume growth.

This concludes today's presentation. We are happy to take on any questions that you may have. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will now take the first question from Taher Safieddine from Citi.

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [2]

--------------------------------------------------------------------------------

Thank you for taking the time. This is Taher from Citigroup. A couple of questions, if I may. Just to start one more mechanical, just running through the retail gross profit per liter in Q4 versus Q4 2018. I mean, it just indicates that the margin per liter is going down, assuming that you've booked 0 inventory gains in Q4 '19. And if I'm not mistaken, around USD 16 million in inventory losses in Q4 '18. I just want to know if I'm missing something? I mean, we should assume margin per liter should be up given that the cost of supply structure changed in November. So if you can just help me reconcile the numbers on that front? So that's the first question. The other question is on the volume growth. I mean, again, a good quarter in terms of retail volume growth on a year-over-year basis. Can we just get more clarity on the drivers of this growth? You mentioned Abu Dhabi is positive, Northern Emirates, you took market share, and Dubai is supporting. Can we get some more details in terms of the extent of growth in Abu Dhabi on a stand-alone in terms of how much market share are you gaining in Northern Emirates? And I think the most interesting out of it is, how are the Dubai stations performing in terms of throughput per station or potentially contribution to this total volume if you can disclose that? And my third question is on the working capital. It just feels that the working capital pressures continue into 2019, and this is mainly may be related to the change in the payment terms. Should we expect this trend to continue into 2020 in terms of negative working capital cash flow on your cash flow statement? And the last one, I think the COO was quoted on Bloomberg talking about growth markets being India, Saudi Arabia and Egypt. On Saudi, is there any update on how you're looking to expand into the market, assuming that now the margin structure has changed? And keeping in mind that everyone wants to be in Saudi Arabia, including Aramco, which is now apparently doing fuel retail. So maybe your thoughts on the growth angle in Saudi? Sorry, it's lots of questions, but that's it from my end.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [3]

--------------------------------------------------------------------------------

Okay. Thanks, Taher, as always, no worries. So I will give the floor first of all to Petri to answer your question regarding the retail gross profit per liter, and then we'll take the other questions.

--------------------------------------------------------------------------------

Petri Pentti, Abu Dhabi National Oil Company for Distribution PJSC - CFO [4]

--------------------------------------------------------------------------------

Thank you. Thank you, Ahmed. And thank you, Taher. So actually, when we look at the Q4 2018 and 2019. Fuel retail unit margin is up by a couple of fils. Predominant reason being the fact that we have, not for the full quarter, but for 2 months of the quarter, benefited from the reduction in the supply cost as discussed, specifically 2 fils per liter. We didn't have any inventory losses in Q4 2018 as we still continue benefiting from the backstop guarantee provided by the parent company, ADNOC Group.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [5]

--------------------------------------------------------------------------------

Okay. So on the volume growth, Taher. Yes, go ahead, do you want to ask a question, Taher?

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [6]

--------------------------------------------------------------------------------

No, no, no, sorry. Yes, I'm just -- nothing -- go ahead.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [7]

--------------------------------------------------------------------------------

So just to build on what Petri was saying on growth. And coming back to your second question, volume growth. So the free assisted fueling has been offered beginning November 2019. So what you have seen in Q4 2019 is not the full impact of the free assisted fueling. So as of January 2020, early Feb, we have seen recovery as expected. So we expect the full benefit of volume recovery to be visible in Q1 2020. The second question you had on the volume was what about Abu Dhabi, what about Northern Emirates. What we can tell you is we have now seen 2 successive quarters of growth in Abu Dhabi market. So Q3 and Q4, which is encouraging. In the Northern Emirates, since the implementation of the free assisted fueling, we have seen volumes starting to grow as we gain market share. In a nutshell, the like-for-like growth actually is slight growth in pure retail volume overall, including Abu Dhabi. Regarding the question on working capital. Petri, do you want to take it?

--------------------------------------------------------------------------------

Petri Pentti, Abu Dhabi National Oil Company for Distribution PJSC - CFO [8]

--------------------------------------------------------------------------------

Yes. So if I -- yes. In terms of net working capital changes, the big change, of course, was this reduction of 60 days to 30 days in the prime supply cost and an arrangement that we have between the parent company and ourselves. The other element is related to trade receivables. We have seen somewhat uplift in trade receivables. This once again is partly offset by the fact that our receivables due from the various related parties within the ADNOC Group have come down quite substantially towards the end. And the basic message going forward for 2020 is that we expect to have normalized our working capital cycle, both with respect to payables within the group as well as receivables. Of course, we will be working hard to bring down the receivables levels even further.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [9]

--------------------------------------------------------------------------------

Taher, so, just on the volumes, you were asking about Dubai, how is it so...

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [10]

--------------------------------------------------------------------------------

Yes, I mean, just some color on Dubai, given that -- I mean, some of these stations have been operating for almost a year now. So you should have a clear picture on the performance?

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [11]

--------------------------------------------------------------------------------

Yes. We have a good picture, actually. So we have today 6 stations operating in Dubai. The performance of these stations is very encouraging. The average volume per site in Dubai is higher than the average volume, so close to 20-plus million liters per station per year, and this compares to Abu Dhabi and Northern Emirates roughly 16 million, 17 million liters per station per year. But for competitive reasons, of course, we will not discuss the volume per region, okay?

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [12]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [13]

--------------------------------------------------------------------------------

So Dubai is clearly adding volume and EBITDA, and this is why this year, we're going to focus on Dubai, delivering 20, 25 new stations in Dubai it's an unpenetrated market, a lot of cues, and we have already secured the land, and we are coming clearly to Dubai. And you will start to see this by end of Q1.

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [14]

--------------------------------------------------------------------------------

Okay, perfect. And just on the last one, in terms of the...

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [15]

--------------------------------------------------------------------------------

Yes, the Saudi question, the Saudi question. Yes, sorry, the Saudi question.

--------------------------------------------------------------------------------

Mohamed Al Hashemi, Abu Dhabi National Oil Company for Distribution PJSC - COO [16]

--------------------------------------------------------------------------------

Okay. So as you pointed out, we've seen good positive development with regulators. In Saudi, as they've increased the fuel margin. So that's obviously good. It's been very good news for us, makes investment in this sector, much more attractive. But opportunities have really opened up for players like yourselves, which bring economies of scale and size, that's important, the economies of scale and size it is not for the smaller players. So under this new regime, the IRR that we expect from expansion in the Saudia is expected to clear a minimum hurdle rate of 15%. And as I mentioned earlier today, we're in advanced stages of establishing a legal structure as well as an operating entity in Saudi. And currently in discussion with several players, including landlords and fuel operators to grow organically or through any acquisitions that we intend to make. As far as the business plan and our strategy for the Saudi market going forward, we have full clarity. So our investment proposals that I mentioned this morning, they're under review by the investment committee. Once we get the necessary approvals, we're going to make the announcement at the appropriate timing. So your other question was Saudi Aramco and Total deal, right?

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [17]

--------------------------------------------------------------------------------

Yes. I mean, it is getting more competitive when you have -- I mean, just imagine, I mean, ADNOC distribution in the UAE. I mean, it's a very similar, I mean, beast, which is Aramco doing fuel retail with Total. And then you have also some of the existing players like ALDREES really talking about a very aggressive expansion now given that the margin structure has changed. ENOC is already there. So I just want to get your thoughts on -- I mean, how lucrative is Saudi for you? I mean, especially that you're coming from a very low base. I mean, you're still just testing the waters so far, you haven't gone into the market on a proper expansion.

--------------------------------------------------------------------------------

Mohamed Al Hashimi, [18]

--------------------------------------------------------------------------------

Look, we've set foot in the water. We had a couple of pilot sites. We took the results. We took the study. Now we know what we're doing, as I said, we're in advanced stages. It's a large, fragmented market. There is much, much room for many potential competitors and as well as ourselves, of course. So it's a very underdeveloped customer offering and a lot of these players, including ourselves, are going to consolidate the market. Because the intention as to how the margin under the new margin regime is to encourage consolidation. So again, we're very, very well placed. We know that our experience and strength and the brand that we -- the brand offering as well as how we are perceived in the Saudi market, this can be leveraged to capture growth. And we can take our customer experience and offering in that market. The customers there know us well, and we're very, very confident we're going to be successful. So we've got the balance sheet strength. Once again, we're going to grow our network organically or acquire small players. We have the balance sheet to do that. But we're in discussions, proposals about to clear, hopefully, the investment committee. So soon, we're going to make some good exciting announcements.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

(Operator Instructions) We will now take the next question from Faisal Al Azmeh from Goldman Sachs.

--------------------------------------------------------------------------------

Faisal Al Azmeh, Goldman Sachs Group Inc., Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

This is Faisal Al Azmeh from Goldman Sachs and thank you for the opportunity to ask questions, and congratulations to Mr. Al Shamsi on the new role. So 2 questions on my end. The first is on the Dubai market size, how big is the market today, given the weakness that have taken place over the past 2 years? And what is the realistic market share in your view that you can achieve in 2 years' time? My second question is on CapEx funding. How do you -- how are you expecting to utilize your balance sheet in relation to the CapEx versus the dividend that you currently pay when looking at your free cash flow generation versus the dividends is almost 100%? And you're planning quite a hefty amount of CapEx this year. I would appreciate some color on how to think about the relationship there?

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [21]

--------------------------------------------------------------------------------

Okay. So let me just take the question on the size of the fuel retail market. So in the UAE, we'll say roughly 10 billion, 11 billion liters per annum. Dubai is roughly 40% of this with -- as we mentioned, unpenetrated market, very high throughput. And it's clearly a question of capturing the EBITDA in the next few years. And this is why we are focusing on Dubai. Your question, the other question was on real estate. I didn't catch it, can you come again?

--------------------------------------------------------------------------------

Faisal Al Azmeh, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

Just my second question is on Capex. How do you utilize the balance sheet to fund the CapEx in 2020, particularly as you also have a sizable outflow relating to the dividend? So will you be -- is there a target capital allocation for Capex? Or how do we think about that?

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [23]

--------------------------------------------------------------------------------

Yes. So Petri will answer the question.

--------------------------------------------------------------------------------

Petri Pentti, Abu Dhabi National Oil Company for Distribution PJSC - CFO [24]

--------------------------------------------------------------------------------

Thank you, Faisal. So as I stated out, we have a very strong starting point as mentioned by Mohamed also, with a net debt-to-EBITDA ratio of 0.26x. We have ample capacity to leverage up in case needed. Of course, the starting point is that the operating cash flow is fundamentally catering for the Capex. When it comes to dividend, substantial capacity to service that as well. We have no problem whatsoever in terms of more optimal capital structure, which would point to a higher leverage. I would like to remind everyone about our thoughts at IPO when we communicated that on a longer-term basis, 1.5 to 2x net debt-to-EBITDA ratio seems a bit more optimum in a business where we have strong underlying market share, predictable cash flows and a very strong market position that we are leveraging. We have access to funding facilities as well. So funding really is not an issue that we see as such.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

We will now take the next question from Wael Atta from ADCB.

--------------------------------------------------------------------------------

Wael Atta, [26]

--------------------------------------------------------------------------------

I'm asking in regards to the recent announcement of ADNOC issuing convertible bonds. And that relation in terms of increasing the free float for ADNOC distribution and reintroducing ADNOC into the Morgan Stanley emerging market index? Can you can share more detail on that matter?

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [27]

--------------------------------------------------------------------------------

So let me answer this question on the -- yes, on the latest article. So we do not have comments on this as we are not party to these developments, ADNOC owns 90% of ADNOC Distribution, and it is up to the ADNOC Group to decide what it wants to do in terms of its current shareholding. So we are not aware of this, first of all. At the time of the IPO, and we reiterate what we said at each quarter. ADNOC has said they will publicly commit to being a long-term shareholder of ADNOC Distribution, and they will maintain at least 70%. This was what has been stated at the IPO in the prospectus. I guess that this is still the case today.

--------------------------------------------------------------------------------

Wael Atta, [28]

--------------------------------------------------------------------------------

Okay. So basically, it's and ADNOC Group decision and ADNOC as per the IPO has mandated or has contracted some float or IPO up to 30% of ADNOC Distribution.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [29]

--------------------------------------------------------------------------------

I didn't catch it. Sorry, could you come again?

--------------------------------------------------------------------------------

Wael Atta, [30]

--------------------------------------------------------------------------------

So yes, you're saying that this is basically a decision on ADNOC Group level. And as per the IPO, ADNOC does have the capability or the intention to lift up to 30% of ADNOC Distribution.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [31]

--------------------------------------------------------------------------------

What I said is, first of all, as per the IPO prospectus and what we have been saying from the beginning ADNOC Distribution -- ADNOC also remains -- ADNOC owns 90% of the company. They have stated that they will commit to be a long-term investor, maintaining at least 70%. We didn't hear about anything at this stage. So this is purely speculation as we speak and from an ADNOC Distribution perspective. Well, again, our focus as a management team is to deliver results and deliver growth and pay our shareholders and create value for our shareholders. So what is related to ADNOC is related to ADNOC. And again, ADNOC has not comments on this article. So we do the same thing.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

We will now take the next question from Ildar Khaziev from HSBC.

--------------------------------------------------------------------------------

Ildar Khaziev, HSBC, Research Division - Analyst [33]

--------------------------------------------------------------------------------

I have a few questions. First of all, on the network expansion program for this year. Could you tell us approximately how this is going to be progressing during the year? Is it going to be a uniform increase in the amount of stations from quarter-to-quarter? Or maybe it's going to be front-loaded because I think last year, you were mentioning that you had quite a number of new stations in the advanced stages of development? So that's my first question. And secondly, on Saudi Arabia, I was just wondering if you can confirm whether you have received higher margin just like some other companies therefrom 1st of February? And whether you can kind of update us on the organic targets? Because I think you were talking about adding a few more stations there organically, but we haven't heard anything, I think, over the past couple of quarters.

--------------------------------------------------------------------------------

Mohamed Al Hashemi, Abu Dhabi National Oil Company for Distribution PJSC - COO [34]

--------------------------------------------------------------------------------

As far as the expansion plans, as we stated this morning, what we disclosed to the market at the end of Q3 2019 was 45 stations, and quite a few of those in advanced stages of construction and development to be opened over the course of 2020. What we stated this morning is that, that number, we're confident will be 60, out of which 20 to 25 stores will be in Dubai. As far as your Saudi question, as I've stated this morning, and as we just stated a few minutes ago, given the margin increase, we can confirm that we are one of the players who are entitled to the margin increase. And now when we expand in Saudi, we can clear the hurdle rate of 15% that we have promised to our shareholders. Did you have a third question as well?

--------------------------------------------------------------------------------

Ildar Khaziev, HSBC, Research Division - Analyst [35]

--------------------------------------------------------------------------------

No, no, I think this is it. Just to clarify, please, the 65 new stations over 2020. Can you tell us maybe how much you plan to launch in the first quarter or maybe the first half of this year?

--------------------------------------------------------------------------------

Mohamed Al Hashemi, Abu Dhabi National Oil Company for Distribution PJSC - COO [36]

--------------------------------------------------------------------------------

So first of all, it's not 65, I said 60. So it's 45 what was disclosed at the end of Q4 2019. And that new number now is 60 and at least 40 to 45 of those by first half. And 20 to 25 of the aggregate number will be in Dubai.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

There are no further audio questions in the queue.

--------------------------------------------------------------------------------

Ahmed Al Shamsi, Abu Dhabi National Oil Company for Distribution PJSC - Acting CEO [38]

--------------------------------------------------------------------------------

Okay. So I guess, this would conclude the call. Thank you very much for participating to the call. Bye-bye.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

This concludes today's conference call. Thank you for your participation. You may now disconnect.