ACWA Power Company (2082) Earnings Call Transcript & Summary

Hello, everyone, and good afternoon. Welcome to the ACWA POWER Financial Results Conference Call for the 9 Months period ended on September 30, 2023. My name is Felicia and I'll be your operator today. [Operator Instructions] I would now like to pass the conference over to our host, Mr. Ozgur Serin, Head of IR at ACWA POWER. Please go ahead, Mr. Serin.

Thank you very much, Felicia. Good afternoon. Good evening, everyone. Wherever you are. It's a pleasure to meet you again in another quarterly earnings call. My name is Ozgur Serin, for those of you who don't know me, I'm the Head of Investor Relations at ACWA POWER. So with me today, we have Mr. Marco Arcelli, who is the CEO of the group, and he is virtually joining us at this meeting. And also, we have Abdulhameed Al Muhaidib who is the CFO of our group [indiscernible]. Thanks for joining the call. And as you know, this is to discuss and answer your questions in relation to ACWA POWER's financial results and further operational and business development performance for the 3 months and 9 months ended 30 September 2023. We will be going through a participation that is prepared for the purpose and the market we are going to take you through this. At the end, we will receive your questions. Please note that the materials in relation to our results have already been announced, [indiscernible] at market and to the international market as well. They are available on ACWA POWER website. We will be using some forward-looking statements. And as you all aware now that disclaimer around all of these forward-looking statements and it I just would like to [indiscernible]. I would now like to pass over to Marco. Marco, it's all you.

Thank you, Ozgur, and good morning or good afternoon and good evening, everybody. If we start from our safety track record that is the biggest deal that I have today in my mind, as we run very complex projects and operations. And so the most important thing is to make sure that all our people and people working at our sites go home safe. I am pleased to report that we have a lost time injury rate that is stable at a level that I find significantly good within the industry. Although we had 3 injuries in the recent quarter, which is 3 too many. Fortunately, they are overall minor, but I think it strengthened the importance within the whole organization, and we're taking very important measures, including removing people or subcontractors from site when we have observations that they are not following adhering to the guidelines and policies that we ask them to expect. So please be reassured that this is a big area of focus that we continue to monitor closely even from my level. On the availability, we had positive results, very positive, in power, in water, in [indiscernible] power. If you see the numbers here, this is good testament to the progress that we're making with the reliability of supply task forces that were put in place to offset some of the issues that were in the past. On the renewables, we were also happy to see -- to be blessed basically by weather that was better than we experienced some regions compared to last year. So I'm talking about the solar radiation in particular. And so we're today at the levels that I consider good, but we're still working to improve them further. If we move to the next page, so moving from the operation to the overall portfolio, you see here a summary of what we have today under our management. You may notice that last time we presented 77 assets. So that is due to the fact that the 2 small assets in Jordan were actually the commission they reached the end of life. Those were quite small because it was less than 300 megawatts in total. But I would focus more on the column on the right, which shows basically the big growth that you see in all technologies. So we added 7 new assets worth around SAR 28 billion of total investment cost, 6 gigawatt of power, all of which are renewables, 1.4 million cubic meter per day of water desalination. This is all in our core technologies, and we are working hard basically to bring the next green hydrogen also to fruition, hopefully, in the next few months. And also, you may have read recently, in fact, it was during the FII conference that we had in Saudi last week or 10 days ago, that we were awarded the [indiscernible] Tabassum in Saudi Arabia. Saudi Arabia, as you know, is going through one of the most -- of the boldest decarbonization projects in the world. So not only the renewables were together with PIF, we're delivering 70% of the program, but also through tenders in combined cycles that we expect will be a sustained activity over the next few years. So it's very important to start well we won 2 of the 4 projects that were awarded. And so it's a very positive development. Moving on to the next slide, please kind of sustained activity in terms of new business that we're bringing in the portfolio. We are pleased to see also good track record in terms of the performance that we do on the bids. So of course, on the negotiated, we basically got 100%, but also on the competitive side, we are at a level where we continue to win our fair share. We continue to be selective. The 2 go hand-in-hand. So the more competitive you are, the more you give support to local governments to partner with ACWA POWER. But the more you have negotiated deal, the more you can be selective on the rest. And so you may have seen that on some recent bids we were not successful, but I don't really display or take a particularly hard spend. We see that with increasing interest rates, in some cases, inflations or disruptions to the supply chain. We want to make sure that we are still conservative in the assumptions that we take. So the result that we showed here, I think, is a very positive result. The next one is what we see ahead. So looking at the history of our tenders and the success rate. This gives you a little bit of an idea of the activity over the next 2 months. This, in particular, what we expect in the 6 months that we will have and also the financial closes that we expect to reach in the next few months. But on this, Abdulhameed will certainly give you some more information. And again, I think that here, when we focus on quarters for some of this is not maybe particularly relevant, as you know, that conditions might change by a few weeks or a month or so. And so again, I wanted to show you more the trend of activity that supports and if we move to the next page, the strategy that we have put in place and in particularly, our target to more than triple the assets under management by 2030 and to be one of the top 3 desalination renewable energy and green fuel company globally, reinforcing our structure with great talent, great development programs to be sure that we can be successful in a market that remains competitive as you all know. The expansion continues to see Saudi Arabia at the center we're making progress in all of our core markets. We are starting also to work on due diligences in China that, as we mentioned, is a market where we intend to enter. And I hope that in the next few months, we will be able to give you some announcements or progress on the activities that we do there. Moving to the next slide, which is actually the last slide that I would like to take before moving to the numbers with Abdulhameed. I think that I'm very pleased after 7 months here at the company. I see the transformation and the evolution of the company growing at the right pace, solid and confirming our competitiveness and ability to deliver good results. At the same time, we know all the context that we believe in high interest rates, inflation, which is subsidizing in some parts, but in some past remains acute particularly when we go to EPC contracts and so on, and the disruptions that are still to be processed from all the COVID and the geopolitical tensions, particularly between Russia and Ukraine that affected some of our Central Asian projects and cause that affected a number of projects throughout the portfolio. So with that caution, the good results, we will continue to deliver. But of course, we live in the context that remains in terms of tailwind, quite considerable. So we want to make sure that we deliver good results within this environment. With this in mind, I would move it to Abdulhameed. Abdulhameed?

Thank you. Thank you, Marco. Good afternoon, everyone. Good evening. We would like to take you to the numbers is, and then we'll go through a detail on the fantastic business that has result to obtain the numbers. So overall, good progress overall year-to-date as against our standards for 2023. [indiscernible] have achieved only 9 months net income of above SAR 1 billion which is a 22% and has increased as compared to the Q3, so third quarter of last year. So that is excellent progress. Also, we have a increase when it comes to the operating income, we are having the SAR 2.1 billion in the 9 months. So when we talk about this, I would say, potent improvement that has a lot of faster, definitely, the units that have came into operation since Q3 of last year and up to today has impacted our operating income under [indiscernible]. A few projects also that have came online that contributed to the overall development that operation of development fees that will be also talking about in the next slide. Finally, this also has been offsetted by 2 main components, one is that on the G&A cost. There has been increase in overall cost as well as advance rate and pace to the market sale solution there has been impact on overall financial cost together with the cost that we have issued in February 2023. So that concludes the details of that. And I would [indiscernible] was a point that I have mentioned by Marco, but I would like to go through the details. So year-to-date, there has been [indiscernible] within aggressive, I would say, achievement for the company. If you look [indiscernible] the processes CapEx year-to-date when it comes to financial closing. One of them was as is also one of the financial tools that we have his budget. We have also achieved a few financial [indiscernible] score during the Q3, which is share a lot and [indiscernible], which is the project subsequent to our reporting period, we also achieved the financial cost of project [indiscernible], which was signed during that last week in Riyadh. So that is what has been achieved when it comes to financial closing. Moving to, let's say, projects that have been moved from the developer stage to the operational stage. And this is also a significant improvement as against the last key picture. So we had more or less 10% power that came into operation during the last, I would say, 9 months. And also, we stick -- when you take into account the subsequent events also we want an additional capacity that added to the [indiscernible] on Saudi when it comes to SBRT. So here, I think what is important to highlight is that something first in Dubai, we had it [indiscernible] came online on the solar site. So we Shuaa Energy 1 and in the [indiscernible]. We have also Dubai in the world -- sorry, in the power side of Dubai completion, which is at an IPP contributing these 600 megawatts, which is the assets very close to the final operation. And final also specifically the water side, it's also been a very good operation. The achievement is remarkable as well as this is the first, I would say, project in operation sort of in Saudi. So that is to be contributing 1.1 gigawatts to the resorts is the [indiscernible] in your projects in the income group. So that's definitely coming into our performed leadership on the energy condition of Saudi Arabia. So moving to the next slide. So we'll talk quickly on the operating income. So this is a good promotion -- the achievement has been on the operating income from the SAR 1.8 billion to SAR 2.1 billion. So first, SAR 270 billion, mainly contribution from the existing assets. And here, I would like to give a bit of a round that if you recall same time last year, we had some challenges in both [indiscernible] assets. [indiscernible] our commercial assets in Saudi Arabia. All these assets came into operation and stability this year, 1 out of 4 for us is still getting on and off, but generally out of the loan [indiscernible] from the market. We've had around SAR 100 million contribution from the new [indiscernible] just sent to our internal [indiscernible] SAR 100 million. We use the same into operational because we own SAR 100 million. When it comes to related past, there have been SAR 44 million additional cost of development, provision and write-offs from the projects that we have not successful with or will it come out exactly when [indiscernible] in our call. Also, there have been other costs that have been impacting our operating income. If we take that into the net income, which is shown to the slide. So first, we have explained the SAR 270 million upside in the operating income. I would take this to the other component that has impact as anything comes. The first one is related to cash and tax charges, which is around SAR 200 million. This is again mainly related to the differ net tax credit that we have as again we have similar periods of last year. When it comes to the finance cost, this has increased to more or less around SAR 200 million. The main impact is just a case in interest rate as against last year [indiscernible] exhibition. The second one is related to the second tranche has pursued and a there have been also other material cost increase, which closed the 9 months sorting to around SAR 1 billion. Before we go to the Q&A, I will just hand it over to Marco to give his concluding remarks, and then we'll open it up for Q&A.

Thank you, Abdulhameed. So I think that as I mentioned, very pleased with the first 7 months in the company. On safety, LTIR remains at industry benchmark levels. But as I mentioned, I'm not satisfied until it really goes to zero. On the availability of the plant, so we saw the increase of availability in all technologies. So that is very pleased. And on the growth, which is the engine of our company, I am happy with the progress that we have made today basically in all technologies. So I am really of the opinion that this company is solid, has a bright future ahead in all the countries where it operates. I'm just back from South Africa, for instance, where I might be the Ministry of Electricity and he is very supportive to our growth in the area, and that is the message that I get from every country that I visit, and you've seen that I've been quite mobile recently. So with this I would like to close it and move it to you for any questions and answers.

[Operator Instructions]

We have some questions coming on the chat. Can you see them? Or do you want us to read them in the call?

Of course, I can see one question that has come through. So it's from [indiscernible], how often is your dividend distribution?

So that in 2021, we have paid a dividend around SAR 560 million. That is an annual basis. Similarly also last year, we have been annual onetime dividend of about SAR 606 million and at the fastest that we have done. So currently, we have followed the part of annual dividend. And for 2023, we will announce it together in the financials of the 2023.

If you allow me, some of the assets -- we haven't [indiscernible] with the company going to follow for the next 3 years following the IPO is covered in the IPO prospectus. So actually, what we will be happy doing in the past 3 years after getting done with what we close to the market in terms of our dividend from the Q4 to 3 years following the [indiscernible].

So we have enough at that time that we get to SAR 560 million a year. We are expecting dividends for the next upcoming 3 years since IPO to be on the rent increase comes from 6% to 9%, so let's say 7.5%. So we have covered that prospect in 2022. And definitely, once we review the policy 2023, we will take that to [indiscernible].

We also have a follow-up question from [indiscernible], what is the EPS.

Yes. So 11% is that also going to be presented in the annual report on the financials. So 2021, it was 0.77 year and 2022, it was 3.83.

Thank you. We will now move on to the audio questions. We have the next question from Oliver.

It's Oliver Connor from Citigroup. My questions to the presentation. So 2 questions, if I can. First one, it was interesting to see the auctions and the gas [indiscernible] that you mentioned, Marco, and you were successful in 2 of those. Could you perhaps give some guidance on where you see the growth potential of gas capacity within Saudi Arabia because clearly, we know about the targets on the renewable side, but just interesting, if you have a sense on that growth towards the end of the decade of gas capacity. And the second one will be more on sort of the neon time line. So it looks like a lot of work happened in the last few months in terms of contracts in place both for the wind turbine and plant facilities as well. So just trying to get a better sense on sort of how you see construction progressing into 2024 and the timeline that you've guided to before.

So I'll take maybe the first one, the second 1 I'll lead to Abdulhameed. We continue to remain committed basically to the carbonization of every economy and community where we operate, but we consider that since we work in growing economies and some of these are very high speed, gas is a transition technology that we continue to operate for the next 30 years, if not more. So that's why we continue to remain interested in developing these technologies. In Saudi Arabia, Saudi Arabia is going through a massive decarbonization program. And I think we can provide you some more details maybe via [indiscernible] group, but we expect that there will be several more tenders similar to what we have seen recently. As you know, basically, the goal is to go from substantially being 100% oil-fired in 2019 to be 50-50 in gas and renewables by 2030. The other 2 countries where we are seeing right now, assets in development with Uzbekistan, where we are building 1,500 megawatts, and we're building -- we are looking at potentially doing 1 more of these plans. And then in some of the other geographies where we already operate, we look the potential for something in that magnitude. So Saudi Arabia will be significantly the biggest area where we employ combined cycles, but to a small extent, also potentially other countries.

Following on the question again on the construction.

The question just an update on the construction because it feels like a lot of the contracts have been put in place now. So I just wanted to get a sense on how that timeline is evolving.

Yes. Definitely. So first of all, allow me to correct, I think the team -- the first question was on the earlier share and not the dividend as yet. So the numbers I gave is a little bit special if you are looking at the [indiscernible] on the financials, SAR 1.48 for the 3 quarters. If you would like to have the numbers for the similar period of the past year, which is Q3 of 2022, which is SAR 1.41 that's on the share. On the production, if you look at the corporate area used to have to 6 to 7 projects and the construction at the same time. This definitely has increased in the last couple of months significantly. So more or less today, we do have around 20 projects and infrastructure. So that gives you the magnitude of the projects that is being progressed to construction significant and require a lot of our, let's say, resource attention. Definitely the project that has been a part of a COVID is somewhat related to the commercial operation and moving them away from the construction phase to the operational phase because this project has been impacted with COVID-19 delay. That's where I see the side a share to you earlier that [indiscernible] continues operations very relevant and cost because not only I think to operation, I'm also taking out a project with that [indiscernible] amount of goods out of the operations -- after the construction operation. So for me by June 2024, more or less, we will be out of the COVID-19 era as it comes to construction projects. This project for us is a challenging project. These projects do have cost over on some of them. And this product, we do have to delay and dispute with intact or the offtake when it comes to the extension and completing the project on time. So definitely, we are progressing on completing these projects. And by June 2024, we will be in a much comfortable position and [indiscernible] the services to operation. When it comes to the current projects that moves into operation, we are trading in a comfortable stage because we there as for the asset, all the challenges as being coming come increase in total when it comes to instances of cost of material when it comes to the logistic challenges. So all this has been [indiscernible] we the financial growth. So we have in a much more comfortable position against the quarter.

We will now move on to the next question from Fawaz Aldossarry.

First of all, thank you for taking this call, and thank you for taking the time to give us such the amazing presentation and congratulations on the outstanding results. My question is regarding the strategy that you previously mentioned during the presentation regarding happening the assets from 2023 until 2030. So just I want to get some deeper look. So where are we looking at the concentration of the assets. During the presentation, it was mentioned that Saudi Arabia is one of the main contributors in that growth also Uzbekistan and potentially might be China. Are we looking into a further geographical expansion? I just want to take [indiscernible] on that.

So in the short term, what we expect is to focus on the geographies where we already operate plus China. Then the geographies where we already operate include, for instance, Central Asia or Southeast Asia, so it might be 1 country or 2 countries that -- where we enter where we might not have invested capacity today, but we do it through a very clear screening that basically starts from what is the total potential in the country. So what we want to try to avoid is to go into a country where we will then have a single asset with no further growth potential, which is, by the way, why we selected China is the first priority because of the huge capacity that needs to be installed there. And I think that with the current discussions that you hear about in terms of slowdown of the economy, I think that there are great opportunities in 2024 basically to use investments in renewables that the country really wants to do to support growth, the economy through investments and positive investments in climate change, friendly technologies. So that's more or less the strategy today, don't expect any major new countries.

We have another question from [indiscernible] Please state your company name and proceed with your questions.

First of all, thank you for the amazing presentation management team, and congratulations on the results. I have 2 questions. The first question is regarding the Chinese project, the CNY 7 billion. Would it follow the laundry cost through the SPV? Or will it go through a different process? And when does it go live? And for the second question, can you share the full capacity if possible right now for the power and the water.

So in China, we don't have -- I don't know the reference to the 7 billion. In China, basically, we're now at the stage where we have originated a good pipeline of opportunities that we're now scouting. We intend to do it with the same model, so to use nonrecourse project finance as much as possible and to have an active growth. So both in the operation, the development, the construction of the project. So it will be a similar role with local partners. It's hard for you -- for me to give you a clear split between technologies and gigawatt and megawatt because of course, it depends on what are the best projects that we find, and we would like to start the lowest risk and highest return like everybody kind of like the low-hanging fruits, although going in with partners that we have known for the past 15 years already in itself is a way to derisk them. We are currently looking at all technologies. If I were to place a bet, probably the most advanced that we are looking at are in the regular renewable space, so solar and wind. That's clear.

For the second question, what is the company standing at currently for the capacity in power and water. Is that available for you guys to share?

Yes. 50.1 gigawatts when it comes to the power and SAR 7.6 billion with a few seats [indiscernible].

This includes the percentages. So if I call a percentage of project, the percentage will be deducted from that.

So technically, the upper cost of our business model that don't develop for it. So all the that we take the leadership on the development side and also take the responsibility and the company for the operation of it. So definitely, we consider the asset as a whole to be as of all say, operating assets, and it's very important from a leadership when it comes to the development side and also the operation accountability [indiscernible]. That number is not our percentage only, but of the total assets that we are managing, whether it is under just development or in the construction of operation. So this is the process, not the net equity.

We have another written question at the moment from [indiscernible], do you plan to continue your dividend on an annual basis.

Can you repeat the question [indiscernible]?

Of course, do you plan to continue your dividend.

So I think we really answer this question earlier at the first statement. So definitely -- look, again, we are going back to that we have out that we have kind of a guideline for the 3 years at IPO or the dividend payout. We did mention that. And we from the fix SAR 550 million, we are expecting that to grow between 6% to 15%. By the year-end, we will take a recommendation to the board, and that the community will also go to the shareholders for consideration for the year of 2023.

I have a question from [indiscernible]. What are your expectations regarding a potential upgrade of ACWA POWER's ESG rating?

So if you want, I can take this one. ACWA POWER has a GE policy that was approved in 2021, which is basically part of our DNA that is reach Net 0 by 2050 and 50-50 renewables and other technologies by 2030. We are well advancing that. That is mainly for the portfolio. I think that there are reports about our ESG performance that will required us to take a look and update not just our ESG policy, but in reality, improve also our communication. What I noticed is that we continue to do better, but I think that we do much more than we communicate in a sense. And I think that the recent inclusion in a water ETF is a casing point. I mean, many people did not know that we are the largest private desalination company in the world. I don't think it was made clear enough. And now I think it is more visible. So what we plan to do is to start with improved communication also of some of the great things that we're doing, for instance, in [indiscernible] Global, where the first results were opened, where we are -- have developed and operated the largest fully sustainable grid in the world with 500-megawatt of capacity installed. 100% of the desalination coming from renewable energy and circular economy solution for the wastewater treatment system or the reconversion of [indiscernible] from MSF technology to reverse osmosis, which would save 22 million barrel of oil equivalent per year. So these are just a couple of examples of things that we do. And I'm talking here environment mostly, but also on social and governance I think that we have -- that we are doing more than we communicate. So that will be the first focus of the activity, and I hope that people will start to realize better our performance.

Another question, what is your quality on technology transfer and your contribution to the local economy for example, EV panel manufacturing to be localized.

With the scale that we have, we can be a great channel for governments to attract manufacturers to produce locally. We do this in Saudi Arabia, and I think we were instrumental in a couple of Japanese membrane manufacturers to site their activities in Saudi Arabia. Some of the other productions also follow suit. Of course, the scale of our operation in Saudi Arabia is much bigger, but we're now having similar progress also in Uzbekistan, for instance. So it is something where we continue to look how we can contribute to the growth of a local supply chain, which in a way is also a way to -- on 1 side, to support the goals of the local government to create employment locally. And on the other is also to potentially derisk the construction activities because of the lower logistical constraints. On our side, then, of course, we are not a manufacturer ourselves we try to be the first ones to go out and scout new technologies, new manufacturers, new suppliers, new EPC players who can work with us. And that's part of our activity to continue to be innovative and competitive. And that's why in our organization that we rolled out in June, we established our strategic sourcing and basically, they take care of the 3 elements. So the EPC, the strategic supply agreement and the local content. So that's how we do it.

Maybe [indiscernible] another examples that we had actually specifically for Saudi Arabia when it comes to building these renewable projects, we've been able to say work hand in hand with the local developers and so local manufacturers one of the [indiscernible] we have been able to activate more than SAR 0.5 billion local content in Saudi. In top of that, actually, and to be honest [indiscernible] of results for ACWA POWER is that this local manufacturers starting to see structure, trackers and other equipments, not only to fall but also other developers outside of Saudi Arabia. So basically, after developing the fit part of the manufacturing, they have to start exporting to much number of developments on side of the [indiscernible] composition. So that's a great example of locating content. And as we have in multiple projects now in the Saudi and outside of Saudi, there will be definitely a local manufacturer development that will take them to another level of production capacity share countries beyond Saudi Arabia.

We have received another question. Are you involved in Neon mega projects?

No, in Neon, we are only involved in the green hydrogen project. So basically, it's a similar location. The 3 partners is Neon, our sales and products, as you know.

So we have just developed that we had a project, which has a one-off arrangement which is separate from the, let's say, NEON. So one specific deal or we have.

[Operator Instructions] We have received another written question from Ryan Zahid. When can we expect the company to obviously announce and share details of strategy to [indiscernible].

Ozgur, do you want to take this one since you're organizing.

Yes, Marco, thank you. We are planning a strategy to, but actually recording it is kind of a Capital Markets Day for power. This is going to take place on December 20. And it will take place into [indiscernible] if the month ago, we announced it through the relationships that we have with the bankers and the analysts and the capital market teams of several banks. Then this will happen again in Dubai. It will be taxed to the tail end of the COP 28, and it still takes place in our broad energy loan plant. So it is actually going to be a fantastic one. We do believe so we can sell the [indiscernible] are going to have the opportunity of saying 1 most magnificent sold [indiscernible] plans either to, I would say. So yes, the answer to the question is yes, we will be covering our strategy 2.0 in this session that will happen on the December 3. And definitely [indiscernible] some of that share and investor relation section of presentation after the meeting.

[indiscernible] participation [indiscernible] site, but there's going to be [indiscernible] link to do that. So it will be physical and as well as virtual live transmission.

We have no further questions. So I will hand it back to you for Ozgur Serin of IR for closing remarks.

Thank you very much, Felicia, and thank you, everyone. Thank you use everyone who participated in the call and also ask questions to us. Any further questions in [indiscernible] that the Investor Relations team of ACWA POWER [indiscernible] of them as much as we can. Thanks again, and we have a wonderful day or night of whatever in front of you. Thank you for joining us.

Thank you, everyone.

Thank you, everyone. This concludes today's welcome. You may now disconnect your lines.