National Central Cooling Company PJSC (TABREED) Earnings Call Transcript & Summary

Welcome to Tabreed First Quarter 2020 Earnings Call. I hand over to your host, Ms. Souad Jamal Al Serkal, Vice President of Strategic Communications. Madam, please go ahead.

Hello, there. This is Souad Jamal Al Serkal, Vice President of the Strategic Communications Department at Tabreed. On behalf of Tabreed management team, I would like to welcome you all, and thank you for joining us for the first quarter 2020 results conference call. Hope you're all keeping safe and are healthy. Given we are all working remotely, kindly excuse us for any technical issues on the call. Before we begin our presentation, I would like to remind you that some of the statements made in today's conference call may be forward-looking in nature and may involve risks and uncertainties. Kindly refer to Slide 2 of the presentation for the detailed disclaimer. I would now like to request you to turn to Slide 3 of today's agenda. On today's call, we have with us Adel Salem Al Wahedi, Chief Financial Officer; and Richard Rose, Senior Vice President of Finance. Adel will first provide an overview of the first quarter 2020 performance and key events. Following that, Richard will discuss the financial performance in more detail. Adel will then conclude the presentation, and we will open the lines for your questions. Thank you, and over to you, Adel.

Thank you, Souad, and thank you, everyone, for joining us today. This is the first time I'm speaking to you all. As you are aware, I have joined Tabreed as the CFO recently. I started my career with Etisalat for more than 13 years. I worked with them in UAE, Saudi Arabia, Sudan and Egypt. And I moved over to Drydocks-Dubai, Petrofac Emirates, Abu Dhabi Ports and Arabtec. And I have more than 22 years of experience in fields of corporate finance, M&A, statutory accounting, budgeting, planning, costing and strategic decision-making. I look forward to interacting with you regularly. Now let's move to our presentation, please. You will see on the slide, before I begin the discussion on the quarterly performance, I would like to say a few words in these unprecedented times and how Tabreed is positioned as you are aware. This health calamity is resulting into significant economic crisis in the region and across the globe. However, given the utility nature of the services that we provide, we have limited direct impact of COVID-19 on our business. We have invoked business continuity actions to ensure the safety and security of our staff as well as uninterrupted customer service. All our plants are operational, and we continue to provide cooling to our customers as we head into the warmer summer months. All of Tabreed plants continue to operate, and we continue to serve all our customers. Now moving to Q1 2020 performance. Despite COVID-19, scenarios in chilled water business continued a stable performance. However, revenue growth in Q1 2020 was impacted by 17% decline in our value chain businesses. During the same period, EBITDA growth was 5%, and as a result our EBITDA margin expanded from 57% in Q1 last year to 61% for Q1 this year. On an organic basis, connected capacity addition during the quarter was 13 -- close to 13,000 RT. In April, we announced the transformational transaction for the company where Tabreed acquired an 80% interest in the Emaar existing in Downtown Dubai district cooling asset of AED 2.5 billion. The transaction includes long-term concession agreement, exclusively provide up to 220 -- 235,000 RP of cooling to Dubai's most prestigious development, including Burj Khalifa and The Dubai Mall. This transaction paves the way for a long-term relationship with one of the world's greatest underrated real estate developer. Kindly move to the next slide, please. Tabreed is contributing to the region's growth through efficient and environmental-friendly cooling, enabling sustainable development. As our business grows, so does our positive environmental footprint. We currently operate 83 -- through 83 plants across the region, delivering about 1.35 million RT of cooling. Our operations saved over 2 billion kilowatt hour of energy consumption in 2019, enough to power over 117,000 homes for a year, and equivalent to reducing over 1.2 million tons of CO2 emissions. Slide 7 will show geographical footprint. As you can see, Tabreed is the only publicly traded and regional district cooling company in the world. The UAE is our base of operations, where we have presence in 6 emirates, providing 946,000 tons of cooling to our customers through 70 plants. This is including the 3 plants of Downtown Dubai. This transformation and acquisition significantly enhances our market positioning in Dubai, the largest DC market in the world. In addition to UAE, we work with key strategic partners in 4 other GCC countries. We have a total of 13 plants outside UAE providing around 400,000 tons of cooling for our customers. Around 70% of our capacity is consolidated, while the rest is equity accounted and associates or JVs. Let me move to the next slide, please. The slide here outlines our strategic growth plans across the region. At the beginning of 2020, we announced that we expected to add at least 75,000 RT of new connected capacity by end of 2021. During Q1, we added 12,700 RTs of capacity across the region. Of this capacity, 5,800 RTs were added to the consolidated level. And 6,800 RTs is through our JVs or associates. This is over and above the 150,000 RTs added on acquisition of Downtown Dubai district cooling. Given the strong organic growth, we reiterate our confidence of adding the 75,000 RT right into 2021. Tabreed continues to demonstrate its ability to deliver a steady increase in connected capacity in the region, driven by growth in our key markets across the region, led by particularly leveraging our regional network to take advantage of commercial opportunity as and when they present themselves. The next slide, please. This slide recaps the evolution of our performance over the years. To summarize, Tabreed has a stable utility infrastructure of business with long-term contracts with high-profile customers. This provides us clear visibility of future earnings and cash flows. We currently have 90% of our capacity contracted for at least the next 10 years. And about 80% of our revenues are derived from wholly government-owned or partially government-owned organizations, therefore, limiting counterparty risk. Tabreed has a track record of delivering profitable growth and EBITDA -- increased the EBITDA by 8% per year since 2017. Our acquisition of the Dubai Downturn district cooling assets and the concession agreement with Emaar is significant to our penetrating the largest district cooling market in the world. And by now, I will hand over to Richard to talk about our financial results in more detail. Richard?

Thank you, Adel. Let me start by highlighting the key points on our income statement for Q1 2020. Chilled water revenue was in line with last year, with gains arising on new capacities in the UAE and Bahrain, being offset by increases in finance lease amortization as a result of the negative CPI experienced last year. Note the IFRS 16 accounting requirements, finance lease amortization increases when CPI is negative and decreases when CPI is positive. These finance lease accounting entries are noncash and do not change the customer billings or actual cash flows in any way. The impact of negative 2019 CPI pass-through on our 2020 revenues is around AED 1 million for the full year. Decrease in total revenue was mainly due to the value chain businesses, which declined by 17%. Value chain businesses account to 6% of our consolidated revenues and less than 1% of our EBITDA. They are noncore businesses which continue to be profitable. Gross margin improvement was primarily due to efficiency gains resulting in reduced operating costs. We've created a provision of AED 10 million for possible COVID-19 impact. As Adel highlighted, we have not been directly impacted by this pandemic, and all our customers continue to require our cooling and all of our products continue to operate as normal. It is too early for us to identify whether there will be any long-term impact on our financials. Finance costs have been lower due to lower interest rates and principal repayments. And overall, net income increased by 3% versus the same period last year. And now we look at the statement of financial position on the next slide. Significant movements in the balance sheet as of March 31, 2020, compared to the 2019 year-end with an increase in receivables due to timing differences in payments from some large customers as well as seasonality compared to December '19. This movement, however, is primarily attributable to a single large customer. We do have a strong relationship with this customer, and we provide district cooling to them on an exclusive basis and there were no contractual disputes. Historically, they have always paid in full, and we anticipate these receivables to normalize soon. Movement in equity and other liabilities was due to a dividend payable for 2019, which was subsequently paid on the 11th of April. The increase in corporate debt and cash balances primarily reflects the AED 2.5 billion acquisition financing, which was drawn down in March and kept in escrow until the transaction closed in early April. Turning to the next slide, we'll now look at the statement of cash flow. Operating cash flow decreased compared to the first quarter of 2019, largely due to the higher receivables discussed on the previous slide. The capital expenditure incurred reflects new connections of our concession areas, the Raha Beach and Yas Island. And despite the short-term receivables build up, we believe our cash-generating ability remains with us and we expect the situation to normalize very soon. We'll now turn to the normal review of our debt portfolio and return ratios. So Tabreed has AED 2.9 billion of net debt and a gearing ratio of 40%. However, it's important to note that IFRS 16 has increased the reported net debt by AED 285 million, and net debt for the last 12 months EBITDA by 0.3x. Excluding the impact of IFRS 16, both net debt and net debt-to-EBITDA are lower than the year earlier. As you are aware, the acquisition of Dubai Downtown is 100% financed through a fully underwritten corporate facility of AED 2.5 billion with a tenor of 5 years and 100% bullet at maturity. However, the facility does allow penalty-free prepayments, which will allow Tabreed to manage refinancing risk over the life of that facility. And our intention is to refinance the term loans before the repayment is due in 2025. We are confident of our ability to generate strong cash flows, will enable us to manage the leverage profile on important line provided by the rating agencies within 18 months. Both Moody's and Fitch reaffirmed their investment-grade ratings with stable outlook, which is a testament to our strong financial position and cash flows. Net debt and net debt-to-EBITDA declined since 2017 as debt has been repaid and EBITDA has grown. That completes the detailed review of our results for Q1 2020, and I'll now pass back to Adel for closing comments.

Thank you, Richard. Before we open the lines for Q&A, let me make a few closing comments. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance with rising profitability and stable margin. We had a strong start to the year with a strong organic growth and a very strategic transformation and acquisition as we mentioned earlier. Tabreed -- also, Tabreed has a flexible capital structure to fund future growth, as we have mentioned before. We will look at opportunities within and beyond GCC, and we'll provide you with updates as and when such opportunities materialize. So today, Tabreed is stronger than even before. We have a stronger shareholder base and management team with significant industry experience. We are working on various fronts from business development to operations to help drive growth and improve profitability. Thank you, and I will now request the operator to open lines for Q&A.

[Operator Instructions] Our first question comes from Mattias Højmark, BlueBay Asset Management.

Just 2 or 3 questions here. The first one is with regards to -- and I apologize, Richard, if I couldn't hear you very well, with regards to potential refinancing on the acquisition facility. First of all, I think you said that it does have prepayment penalties, but I just wanted to double check that. Second question would be in light of what I think is attractive and competitive funding cost of that facility, however, whether you would be looking to refinance that in the market in the kind of short to medium term? And then lastly, given the increase in working capital from the receivables, whether the company currently has any committed credit facilities available and whether you would be considering drawing any such facilities given the increase in receivables?

Mattias, sorry I wasn't apparently too clear earlier. So the facility that we have for the acquisition in April does not have any prepayment penalties. So we are able to prepay that over time as the entity Downtown DCP generates free cash flows and dividends and backups to corporate level. So -- and that is our intention to do that. I think you -- I think your question on the funding costs and how that may drive our actions plan, so it was a very insightful question, and it is quite correct. I mean it is a very tightly priced facility, especially given the current climate. However, I think we do have a clear refinancing risk in 2025, which you saw from the presentation. So we will have to manage that out. I think a short-term move to the debt capital markets would seem to be unlikely. But -- and we will get some time to refinance, whether that be through debt capital markets or another facility is going to be necessary. So I think it could be more in the medium term than the short. And I think your last question was on [indiscernible]. We have a AED 590 million worth of capital facility. We routinely draw down on that in -- towards the end of Q1 and beginning of Q2 each year. And then normally by the end of Q2, beginning of Q3, we repay that in full and we're back in surplus. So that is partially drawn at the moment, but I think we have around AED 250 million of that still available to us, which is not yet drawn down.

Perfect. And I'm sorry, you said that the total size of the facility is AED 500 million?

AED 590 million.

Question comes from Belal Sabbah, Jadwa Investment.

And I apologize as well. The voice isn't that clear, so you may have answered my question, but I didn't catch them, but I'm going to ask them anyway. First of all, if you could just take a couple of seconds and just explain how your revenues get impacted or don't get impacted by the whole situation of COVID? Do clients coming up for some sort of waivers, et cetera? Also, I think you mentioned something about receivables and how that's expected to normalize, would you mind recapping that point, please?

This is Richard, again. So on COVID, I think, again, I'll reiterate, the direct impact on Tabreed is very limited. We have taken a number of actions, which incurred a little bit of cost to ensure that we have business continuity, and to ensure that COVID can't cause any kind of interruption in our business group. But really, those costs didn't move the needle in any way. In terms of the impact on revenues, we are passing through to our customers the discounts which are being provided by the major utility companies in the region. So that will cause a small decline in revenue, but no decline in EBITDA and net income as a result of that. That's simple pass-through. If we're given a discount, then we'll pass that through to the customers. We don't keep any of that for ourselves. And I think, Belal, your second question -- and beyond that -- sorry, just on finalizing on COVID. Beyond that, as I said, all of our customers continue to take our cooling services and all of our plants are continuing to operate. Therefore, given that the vast majority of our EBITDA, our net income is driven by capacity charges, they are still chargeable and we don't expect any impact on the performance of the business as we sit here today. But it is early days for us. In terms of receivables, we have our single largest customer who historically has delayed on his payments at times, but they've always caught up and always paid us in full. So the situation that we have on receivables at the moment is most entirely due that single large customer, and we do expect them to pay us in full. I will reiterate it again if I can that we have no contractual disputes with our customer, and we are informed that all of our invoices are authorized payment. So we do anticipate payments coming through in due course, and we don't expect to incur any losses there at all.

Super clear. And just one thing, more of a general question. How are you guys seeing the pipeline of projects in the region now? I think in the overall economy in the region, other than COVID, it's also being impacted by low oil prices, et cetera. You guys did a fantastic job of securing the Emaar contract to secure some growth. But how is the overall market situation looking right now? Are there still -- is there still a decent pipeline of projects that were maybe ongoing and they're soon looking for district cooling service providers? Or has everything come to a halt and people -- and projects are being canceled, et cetera?

So we haven't seen any projects canceled. And the majority of the growth that we've seen outside of the recent acquisitions over the last couple of years has come from our concession areas around our network. I think at the moment, perhaps the most active of those concession areas is Raha Beach and Yas Island which I mentioned. And they continue to provide new capacities to us at a relatively low level, but they continue to provide. The recent acquisition of Masdar is also a concession area, so over time that will provide further capacities as well. Beyond that, I think -- in this climate, I think we said over the last 3 or 4 years, this relatively depressed economic climate should create additional M&A opportunities for us over time. And it took time for that to materialize with the Downtown acquisition. I think there are other opportunities out there in the market. And we don't believe that Emaar is the end of our growth story in any way at all.

And our next question comes from Divye Arora, Daman Investments.

So I was just looking to question regarding the COVID situation. So if you look at your clients, most of them are -- 80% of them are government or government entities. So they are guys like Aldar and all over there, which have been impacted, whose businesses have been shut down. So I can -- we can understand that capacity charge is a fixed charge, and it is there to call your investments. But on the consumption charge, is there any -- have the customers approached you to do discount on the consumption charge or -- the new facility was not operating. Obviously, they were not using it, but now in the current environment when they're also getting started again, is there any request for reducing the consumption charge? Or even the capacity charge, some sort of a deferral to be made from the cash flow perspective? So that's number one. So once you answer that, then I'll put up the next question.

Okay. Thank you, Divye. I think as I said, the discounts that are coming from the utility companies in the region, we are passing on to our customers. So that's the consumption discount that we have provided to our customers. We've seen a small reduction in consumption year-to-date of around 5%, that kind of area, which we think is reflecting the situation of many large buildings being close to public. So we wouldn't anticipate that, that carries over to the remainder of the year. And then in terms of capacity discount, I mean, if the customer is still taking the cooling, then the capacity charge is still payable. We haven't reached any agreement with any customers to defer or to discount in any way at all. Some discussions with customers, but nothing concrete at this stage.

But any customer has approached you from that angle to provide a deferral or something at least, if not a waiver, of the capacity charge for 3 months or 6 months?

There have been some discussions with some customers, yes, but I'm not going to go into any details today. I think the position we have is very clear that the service is still provided by Tabreed and therefore, the -- we still need to be paid for that. We're still incurring costs that we have to continue to provide that service. We can't cut our costs and continue to give out service. So yes, that's why they pay.

Okay. All right, clear. In terms of the Emaar acquisition, district cooling acquisition, so the -- when -- is this already closed because the cash flow is still there on your balance sheet? Have you already -- now recently have you already paid it, paid for the acquisition?

Yes. Yes. So the transaction closed on the 6th of April. So we had drawn down the funds, we put in an escrow at the 31st of March, and that's why you can see it in the Q1 financials because the transaction is fully closed and we are now fully operating those products on behalf of the Downtown DCP.

Okay. And the consolidation should begin from April 6?

Yes.

Okay. All right. The third question is linked to the revenues. So what we have seen is that on the chilled water side, the revenues have been flattish. So you have mentioned something regarding the -- I think some accounting charge or some noncash charge over there. And I think as far as we remember, you have a CPI component and there is a delay of 1 year in passing on the CPI to the customers. So last year, I think there was a deflation in the economy, so that would be having a negative impact on the revenues this year.

So I think I did mention that in the presentation. It's important to recognize not all of our contracts are the same. We are not an electricity -- government electricity company, so we have individual contracts with our individual customers. And the escalation clauses within those contracts vary. So not all of the contracts will see a flow-through of negative CPI into the tariff. So the overall impact on this year's revenue will be around AED 1 million for the full year.

Next question comes from Rakesh Tripathi, Franklin Templeton.

All my question are answered. Thank you very much.

Then we'll take our next question from Farah Kandil from Arqaam Capital.

I'm sorry, the line was not so clear, so the question might have been answered already. So I would like to ask about the JV growth and JV income on a year-on-year basis. There is a part of the business, mainly due to the one-off, as mentioned in the presentation. So I just wanted to see if you can quantify how much is the increase for business one-off gains? And how much was not focused on the growth and non-growth?

I'm afraid, I didn't catch that question. The line is quite full. I think -- I don't know whether we could take it off-line, maybe have a chat with Saket on that point. Is that possible?

Yes.

Thank you.

[Operator Instructions] As we have no further speakers at this moment, dear speakers, back to you for the conclusion.

That concludes our first quarter earnings call. Tabreed looks forward to interacting with you at our earnings conference call and investor conferences. Should you have any further questions, please do not hesitate to contact us. Have a great day and stay safe, and thank you once again for joining us on this call.

This concludes our conference call. Thank you all for attending. You may now disconnect.