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

Ladies and gentlemen, welcome to the Tabreed's Q1 2022 Earnings Call. I now have the pleasure of handing the call over to your host, Ms. Weaam [ Osman ]. Madam, please go ahead.

Thank you. On behalf of Tabreed's management team, I welcome you all and thank you for joining us for the Q1 2022 results conference call. Hope you are all keeping safe and healthy. 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 request you to turn to Slide 3 for today's agenda. On today's call, we have with us: Adel Salem Al Wahedi, Chief Financial Officer; and Salik Malik, acting Vice President of Finance. Adel will begin with opening remarks and provide an overview for Q1 2022 performance and key highlights. Following that, Salik will discuss the financial performance in more detail. Adel will then conclude the presentation. And we will open the line for your questions. Thank you, and over to you, Adel.

Thank you, Weaam, and thank you, everyone, for joining us today. I would like to highlight our first quarter of this year's performance. The total revenue grew by more than 17%, led by the chilled water business growth of 19.6%. During the same period, EBITDA growth was 16%, resulting in EBITDA margin of close to 63% for that period. Net profit during the year increased by 3.1% to record AED 88.2 million. During the quarter, we added capacity over 26,000 RTs, including 18,000 RTs, which was the acquisition of Al Mouj district cooling assets in Muscat, Oman in January of this year. In the month of March, we published our Green Financing Framework, which will help the company meet its commitments and finance new projects to support its business strategy and vision. Further, I would also like to highlight that we are expected to publish our second ESG report by end of this month. Moving to the next slide, please. Tabreed is contributing to the region's growth through efficient and environmentally friendly cooling, enabling sustainable development. As our business grows, so does our positive environmental footprint. We are one of the largest district cooling providers in the region and currently operate 86 plants across the region, delivering over 1.24 million tons of cooling. Over last 12 months, our operations saved over 2.3 billion kilowatt hours of energy consumption, enough to power over 132,000 homes for a year and equivalent to over 1.38 million tons of saved CO2 emissions. Today's results announcement will demonstrate Tabreed's sustainable and resilient financial performance. In addition, we believe that carbon emission savings generated through our district cooling services are an essential enabler to allow the region's government to meet their sustainability targets for the future. The next slide, we summarize our connected capacity. During the first quarter of this year, we added capacity of 26,000 RTs across our operation. Of the total added capacity, 18,000 RTs in Oman was an acquisition of the Al Mouj district cooling assets in January in Oman and approximately 7,500 RTs were added in the UAE and the balance, 500 RTs in Bahrain. As you would be aware, in the last quarter of last year or the fourth quarter of last year, we also had a set of acquisitions of the remaining 50% stake in Al Wajeez cooling plant in Abu Dhabi, Al Maryah Island, which has resulted in movement in 64,000 RT of capacity from equity accounted to fully consolidated. Moving to the next slide, which summarizes recent corporate developments. 2021 was another stellar year for Tabreed and DC markets in the region. I think you will agree that pandemic has brought significant change and Tabreed has demonstrated its resilience and agility to adapt quickly and responded to this evolving situation in a very positive way. We also entered into a strategic partnership with IFC, a subsidiary of World Bank, to expand in India with a mandate to develop projects in the next 5 years. We have established JV based out of Singapore with 75% being owned by Tabreed and 25% by IFC. We completed a small acquisition of Al Mouj development through Tabreed Oman in January this year. This district cooling plant, serving the iconic and luxurious The Wave development in Muscat, home to a mixed range of residential, commercial and hospitality venues, including the Kempinski Hotel. It's a concession for 30 years and 28,500 tons capacity. And currently, the contracted capacity is over 18,000 as explained earlier. We also announced our entry into Egypt via a partnership agreement with Gascool and Marakez. Once again, this demonstrates the Board and the management commitment to diversify and expand into new markets beyond GCC. In March of this year, we published our Green Financing Framework, enabling us to target the green financing instrument and attracting green financing investors. The target is led by 2027 Tabreed debt facility should be green. Tabreed continued to deliver a strong and robust financial performance with a CAGR of 12% in revenue and 16% in EBITDA since 2019. Similar to last year, we saw Tabreed's first equity dividend, reducing dividend cash flow by 50%. The Board and shareholders once again adopted the same in '22 to support the growth strategy and demonstrated their commitment to protect the ratings and improve the credit metrics. Earlier of this year, Tabreed appointed Mr. Antonio Di Cecca as Chief Operating Officer in place of Jean-Francois, who has moved to another assignment within ENGIE Group. Moving to the next slide. This slide recaps the evolution of our performance over recent years. To summarize, Tabreed is a stable utility infrastructure business with long-term contracts with high-profile customers. This provides a clear visibility of our future earnings and cash flows. We currently have approximately 85% of our recent capacity contracted at least for the next 10 years. The current connected capacity of 1.24 million RT, which has grown at an average rate of 10% since 2019. About 70% of our revenues are derived from fully government-owned or partially government-owned organizations, therefore, diversifying the customer profile. Group revenue has grown by 12%, mainly from cold or chilled water business, which has shown an average growth rate of 14% since 2019. Tabreed has a track record of delivering profitable growth. EBITDA has increased at an average rate of 16% per annum since 2019. Our profitability is in line with the historic averages. And we are confident of maintaining the margin levels over long term. Tabreed's performance during the last 2 years of the COVID pandemic and negative CPI demonstrates a robust and resilient nature of our business and the returns that we generate. I will now hand over to Salik for a detailed discussion of our income statement.

Thank you, Adel, and good afternoon, everyone. Let me start by highlighting the key points on our income statement for Q1 2022. As mentioned by Adel, total revenue grew by 17%, driven by robust performance in chilled water, which recorded a growth of 20% compared to the same quarter last year. Other key factors driving this increase in revenue are the recent acquisitions in 2021. Both Saadiyat and the step-up acquisition that we did in Q4 last year of Al Wajeez has contributed around 14% of the growth. Around 6% of the growth was contributed by the new connections, increase in consumption volumes and overall improvement in our operational efficiencies in our existing portfolio. We also had some small benefits from the positive CPI adjustments that took place at the start of this year. EBITDA for the first quarter grew by 16% to absolute value of AED 264 million, an increase of almost AED 38 million year-on-year first quarter. The growth in EBITDA was primarily driven by consolidation of Saadiyat and Al Wajeez DC assets. EBITDA margins were at 63%, in line with our historical margins for the same quarter. Increase in net finance cost is due to consolidation of debt of Al Wajeez upon the step-up acquisition in Q4 last year. Share of results of equity accounted entities has reduced, again due to the same factor of Al Wajeez step-up acquisition, resulting in a change in accounting as a subsidiary versus the previously accounting method of equity -- equity method of accounting. Net profit for the period increased by 3.1% compared to the last year, delivering an overall net income of AED 88.2 million. We'll now move on to the next slide, which is talking about the financial position. This is a slide showing summarization of the balance sheet as at 31st March 2022. The key movements in the first quarter are as follows. Fixed assets and the intangible movements represent the Q1 amortization. The accounts receivables are lower, mainly from the improved collections and a catch-up of last year from our top 5 major customers. DSOs as of end of March has improved significantly and at historical low levels for Tabreed. Changes in derivatives represent the positive MTM movement in our existing interest rate swaps, reflecting the current hikes in the interest rate markets. Increase in other liabilities mainly reflects the cash dividend payable of AED 167 million, which was subsequently paid in first week of April 2022. Share capital was increased following the bonus share issuance and the first quarter profit. Turning on to the next slide for the cash flow. Our cash flow performance during the period has been extremely robust. Strong cash flow from operations of AED 391 million, reflecting significantly higher collections across all customer segments, and among them were the top 5 major customers. Our cash from operations to EBITDA ratio for Q1 was at over 140% compared to the full year last year 2021 at 120%. In Q1 this year, there is no significant investment in CapEx or acquisition. And in the comparatives, it reflects the payment on the acquisition of Saadiyat Island district cooling assets. Financing activity represents a normal debt service. And the increase versus last year is due to the consolidation of Al Wajeez post the step-up acquisition we did. Overall, the first quarter 2022 recorded a strong and robust cash from operations, resulting in a healthy closing cash balance of close to AED 1.5 billion. And our revolving credit facility of almost AED 600 million remains fully unutilized. This liquidity, combined with our flexible capital structure, positions the group well to fund the future growth. Now moving on to the next slide, where we talk about the debt portfolio. As of end of March 2022, Tabreed has a net debt of AED 5.9 billion. Though the debt has increased, but it is due to the consolidation of Al Wajeez debt post the step-up acquisition. Net debt has reduced due to the higher cash balance that we have seen in the previous slide. The overall net debt-to-EBITDA ratio has improved to 5.5x in March compared to 6.0x in December 2021 last year. Tabreed, as we all know, naturally delevers over time due to the strong cash-generating characteristics of our business model. Both Moody's and Fitch reaffirmed their investment-grade status following the 2021 acquisitions. This completes the detailed review of our results for our first quarter 2022. Now I'll hand it over back to Mr. Adel to take you through the conclusions.

Thanks, Salik. Moving to the next slide. Tabreed is a highly sustainable business, delivering significant power efficiencies compared to other cooling alternatives. Sustainability is at the core of Tabreed's operations, which reflects the company's commitment to energy efficiency and the environment and the sustainable socioeconomic development of the region. Tabreed has set its own target to support energy consumption reduction and emission prevention through innovative technology solutions and environmentally friendly practices. Tabreed's environment-friendly initiatives are part of Tabreed's operation such as use of treated sewage effluent, emission monitoring, thermal energy storage, use of sea water, management of hazardous waste and compliance with the framework of the regulation of trade effluent. All the above initiatives has saved over 2.33 billion kilowatt hours of energy consumption, enough to power around 132,000 homes for a year and equivalent to reducing around 1.39 million tons of CO2 emissions. Next slide. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance with rising profitability and margin. We continue to work on various fronts from business development to operations to help drive further growth. Tabreed has solid corporate governance and market-leading transparency, demonstrated by nonexecutive Board composition. The second-party opinion in our Green Financing Framework confirm the positive environmental impact of our core district cooling operations. I would like to reiterate that Tabreed's performance during the last 2 years of COVID pandemic and challenging business conditions demonstrate the robust and resilient nature of our business. Thank you for joining us today, and I will now hand back to Weaam to open the Q&A line.

Thank you, Adel. That concludes our results presentation. I will now request for the operator to open lines for Q&A.

[Operator Instructions] And our first question comes from Rakesh Tripathi of Franklin Templeton.

I had one question basically. If you could talk a little bit on future M&A plans, what should we expect from -- as far as the business direction is concerned, should we expect more of acquisitions to come in the near to medium term or more organic growth to be pursued from hereon? And then secondly, in connection to the same thing, if you could also talk about the -- you plan to use the cash on books as of now. The cash balance has gone up after the solid collection in terms of the cash flow in Q1. How do you plan to use this cash? Where should we see this cash being deployed?

Thanks, Rakesh. See, in terms of the M&A activities, we are definitely looking -- this market is still open for the opportunities. And we have seen the consolidation in the district cooling market in the last 2 years, right, which was an exceptional period when it compared to the history. But we do anticipate that there are still a few other opportunities in the market, and we continue to target that. And as and when we are close to those transactions, we would definitely inform through the market, DFM basically. And your second question, if I'm not mistaken, it's on the closing cash balance. Am I right?

Yes. And then basically, the use of the cash, how do you plan to deploy that cash?

So currently, we have seen this working capital change because of the huge collections that we had witnessed during the first quarter. This was a catch-up and this was always expected. And we are -- and we also expect some kind of transactions in the market that's there and our BD team is working on it. So keeping in mind, definitely -- and that's one of the reasons that during the Annual General Meeting, the shareholders had recommended a 50% scrip dividend in order to be ready for any potential M&A activity that may spring on the targets that we are following. So we are ready to fund this and then take out to the market at some stage. That's the idea behind this.

Okay. So this is basically to confirm, this is more like dry powder that you want to keep on the books, be ready whenever you see a good opportunity, right?

Yes. Can you -- your voice is echoing, Rakesh. Can you please repeat your question, if you don't mind?

Yes. No, so I was just saying, so just to confirm, this is basically surplus liquidity that you want to -- that you prefer to keep on the books for now with potentially opportunities that you might see?

Correct. Absolutely. So yes, this is the phenomenon. But yes, if -- once there's any potential transactions materialize, we should be in a position to go and execute it and do the financial close of this transaction.

Great. And on leverage, can you talk a little bit about the kind of path that you see as far as the leverage profile is concerned from hereon? I understand that you don't have any material maturities coming up before 2025. And in that respect, basically, the question is just to understand, how do you see the leverage evolving? Do you want to keep sort of this kind of level of debt and just grow the EBITDA, grow the business so that the leverage metrics automatically reduce? Is that how you see it? Or are there plans to, at some point, maybe start looking at deleveraging and paying down some of these debts, prepaying some of it? Do you see the whole leverage position evolving?

Thanks, Rakesh. So it's multiple questions in one question, I appreciate that, really good questions. Yes, Tabreed -- as you are aware, Rakesh, Tabreed naturally delevers over the time. And due to the strong cash generating capacity, our EBITDA margins, on an annualized basis, is close to 50% and a little above, yes. And when it comes to the leverage target, as we had mentioned in the past, there is no set target, but we are committed to maintain the investment-grade status. And we have reiterated in various platforms, be it our CEO, CFO and the Board members in various public platforms, they have mentioned this that we would like to maintain our investment-grade status. And the current ratings requirements on the leverage is very clear. And that's available both with Fitch and Moody's. So the Moody's, they track with the RCF ratios, which should be more than 10%. And when it comes to the Fitch, the net debt to the -- the conventional net debt-to-EBITDA is at 4.5%. And both these acquisitions, yes, we have increased, we have gone a bit higher. But those have been agreed. And there is a definite time frame to be back within the threshold or the metrics set by both these agencies. So yes. And we expect naturally to delever this going forward. And as you know, this -- our business generates almost 50% of EBITDA, yes. And that's how we would like to manage. And any new transaction comes, we would definitely look for the free cash available to fund. If not, definitely, we will look into the liability management that may come in future.

[Operator Instructions] It appears we currently have no further questions. So I'll hand the call back over to Weaam for any closing remarks.

That concludes our quarter 1 2022 earnings call. Tabreed looks forward to interacting with you at our earnings conference call and investor conferences. Should you have any further questions, please don't hesitate to contact us. Have a great day, and thank you once again for joining us on this call.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.