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

Hello, and welcome to the Tabreed Q1 2023 Earnings Conference Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Kevin Hackett, to begin. Please go ahead.

Thank you. Hello, everyone. On behalf of Tabreed's management team, I welcome you all and thank you for joining us for the quarter 1, 2023 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 ask everybody to turn to Slide 3 for today's agenda. On today's call, we have with us Adel Salem Al Wahedi, Chief Financial Officer of Tabreed; and Salik Malik, our Vice President of Finance. Adel will begin with the opening remarks and provide an overview of the quarter 1 2023 performance and key events. Following that, Salik will discuss the financial performance in more detail. Adel will then provide a brief overview of Tabreed's leadership team and subsequently conclude the presentation, and we will open the lines for your questions. Thank you, and over to you, Adel.

Thank you, Kevin, and everyone, for joining us today. I would like to highlight our first quarter and 2023 performance as follows. Total group revenue and chilled water revenue increased by 10% to AED 464 million and AED 447 million, respectively. The increases are organic and derived from new connected loads during the last 12 months and consumption volumes. During the same period, EBITDA had increased to AED 268 million with a sustainable margin of 58%. The company's net income has shown a remarkable growth of 168% amounting to AED 236 million and net income before the one-off income also increased by 33.4% to AED 117 million. The annual general assembly on 20th of March 2023, Tabreed shareholders had an approved cash dividend of [indiscernible] for the year 2022, representing a payout ratio of 64%, which was paid subsequently in April '23. Further, I would like also to highlight that our third ESG report will be published by end of June of this year. Moving to the next slide. Tabreed is the first and one of the largest -- world's largest publicly listed district cooling company with a strong presence in GCC and beyond. Currently, we operate 86 plants, delivering close to 1.3 million refrigerated tons of cooling. Our growth strategy is focused on exploring further opportunities in India and Egypt. Our business model is highly cash generating, delivering significant power efficiencies compared to other cooling alternatives. At Tabreed, we prioritize financial discipline and sustainability, which is at the core of our long-term strategy. We are fully committed to the sustainable socioeconomic development of the region. Also, we continue to work diligently in all areas from business development to operations to drive growth and improve operational efficiencies. Moving to the next slide, which summarizes our connected capacity. During this quarter, we successfully increased our operational capacity by 12,000 RTs. This has brought our overall connected capacity to close to 1.276 million RT. Of the total new connected capacity, which is purely organic consists of new connections in our existing concession areas mainly in UAE and Oman, 11.3k RT and 0.9 RT, respectively. Total CapEx spend in this quarter is AED 16.8 million, accounting for maintenance, replacement and growth efforts. -- it is lower as it is spent on the new connections from our existing connections, which normally require lower CapEx. Moving to the new slide. As we look forward across the next 2 years, the new capacity guidance for '23 and '24 is 120,000 RT. This is in line with our previous guidance. Around 60% of this guided capacity is expected from the consolidated entities while the remaining from equity-accounted entities. We remain confident of achieving '22, '23 period guidance having already achieved 67,000 RT of the 120,000 RT guidance, all from consolidated entities. Tabreed continues to demonstrate its ability to deliver a steady increase in connected capacity in the region, driven by the growth in our key markets across the GCC and by successfully leveraging our regional network to take advantage of commercial opportunities as and when they present themselves. Moving to the new section of the performance highlights. Tabreed operates as a stable utility business model, entering into long-term contracts with repeatable customers. The group's connected capacity has now reached 1.276 million RT across GCC based on average contract term of 20 years. Approximately 80% of the group's revenues are derived from contracts with the fully government-owned or partly government-owned entities, which ensures a robust credit profile for its customers. As a result of the utility business model and its contracts with repeatable customers, Tabreed has witnessed a steady increase in revenues with a growth rate of 16.4% annually since 2020. Moving to the next slide. Over the years, Tabreed business has recorded a steady growth in its EBITDA profit from operations and net income level, which has mirrored its impressive top line performance. This growth has been supported by capacity charge component in our revenue model, which has increased predictability in earnings. Over the past 3 years, our EBITDA, operating and net income margins have remained stable, averaging at 61%, 36% and 24%, respectively and demonstrates the sustainability and effective financial prudence of our business. We are confident in our ability to maintain these strong margin levels over the long term as we continue to operate a robust and resilient business model. Moving to the next slide. Tabreed has maintained a resilient cash flow from operations, allowing us to maintain our investment grade rating with both credit rating agencies, Fitch and Moody's. The early settlement of one of our bank facilities led to a reduction in our total debt by AED 650 million, thus, improving our gearing ratio from 53% to 49%. Now I will hand over to Salik for the financial results detail.

Thank you, Adel, and good afternoon, everyone. Let me start by highlighting the key points on our income statement for the first quarter 2023. Total revenue grew by 10%, driven by the robust performance in chilled water, which recorded an annual growth of 10%. The increase are organic from the new connections of 40,000 tons connected during the last 12 months. Also, consumption volumes have recorded an increase, which contributed 2% growth in our revenues. Added to that is the 2022 CPI of 4.8%, contributing another 2% in overall blended revenue. The increase in operating cost is in line with the increase in customer volumes and also some winter maintenance activities that we carried out during the first quarter. In aggregation, our EBITDA grew by 2% year-on-year to AED 268 million during the first quarter, with a sustainable margin of 58%. Lower finance costs associated with additional fixed deposit income of approximately AED 15 million during the first quarter based on our healthy cash balances. During this quarter, there were 2 significant events which had a positive impact to our net income, namely the liability management backed by our healthy cash balance, Tabreed Board had approved to early settle one of the facilities along with the associated hedge instrument during this quarter, resulting in reducing the future finance cost and improving our gearing. This exercise resulted in other income of AED 100.6 million, which is a combination of a cash flow gain upon unwinding of the hedges and a reclassification of fair value of derivatives from other comprehensive income to P&L. This together after a right off of the unamortized transaction cost, the net gain from this transaction is around AED 80 million. In addition, during the first quarter, PIF is Saudi Sovereign Wealth Fund joined as a new shareholder in Saudi Tabreed along with the issuance of new shares. As a result, the group's holding in Saudi Tabreed diluted from 31.1% to 21.8%. This resulted in a one-off accounting gain of AED 49 million based on the fair valuation of the PIF transaction. In summary, the net income for the first quarter is at AED 236 million, including in other gains of AED 119 million recorded during the first quarter. Net income before one-off is at AED 117 million, recording an increase of 33% compared to the same quarter last year. Moving on to the next slide, talking about the balance sheet. The decrease in trade receivables represent a seasonality impact and an enhancement in our billing to cash conversion cycle. Increasing investments in associates represents the fair value adjustment of our investment in Saudi Tabreed post the PIF transaction. Our net debt position from AED 5.5 billion in December 2022 has reduced to AED 5.2 billion in end of first quarter. The decrease is due to the liability management exercise done at the end of Q1 this year. And in conjunction with the increase in our last 12 months EBITDA, our leverage ratio of net debt to EBITDA improved to 4.27x. Our fixed rate bond and sukuk are -- and the 100% hedged corporate loan facility have provided a protection against interest expenses in the current environment of raising interest rates. The central banks across the major economies took measures to address the inflation period during the past 2 years, which has protected us. As a reminder, we have 2 facilities maturing in 2025. One is the corporate facility that we did during the acquisition of Downtown and the other 1 is the sukuk. This long-term facility allows us the penalty-free prepayments, and this will help to manage the refinancing risk over the life of the facility. Other liabilities increased mainly due to the accounting of dividends during the quarter, which was paid late in April. To reiterate, during the second half of 2022, both Moody's and Fitch, reaffirmed the investment-grade ratings of Tabreed, Moody's at BAA3 and Fitch at BBB, with an upgrade from negative to stable outlook. The movements in equity results and other liabilities is due to the dividend payable that was settled in April. Moving on to the next slide. Our cash flow performance during the period remains robust. Strong cash flow from operations of AED 323 million, reflecting high collections across all our customers. Our CFO to EBITDA ratio from Q1 '23 was over 120%. The cash flow from investment activities reflects the CapEx required to grow and the maintenance CapEx. Financing activity represents the settlement of bank facilities as part of the liability management program that we undertook during this quarter. Overall, the first quarter 2023 recorded robust cash from operations, resulting in a healthy closing cash balance of close to AED 1.4 billion. And our revolving credit facility of AED 590 million remains fully unutilized. This liquidity, combined with our flexible capital structure positions the group well to fund the future growth. The next slide, the net cash flow from operating activities before the working capital, which is equivalent to EBITDA has increased to AED 268 million versus AED 264 million year-on-year. Free cash from operations has increased by 120% of EBITDA driven by improved customer collections and better working capital management. Investment in CapEx is minimum as we are committed to disciplined prudent investment opportunities in line with our board mandate. As you would have noticed, we are well positioned to invest in any new opportunities, which meets our thresholds of internal IRR and we remain competitive with our peers. With this, I conclude and hand it over to Adel to take through the rest of the presentation. Over to you, Adel.

Thank you, Salik. I would like to provide a brief update on Tabreed's leaders, corporate governance as a critical component of the letter G in ESG, and expect that Tabreed's shareholders have always pressurized. This slide provides a background on our Board members on 20th of March of this year, during the annual general assembly, Tabreed's shareholders elected its Board of Directors for the upcoming 3 years. 8 of the existing board members have been reelected, and we have 1 new board member, Dr. Alyazia Ali Al Kuwaiti to the Board of Directors. By this, we have now a little more than 20% women representatives in our Board as we have to now. I would like to take this opportunity to express our gratitude to the excellency Dr. Ahmad Belhoul Al Falasi who have stepped down during the year from board for his invaluable service to the Tabreed Group. We also welcome the new Board, all of whom bring extensive experience and knowledge. In summary, Tabreed has a robust corporate governance and practice transparency guided by a fully nonexecutive board composition. Moving to the new slide. Furthermore, our management team remains fully committed and led by our CEO, sir, Khalid Al Marzooqi. Recent changes in the senior management team is the introduction of Nadia Bardawil as Chief Legal Counsel; and Philippe Coquelle, Chief Development Officer, who has replaced François Xavier Boul. Nadia Bardawil has more than 15 years of experience in working on the development and financing of energy and infrastructure projects in MENA and Europe. And Philippe has more than 20 years of experience within the international energy sector. He has performed numerous roles in project management, business development, project finance and mergers and acquisitions. It's a great management team, has a wealth of experience and is well equipped to guide Tabreed through the coming years. Moving to the next slide, please. I would like to provide a brief overview of Tabreed's environmental footprint. Tabreed has set ambitious targets for reducing energy consumption and emissions. We will leverage innovative technology solutions and environmentally friendly operating practices, such as the use of treated sewage effluent thermal energy storage, sea water, emission monitoring, hazardous waste management and compliance with the trade affluent regulation to achieve these targets. We are proud to report that Tabreed's operations have resulted in the savings of approximately 2.34 billion kilowatt hours of energy consumption, enough to power over 133,000 homes for a year and equivalent to the annual prevention of over 1.4 million tons of CO2 emissions. We believe that the carbon emissions prevented through our sustainable cooling services are essential and enabling governments in the region to meet their sustainability targets for the future. As a result, Tabreed is committed to playing a key role in the UAE's Net 0 emission target by 2050. And as we have this year, it's a year of sustainability and UAE will host [indiscernible]. We have many initiatives that it will be announced in a quite time. So it will be individually and others that will be in coordination with [indiscernible] office and the Ministry of Climate Change and Environment. I will now open -- request -- to work with the operator to open lines for questions and answers.

[Operator Instructions] Our first question for today comes from Rakesh Tripathi. He has a few questions. And congratulations on a good set of results. Can you comment a bit on the EBITDA margin decline this year relative to the past 4 years?

Thank you, Rakesh. Thank you for your comments and congratulations. Thank you. So with regard to the EBITDA margin decline, the main reason for the increase in revenues are customer volumes. And as you know, customer volumes has a thin margin when it comes to the EBITDA. And similarly, as I mentioned in my talking points that we have undertaken a winter maintenance program this year. So that has also resulted in the higher cost, which is just a one-off in Q1. Because of long winter, we took this as an opportunity to fix all our maintenance-related programs. And that is why that blip, you would notice.