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

Hello, everyone, and thank you for joining Tabreed H1 2023 Earnings Conference Call. My name is Daisy, and I'll be coordinating your call today. Tabreed to begin, so [ Farida ], go ahead.

Good afternoon, everyone. On behalf of Tabreed management team, I welcome you all and thank you for joining us for the H1 2023 Results Conference 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. Finally, 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; as well as Salik Malik, Vice President of Finance. Adel will begin with the opening remarks and provide an overview for H1 2023 performance and key events. Following that, Salik will discuss the financial performance in more detail. Adel will then conclude the presentation and will open the lines for your questions. Thank you, and over to you, Adel.

Thank you, [ Farida ], and everyone, for joining us today. I would like to provide an overview of Tabreed's first half of this year 2023 performance and key events. Tabreed recorded 9% growth in group revenue, which is primarily attributed to the robust performance of our core Chilled Water business. Specifically, our core business revenue grew by 8%. This growth was driven by various factors, including new connections and existing concession, higher consumption volumes and positive impact of CPI. Throughout the first half of this year, the company delivered a healthy and sustainable EBITDA of AED 590 million with a margin 55%. H1 of this year as well, net income before the one-off gains increased by 16% to AED 280 million, including the one-off gains of AED 107 million, our net income increased by 61% to AED 386 million. In India, Tabreed has established a strategic alliance with Tata Reality and Infrastructure Limited, TRIL, for it's first project in the country. Excluding India, we have successfully commissioned 3 new plants during the first half of the year one in UAE and 2 in Saudi Arabia. As part of the previously communicated capacity expansion plan, Tabreed has been diligently working towards delivering the capacity guidance of 120,000 RT for the year '23 and '24. As part of it, we have now successfully delivered 34,000 RT of this plant capacity expansion. We are pleased to announce the publication of our third environmental, social and government, ESG report available in our quarter. Moving to the second slide or the next slide, please. Tabreed is the first and one of the world's largest publicly listed district cooling company providing district cooling services across 5 countries with a strong presence in the GCC and recently in India. Our operational portfolio comprises 89 plants, collectively delivering close to 1.3 million RTs of cooling. As we move forward, our growth strategy remains focused on exploring selective opportunities in the Egyptian market. Across all aspects of our business, we remain dedicated to driving growth and optimizing operational efficiency. This is a testament to the mindset of our management team and their pursuit for excellence. We continue to work diligently in all areas from business development to operations to drive growth and improve operational efficiency. Moving to the next slide, which summarizes our connected capacity. In the current quarter, we achieved a significant increase in our operational capacity, adding 20,000 RT. This expansion brings our overall connected capacity close to 1.3 million RTs. Notably, the entirety of this new connected capacity in the second quarter is purely organic and arises from new plants and connections established within our existing concession areas, which includes 14 RT in Saudi Arabia -- 14,000 Saudi Arabia; 6,000 in UAE; and 1,000 in Bahrain. For this quarter as well, we spent a total CapEx close to AED 60 million strategically directing this capital towards majorly for expansion and construction of the new growth. Moving to the next slide, please. Looking ahead to the next 2 years, we maintain our guidance for new capacity additions in '23 and '24, targeting a total of 120,000 RT. This is aligned with our previous guidance. Approximately 60% of this guided capacity expansion is expected to come from consolidated entities, with the remaining contribution coming from equity accounted entities. We are confident in our ability to achieve our stated guidance for the year '22 and '23 period as we have already made substantial progress by achieving 89,000 RT on last year guidance. Tabreed's consistent ability to steadily increase its connected capacity in the region is a reflection of our dynamic growth in key markets across GCC. Furthermore, our expertise in utilizing or utilization of regional network allows us to capitalize on commercial opportunities as they arrive. Moving to the next slide. Overview about the performance. Tabreed operate a stable utility business model, engaging in long-term contracts with high liquidity-worthy line. As previously mentioned, the group's connected capacity is close to 1.3 million tonnes across the GCC with an average contract term spanning over 25 years. Approximately 80% of the group revenue are derived from contracts with either fully government-owned or partly government-owned entities, underpinning a robust credit profile. Leveraging our utility business model and partnerships, Tabreed has experienced a consistent growth in revenues, showcasing strong annual growth rate of 15% since year 2020. Moving to the next slide. Throughout the year, Tabreed business has demonstrated consistently growth trajectory in EBITDA, profits from operations and net income, which closely aligns with its top line performance. This upward trend has been supported by capacity charge component within our revenue model, effectively enhancing earnings predictability. Over the past 3 years, during the same period, our EBITDA operating profit and net income margin remained stable, maintaining an average of 55%, 36% and 30%, respectively. This stability underscores the sustainability and the effective financial prudence that forms the core of our business practices. With confidence in our robust and resilient business model, we continue to expect to deliver these margin levels over the long term, further solidifying our position in the market. Next slide. Tabreed has demonstrated resilience in cash flow from operations, enabling us to uphold our investment grade rating, with both reputable credit rating agencies, Fitch Moody. Through the early settlement of one of our bank facilities, we successfully reduced our total debt by AED 650 million, resulting in a lower gearing ratio from 62% to 49%. I will now hand over the presentation to Salik, who will provide a detailed overview of the financial results for the first half of this year.

Thank you, Adel, and good afternoon, everyone. Let me present the key highlights from our income statement for H1 2023 versus the same period last year. As mentioned by Adel, total revenue, delivered a robust growth of 9%, primarily driven by our performance in our core Chilled Water business segment, which recorded an impressive year-on-year growth of 8%. This growth is primarily organic attributed to addition of 55,000 tonnes, majorly through new connections during the last 12 months. Our consumption volumes also experienced an increase of 5%, and we benefited from the positive impact from 2022 CPI at 4.8%. The rise in operating cost is in line with the corresponding increase in our customer volumes ensuring the efficient management of our expenses. During the first half of 2023, Tabreed delivered a healthy EBITDA of AED 590 million, demonstrating our ability to generate consistent earnings with a sustainable margin of 55%. Finance cost decreased compared to the previous year due to the interest cost saving arisen from our Q1 liability management exercise as well as the fixed deposit income. During the first half of this year, there were 2 significant events, which had a positive effect to our net income. One was the liability management. The Tabreed Board has approved the early settlement of one of our loan facilities, along with the associated hedging instruments, resulted in reduced future finance cost and our improvement in our gearing. This initiative led to another income of almost AED 100 million, comprising a cash flow gain from unwinding the hedges and a reclassification of fair value of derivatives from OCI to P&L. After the writing off of unamortized transaction cost, the total net gains amounted to AED 80 million. Additionally, during the same quarter this year, PIF, the Saudi Public Investment Fund became new shareholders in Saudi Tabreed. Consequently, the group holding in Saudi Tabreed diluted from 31% to 22%, resulting in a one-off accounting gain of AED 49 million based on the fair valuation of PIF concept. In summary, the net income for the first half of this year was AED 386 million, including another gain of AED 107 million recorded during the same period. Net income before one-off adjustments amounted to AED 280 million, reflecting a notable increase of 16% compared to the same period last year. Moving on to the next slide. This slide represents a summarized version of the balance sheet, as of the end of June 2023 highlighting the key points. The decrease in trade receivables is attributed to the enhanced in our billing to cash conversion cycle, reflecting efficient working capital management. The decrease in investment -- the increase in investment in associates reflects the fair value adjustment of our investment in Saudi Tabreed and a share of in-year profit demonstrating our value creation in our investments to our shareholders. Our net disposition has decreased from -- to AED 5.4 billion as of June 2023. It also reflects the decline in the gross debt by AED 650 million from the liability management exercise done during this period. And in addition to our healthy EBITDA generation during the last 12 months, led to an improved leverage ratio of net debt to EBITDA at 4.4x. Our financial positions are prudently secured with 2 fixed rate DCM instruments, sukuk and bond, and 100% hedged corporate loan. This effectively shield Tabreed from higher interest costs, which is a highlight of having an effective interest -- effective risk management policies at Tabreed. As a reminder, we have 2 facilities maturing in 2025, one in H1, the other one in second half of 2025. Our loan -- all the penalty-free prepayments, providing us with greater flexibility to manage our cost of capital and refinancing risk. As mentioned earlier, during the second of 2022, both Fitch and Moody's, reaffirmed our Tabreed's investment-grade state with Moody's at BAA3 and Fitch at BBB, also stay with an upgrade and the outlook to stable, a testament to our strong financial standing. The movement in equity and reserves from 31st December are due to the settlement of dividend, reflecting our commitment to value distribution to our shareholders. Moving on to the next slide. The cash flow performance during the period has remained robust. Strong cash from operations totaling AED 709 million, reflecting efficient collection process across all our valued customers and reinforcing our strong financial position. Our cash from operations to EBITDA ratio for the first half of this year was 120%, again reflecting our effective and improved customer collections and product financial practices. The net cash flow from investment activities in the first half reflects the strategic CapEx allocation required for growth and maintenance, enabling us to strengthen and expand our operations. The financing activity primarily represents the settlement of bank facilities as part of the liability management program and the payment of dividend for the year 2022. Overall, the first half of the year recorded a robust cash flow from operations, resulting in a healthy cash -- closing cash balance of AED 1.2 billion. And our revolving credit of AED 590 million remains fully unutilized. This liquidity position, combined with our flexible capital structure that strongly position the group to fund any future growth opportunities easily. Moving on to the next slide. The net operating cash flow pre-working capital remained at AED 590 million, which is once again a testament to our company's resilient business model and ability to consistently generate sustainable cash flow. Our dedication to disciplined investment is evident in our net cash flow post investing activities for 2023, which has increased to $633 million, focusing our strategic approach to acquisition and expansion. As you would notice, we are well positioned to invest in any new opportunities, which meet our thresholds of Board-mandated IRR, whilst remaining competitive to our peers. With this, I conclude the financial highlights presentation, I will now hand over back to Adel to take you through the rest of the proceedings. Over to you Adel.

Thank you, Salik. I would like to provide a conscious overview of Tabreed's commitment to environmental sustainability. Tabreed has set ambitious targets to reduce energy consumption and emissions. We are committed to achieving these goals by harnessing the innovative technology solutions and implementing environmentally friendly operating practices. These include utilizing sewage effluent thermal energy storage, sea water, emission monitoring, hazardous waste management and the strict compliance with trade effluent regulation. We take pride in reporting that our operations have resulted in saving approximately 2.3 billion kilowatt hour of energy consumption, which is equivalent to powering over 134,000 homes for an entire year and preventing the annual release of more than 1.4 million tonnes of CO2 emissions. The carbon emissions prevented through our sustainable cooling services play a crucial role in supporting regional government's efforts to achieve their sustainability targets. Tabreed recently released the 2022 ESG report, which highlighted our commitment to invest in new technologies and to enter into strategic partnerships, that will enable us to meet our stakeholders' expectations. Lastly, in line with the UAE Government directed, Tabreed remains committed to its sustainability objectives as we continue to provide innovative district cooling solutions to the region and beyond. Tabreed has demonstrated its commitment to decarbonization and net zero by signing the UAE Climate-Responsible Companies Pledge last March. These initiatives underscore our unwavering dedication to environmental stewardship and our role as a responsible corporate citizen, aligning our efforts with the global sustainability objectives. I will now request the operator to open lines for Q&A.

[Operator Instructions] Our first question reads, could you please share with us an approximate geographical split of the remaining new capacity additions over 2023 or 2024? Could you please also elaborate on timing of key milestones of the contract with Tata?

Thank you for the question. With regard to the split of the new capacity guidance, we have always mean the majority of this is going to come from our consolidated entities, mainly in UAE. And also it will be contributed from our Saudi business operations. So with that, I think I answered your first part of the question. With regard to your second part on the timing of the key milestones of contract. Yes, we have signed this contract and the plant is commissioned as we speak in July this month. That's the key milestones, and this is the 2,000 tonnes contracted capacity with the concession of 6,600.

[Operator Instructions] Our next question is from [ Marc Hadeep ] from CI Capital. And the questions read, what was the reason behind the annual drop in gross profit in absolute terms and GPM accordingly? The second question is, do you expect margins to revert back to second half 2023 to normal levels? And the third question is, can you give us some color on margins related to regional expansion and expected revenue contribution?