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

Good afternoon, ladies and gentlemen, and welcome to National Central Cooling Company, Tabreed's Q1 2024 Earnings Conference Call. At this time, [Operator instructions]. Following the presentation, there will be a Q&A session. I will now hand over to Yugesh to introduce the call.

Thank you, [Jim]. Good afternoon, everyone. I'm pleased to welcome you all to Tabreed's earnings call for the first quarter of 2024. I am Yugesh Suneja, Head of Investor Relations at Tabreed. Very quickly, let me reiterate a few housekeeping points before we move on to the main presentation. Today's presentation may contain forward-looking statements. Kindly refer to the disclaimer on this slide for more details. It contains important information and cautionary advice on the interpretation and limitations of historical data and forward-looking statements. Today's call is recorded and a transcript of the call along with the presentation and other earnings materials will be available on the IR section of Tabreed's website. Moving on to the agenda for today's call. I'm joined today by our Chief Financial Officer, Adel Al Wahedi; and Vice President of Finance, Salik Malik. Adel will begin the presentation with the key highlights of the quarter and overview of sustainability at Tabreed. Following that, Salik will discuss the financial results in detail. Finally, Adel will provide an update on our guidance and outlook for the company. We will then open the lines for your questions. I will now hand it over to Adel to start the presentation.

Thank you, Yugesh. Good afternoon, everyone. Thanks for joining us today. In the first quarter of 2024, Tabreed demonstrated solid profit generation capability, remain focus on executing strategic growth initiatives and continue to advance on its sustainability ambitions. Financially, the revenue grew year-over-year, exceeding last year's strong performance. The growth in the top line on a like-for-like basis is an increase of 6% after considering the consolidation of the Tabreed Park Investments and removing the one-off CPI gains recorded last year. One of the key factors is an organic increase in consumption volumes, which has recorded an increase of 9%. EBITDA margin growth of 58% compared to 57% last year, [indiscernible] resilient business model, whilst we continue our journey into prudent capital allocation measures as a result reducing our debt level, which led to 32% savings in net finance cost and a healthier financial position. These factors combined contributed to a 4% increase in net profit before UE corporate tax and before the one-off gains, while net debt-to-EBITDA ratio improved to the level below 4 multiples at the end of the first quarter of this year. Strategically, we witnessed an impressive 9% growth in consumption volumes driven by higher cooling demand from our existing customers as well as through our connections and our concession areas. During the last 12 months, we have added a new capacity of 26% RT in our core markets of UAE and DCC, but we are not stopping there. We continue to grow outside our core markets and expanded internationally into India and Egypt, adding 3,000 RT during the same period, thus diversifying our geographical presence. To ensure continued growth, we have a pipeline of a long list of new greenfield and brownfield projects, all carefully being vetted to deliver healthy returns for our shareholders. On sustainability front, we completed Phase III of the seed program, which retrofitted our chillers with variable frequency drives. This brings more efficiency to our operations as well as the cost savings. As a result of more sustainable district cooling produced by our operations, we significantly reduced energy consumption and carbon emissions, thereby translating into significant environmental benefits. Overall, Tabreed delivered steady results in the first quarter and remains focused on profitable growth and environmental responsibility. Moving to the next slide. Let's dive deep into our operational performance and expansion updates. As you know, our chilled water revenues consists of fixed capacity charges and variable consumption charges. The revenue mix in Q1 this year is fixed capacity charges made up 71%, which grew by 3% based on additions to connected capacity over the last 12 months, new connections and the CPI indexation. Whilst variable consumption charges typically lower in Q1 due to seasonality has also recorded an increase of 9% over previous year quarter, which made up the remaining 29% of revenue in the first quarter. This was partially offset by the consolidation of one of our assets in Q3 last year due to the 50% divestment of the bypass plan. On consumption volumes, our consumption volumes increased to 300 million refrigerating tonnes hours, rising by 9% year-over-year. This growth is driven by both higher connected capacity and rising demand for cooling. In terms of capacity UAE remains our largest and core market, accounting for 83% of connected capacity. We also have a presence in Saudi Arabia, Oman, Bahrain, India and Egypt. Historically, our connected capacity has grown by 8% per year since 2019. Q1 2024. So 1,700 refrigerated tons of new connections, mostly organic growth within the UAE. Addition of connected capacity in the first quarter is slightly behind our usual run rate recorded historically and is due to the phasing of new connections across different quarters, which is aligned to timing of new developments coming on stream. I will provide more details on the capacity guidance later in the call. Moving to the next slide. This slide highlights Tabreed's unique role in enabling sustainable development through our district cooling solutions. Cooling has become a critical part of our infrastructure requirements, especially relatable given escalation of escalating climate challenges base globally and particularly in the region. And our ongoing battle against climate change, district cooling emerges as an effective tool and reducing carbon footprint and enhancing energy efficiency. By leveraging advanced technologies and innovative practices, we are now only meeting -- we are not only meeting the immediate cooling needs but are also contributing towards achieving broader sustainable goals. In the last 12 months alone, Tabreed's operations resulted in energy savings of INR 2.5 billion kilowatt hours, equivalent to powering over 143,000 homes for a year. Our operations also prevented an impressive 1.5 million tons of CO2 emissions equivalent to taking more than 330,000 cars off the road annually. This demonstrates the significant environmental benefit of our district cooling model. And as our business growth, so that's Tabreed's contribution to reducing the environmental footprint with more and more savings in energy required to call our planet. Moving to the next slide. Sustainability is at core of Tabreed's long-term strategy, and we remain committed to integrating sustainability in our operations. Tabreed has demonstrated its commitment to the car -- decarbonization and net zero by signing the UAE's Climate Responsible Companies Pledge. This Pledge is more than a commitment. It's a public declaration of our dedication to achieving net 0 and spearheading the transition towards low carbon economy. A fundamental element of our road map to net 0 emissions is the expansion of our digital capabilities by leveraging big data and AI. We are enhancing the efficiency and resilience of our district cooling operations. The adoption of advanced technologies and clean energy sources plays a pivotal role in our strategy, the inclusion of geothermal and solar PV energy sources is a testament to our innovation and commitment to sustainability. Our efforts to improve energy efficiency are ongoing and dynamic indicating by implementation of cutting-edge technologies such as partnership with HTMS to develop the Maxwell fluid technology that promises efficiency improvements of 9% to 15%. Installation of variable frequency drive motors across numerous plants that has significantly enhanced the energy efficiency of our chiller equipment. Pioneering geothermal district cooling plant affairs in the region demonstrates our ambitious move to towers using renewable energy in collaboration with ADNOC. We are exploring more opportunities to integrate geothermal energy into our operations, reinforcing our commitment to sustainability. The next slide, Tabreed has also set ambitious targets to reduce water consumption and effectively manage waste across its operations. Tabreed has committed to pioneering initiatives that aim to cut down freshwater consumption while optimizing our operational efficiency by leveraging treated sewage effluent in our cooling process. We can conserve freshwater water that can serve communities and natural ecosystems instead. Similarly, our innovative approach by using seawater for cooling purposes underlines our commitment to finding sustainable solutions that reduces our reliance on freshwater resources. Our dedication on sustainability extends beyond water conservation. Environmental stewardship involves the responsible management of all materials, including those classified as hazardous. We continually review our processes to reduce the consumption of materials and where possible, we hope to recycle or reuse or reduce to many more waste generation. We work alongside leading environmental service providers to ensure the safe management and disposal of hazard-based materials adhering strictly to the regulations governing trade effluent. I will now hand over the presentation to Salik, who will discuss our Q1 2020 financial results in details. Over to you, sir.

Thank you, Adel, and good afternoon, everyone. This is a slide providing the financial summary and an overview for the first quarter 2024 and across key areas. We will delve into each aspect in the coming slides, but let's keep a quick look at the 2024 highlights. We delivered a healthy EBITDA of AED 272 million with a resilient 58% margin, demonstrating our operational efficiency. Net profit before taxes and one off gains saw a 4% increase, reflecting a steady and sustainable growth in our financial metrics. Our commitment to financial prudence is evident from capital allocation and the continued improvement of our leverage ratios. Net debt to EBITDA stands at healthy 3.97x at the end of Q1 2024. We have achieved exceptional cash generation capabilities, further solidifying our financial position and enabling us to deliver greater value to our shareholders. During the AGA held this year, EBIT shareholders approved a cash dividend of AED 15.5 per share for the year 2023 compared to AED 13.5 previous year. This underscores our commitment to increasing shareholder returns and generating attractive long-term value. Moving on to the next slide. It takes a closer look at the income statement and the key factors influencing its performance in the first quarter of this year. Group revenue reached AED 468 million, primarily driven by our cold chilled water business. While chilled water revenue saw an increase year-over-year accounting adjustments due to financing receivables and deconsolidation have masked the underlying organic growth. For the first quarter 2023, benefited from a onetime higher CPI gain, which was an indexation of 4.8%, while starting '24, the CPI indexation was at 1.6%, which was duly applied. Similarly, last year first quarter numbers included a revenue from Tabreed's [indiscernible] and investments, which had been deconsolidated effective 14 August last year. On a like-for-like basis, revenue growth is primarily organic attributed to the gross addition of about 29,000 tonnes during the last 12 months, which were connected and the rise in consumption volumes of 9% compared to the same quarter last year. Gross profit remained stable in first quarter as operating costs increased proportionately with increase in the volume growth. EBITDA reached AED 272 million, whilst maintaining a healthy margin of 58%, while the deconsolidation of Tabreed's Park Investments and the [indiscernible] impacted growth slightly. The expansion of our operations in both existing and new markets resulted in an increase in this cost, which should benefit us going forward from the new projects that may come on stream. Looking at the net profit movement for the first quarter of '23 was AED 117 million last year, whereas net profit before more tax for this year grew by 4% reported at AED 122 million. This performance is attributed to prudent debt and cash flow management, including debt repayments and a partial Sukuk buyback, resulting in significant savings in finance costs, increased fixed deposit income due to a stronger cash balance as well. With the introduction of corporate tax in 2024, the reported net profit for the first quarter of this year was AED 112 million. Moving on to the next slide. This slide talks about the Tabreed's balance sheet as of end of 31st March 2024. Highlighting key developments are fixed assets and intangible changes for the quarter reflect the normal depreciation and the amortization. Investment in associates and JVs increased due to the first quarter profit earned improved collections and fair value movement in the derivatives led to a decrease in the receivables and other assets. Movement in equity and results primarily reflect the proposed '23 shareholder dividends and the fair value changes in the derivatives. Payables and other liabilities increased due to the 2023 dividends, which were subsequently paid in April. Our net debt has decreased to AED 4.8 billion by March 2024. This is as a result of strong cash generation and a reduction in gross debt through periodic repayment and a partial Sukuk buyback, representing the prudent capital allocation. Overall, the leverage ratio, which is the net debt to EBITDA has improved to a healthy 3.97x, demonstrating robust balance sheet. Tabreed maintains a strong financial position with a strategic mix of financing instruments such as fixed rates, Sukuk and bond and a fully hedged corporate loan. This effectively shields us from interest rate fluctuation, showcasing our commitment to some risk management. While 2 debt facilities, which are maturing in 2025, a recent $201 million partial Sukuk buyback in April 24 reduces our 2025 repayment obligation. Our loan facilities allows us for penalty-free prepayments, providing flexibility in managing cost of capital and refinancing risk. Moving on to the next slide, which talks about the cash generation, which is -- which remains highly cash generative. This slide shows the sources and uses of those cash during the first quarter. Our net operating cash flow equivalent to EBITDA amounted to AED 274 million. This demonstrates the strength and sustainability of our business model. Negative working capital during the period reflects a reduction in payables after the increase in the prior year. Receivable days continued to decline during the first quarter, indicating efficient collections and a strong customer credit profile. The net operating cash flow to EBITDA ratio for the first quarter is at 90% underscores our commitment to prudent financial practices. Capital expenditure of AED 57 million during this quarter was interest from the operational expansion and the growth as we completed one new plant in [Sabya] Thailand, which became operational post the quarter end. All in all, Tabreed delivered robust free cash flow of AED 187 million during the first quarter of '24. Financing activities primarily included debt service costs, interest income and debt settlements and dividend payments to the minority shareholders from the subsidiary. At the end of the first quarter of 2024, we reported a healthy cash balance of AED 1.6 billion. In addition, we have a AED 600 million green revolving facility, which remains undrawn. This enhances our liquidity position and enabling us to capitalize on growth opportunities through organic and inorganic in the form of acquisitions while maintaining balance sheet strength. With a robust financial position and a proven ability to generate significant cash flow, Tabreed is well placed to deliver sustainable value for all stakeholders. With this, I conclude the summary of financial results presentation. Now I'll hand it back to Adel to take you through the rest of the proceedings.

Thank you, Salik. Now I would like to provide an update on our cooling capacity and future growth plans. We remain committed to our existing guidance of adding 120,000 RT of new capacity during the years '23 and '24 period. Approximately 60% of this growth is expected to come from consolidated entities, ensuring a direct contribution to revenue and EBITDA. We have already delivered 55,000 RTs in '23 and Q1 of this year. While there has been a slow start to '24 this year, we expect the remaining capacity to be connected in '24. While we are executing planned projects and following the new business opportunities closely to achieve the guided target for 2024. And there could be some temporary timing differences. This difference mainly arises from small delays in the completion of the greenfield projects or development delays from customer end, which could then temporarily push forward the new connection and capacity to the next quarter. Beyond our current short-term guidance, we are targeting an annual growth rate of 3% to 5% and connected capacity over the next 3 years. This growth is fueled by existing development projects currently underway and the new project wins anticipated in '24 for completion by 2026. This strategic expansion plan positions Tabreed capitalize on growing demand for sustainable district cooling solutions. We are confident in our ability to deliver consistent capacity growth and solidify our market leadership position. The current -- the new -- the next slide, we show key drivers for growth in the district cooling industry due to renewed focus on accelerating climate action and advancing sustainability goals. We see strong tailwinds for district cooling sector. Cooling typically accounts for 50% of electricity consumption, 70% at peak demand, especially in Tabreed's key markets which exhibits relatively hot climate. Energy demand for cooling is expected to increase at drastic pace, demanding huge investments in electricity systems. District cooling is 50% more energy efficient, more reliable as longer asset life and is more economical over life cycle compared to conventional cooling and thus offers a huge potential to save energy and avoid massive investments. Given its high efficiency, district cooling will be critically enable us to meet strategic 0 emission targets announced by various governments in the region, further efficiency improvements brought in by new technological developments, such as German energy storage, zero water consumption solution, renewables energy, et cetera, make district cooling the preferred choice for smart and sustainable developments. In most of our markets, [indiscernible] growth is poised to [indiscernible] over the next 5 years compared to the last 5 years. Some of these markets such as Saudi Arabia and India [indiscernible] the new potential driven relatively underpenetrated DC markets and significant size for cooling demand. The [indiscernible] remain focused to increase use of these systems and integrated within [indiscernible], and we are [indiscernible] present in these markets and play a leading role in this evolution. Moving to the next slide. Underpinned by a favorable market backdrop, let me now share with you Tabreed's growth outlook. In the heart of our growth strategy, lies our local markets, the United Arab Emirates. Our strategy here is twofold focusing on organic growth and strategic mergers and acquisitions. We have secured opportunities to add additional capacity in our existing connection areas. For instance, our downtown DCP assets have a total concession size of 235,000 RTs with the current contracted capacity of approximately 185,000 RTs. Furthermore, areas such Saadiyat, Reem Island, Al Raha Beach, Yas Island and [indiscernible] City offer opportunities for expanding our capacity by about 300,000 RT over the medium term. While we anticipate further opportunities for mergers and acquisitions in the UAE, the scale may not mirror our historical acquisitions. Nonetheless, these opportunities remain an integral part of our growth strategy. Looking beyond the borders of UAE, Tabreed is poised to venture into new geographies aiming to replicate our success on a global scale. We are actively assessing multiple opportunities in dynamic markets such as Saudi Arabia, India and the wider Asian region. Our goal is to build greenfield plans to enter into new concessions, leveraging our expertise to meet the cooling needs of these flourishing markets. The international landscape offers suitable opportunities for growth through mergers and acquisitions. [indiscernible] Tabreed's presence in Saudi Arabia, where Saudi Tabreed operates over 500,000 RT of asset owners, highlighting potential avenues for acquiring assets and expanding our footprint. In conclusion, the road ahead for Tabreed is [indiscernible] with exciting opportunities and promising prospects. Our expertise in the industry positions us uniquely to seize these opportunities, ensuring value accretion for our shareholders and contributing to a sustainable future. Moving to the next slide. Before I conclude this presentation, let me summarize the breed sustainable investment proposition. At the core of Tabreed's strategy to deliver long-term shareholder returns as a resilient business model designed for stability and sustainable growth, our utility like tariff structure forms the backbone of this resilience. These attributes enabled us to forge long-term contracts with our clients and afford us a high degree of future revenue, reductibility and visibility, crucial for steady growth and investor returns. Looking ahead, Tabreed is positioned for significant growth, our balance sheet rapidly leveraging in recent years has [indiscernible] well placed to allocate capital tower growth initiatives. Expanding our horizons, we actively leverage partnerships to venture into new markets and adopt cutting-edge technologies aimed to boosting operational efficiency. Our disciplined approach towards investment has been a key driver for our success. By managing our cash flows, we have maximized shareholders' return through strategic growth investments, optimize capital structure and increase dividends. This disciplined investment strategy is aligned with our commitment to sustainable growth and value creation. In conclusion, our focus remains steadfast on pioneering solutions that are sustainable, efficient and beneficial for all stakeholders. At Tabreed, we are more than just cooling services provider. We are partners in progress towards the cooler Greener planet. With this, I conclude my presentation. Thank you for your attention. We are happy to answer any questions you may have.

Thank you. We will now move to the question-and-answer section. [Operator instructions]. We'll just wait a moment or 2 for the questions to come in. So we have a tax question from Metehan Mete from Waha Capital. They are 2 questions, actually. What was the reason for the weakness in revenue growth as growth was flat versus last year despite capacity growth? And also, what is the equity IRR criteria for M&A?

Thanks for your questions. As regard to the first question, the -- being revenue being flat. I'd like to reiterate that. The revenue has not been flat. There was -- on a like-for-like basis, the fixed revenue has also grown by 3% and the revenue from consumption volumes has also grown by 9%. However, if I remove the one-off, the impact due to the CPI compared to last year versus this year, last year, we had a 4.68% increase compared to this year's 1.6%. That is the reason that you noticed that big dip down. And the other one is due to the deconsolidation because we had the 50% divestment in Tabreed's Park investment in Q3 last year. So as a result of the accounting treatment, now we are doing this asset based on equity method of accounting and not consolidating. These 2 factors had made the revenue to be flat. In regard to the second question on the equity IRR criteria for M&A. Again, as we had mentioned in various [perform]. These returns are based on the regions where we are entering. But typical, if I talk to you on the U.S. dollar terms, we usually make our decision based on IRR, the IRR, which is high single digit or low double digit. When it comes to the equity IRR itself, if you exclude the debt position, it is higher than those high single-digit and the low double digit overall. I hope I have answered your questions.

Thank you. Just a reminder, if you would like to ask a question, [Operator instructions]. So we have a question from Shadab Ashfaq from Arqaam Capital.