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

Good afternoon, everyone, and welcome to Tabreed's First Half 2024 Earnings Presentation Call on the 9th of August. Please note that this call today is being recorded [Operator Instructions] So without further ado, I would now like to pass the line to Mr. Yugesh Suneja, the Head of Investor Relations at Tabreed. Please go ahead, sir.

All right. Thank you, everyone, for joining Tabreed's earnings call for first half of 2024. I am Yugesh, Head of Investor Relations at Tabreed. Joining me today are Adel Al Wahedi, our CFO; and Salik Malik, Vice President of Finance. Before we dive into the details, I would like to remind everyone that some of the information we will be discussing today is about future performance. These statements are based on current expectations and are subject to risks and uncertainties. Please refer to this slide for interpretation and limitation on these forward-looking statements. Today's call is being recorded. A written copy of this call, the slides and other financial information is available on Tabreed's website, and the transcript and the replay will be available on the Tabreed's website under Investor Relations section later. In today's agenda, we will discuss Tabreed's financial performance for the first 6 months. We will provide an update on our business operations and outlook and then open the floor for your questions. Adel will commence with an overview of the first half operational and financial highlights, including progress on our sustainability initiatives. Subsequently, Salik will delve into the financial results. Finally, Adel will conclude with a discussion on our strategic priorities and outlook on the capacity guidance. We will then open the call for your questions. I would now like to hand the presentation over to Adel.

Good afternoon, everyone, and thank you for joining us today. Tabreed had a good first half. We grew our business, improved our financial position and continue to contribute positively to global sustainability growth. Let us start with the financials. Revenue increased compared to the prior year same period. Growth in top line on a like-for-like basis was 6% after considering the consolidation of the Tabreed Park Investments and removing one-off CPI gains. This shows a strong operating environment driven by rising consumption volumes and the new loads connected over the last 12 months. Our profit margins remained healthy, with first half EBITDA margin reported at 56%. We prudently use surplus cash to reduce our debt by buying back Sukuk worth of USD 207 million, thereby saving interest charges, improving gearing and optimizing balance sheet. Overall, normalized net profit before tax grew by 4% versus last year. Like-for-like growth adjusted for factors mentioned before would have been significantly higher. As a result of a strong underlying growth and capital allocation measures, our normalized return on equity showed sustainable improvement year-over-year, reaching 9.7% in first half of this year. These results demonstrate that we are on track to deliver on our strategic expansion plans and growth in earnings. Moving to the strategy of the company. Demand remained robust in the first half. Tabreed saw 8% growth in consumption volume driven by rise in cooling demand from our customers. In the first half, we commissioned 1 new greenfield plant at Saadiyat Island. This plant has an installed capacity of 9,000 RT, which will ultimately increase to 21,000 RT, 2/3 growing demand in this community. During the last 12 months, we had added a new capacity of 24,000 RT in our core markets of UAE and GCC, and also grow our international presence in India and Egypt. We have a strong pipeline of new projects to continue this growth and expect momentum to increase in the second half of this year. I will provide more updates on the future opportunities while discussing our growth outlook. More than just growth, Tabreed is committed to sustainability while enhancing energy efficiency and actively reducing carbon footprint. Tabreed sets a benchmark for responsible operations in the cooling sector, translating into significant environmental benefits. In line with our commitment to transparency, Tabreed published its fourth ESG report during the second quarter of this year. Despite continued increase in cooling consumption, Tabreed was able to reduce its energy [ intensity ] by 10% last year driven by efficiency initiatives such as demand optimization and technology upgrades to plant equipment. The company made significant strides in decarbonization of cooling as evident in the carbon emission intensity reduction by 35% in '23. This was driven by lower energy consumption, use of a clean and renewable energy sources such as geothermal, clean energy certificates and decreasing emission intensity of grid electricity. Overall, Tabreed remains focused on profitable growth with solid cash flow generation of nearly AED 1 billion in the last 12 months, that translates into attractive free cash yield of more than 10%. This supports our ongoing investments in domestic and international business expansion and increasing dividend payout to maximize shareholder value creation. Moving to the next slide. This slide provides update on our operational performance and expansion updates in the first half of this year. Our Chilled Water revenue, which is 96% of group revenue comes mainly from 2 components: fixed capacity charges and variable consumption charges. In the first half, fixed charges contributed 62% of Chilled Water revenue and experienced like-for-like growth of about 3%, driven by increased capacity and CPI indexation. Growth in variable charges was about 9% compared to the last year. The growth in both fixed and variable charges on a reported basis was partially offset by deconsolidation of Tabreed Park Investments in Q3 last year due to 50% divestment as well as higher one-off CPI gains booked in 2023. Consumption volumes increased by 8% year-over-year to reach 1 billion RT hours. This growth is attributed to both increased capacity and higher cooling demand. The UAE remains our core market, accounting for 83% of our connected capacity. We have established presence in Saudi Arabia, Oman, Bahrain, India and Egypt. Historically, our connected capacity has expanded by 8% annually since 2019. In the first half of this year, we added close to 5,000 RTs of new capacity primarily within the UAE. There have been a few projects where we pushed few months -- where we're pushed by a few months due to delays in obtaining NOCs from authorities or completion delays at customer end. Other than these delays, the new additions in the first half were broadly aligned with the typical project time line forecasted for the year. I will provide further details on our capacity outlook later in the call. Today, Tabreed announced appointment of Dr. Bakheet Al Katheeri as the new Chairman of Board of Directors, succeeding Mr. Khaled Al Qubaisi. Khaled served as Tabreed Chairman since 2017 and played an instrumental role in expanding Tabreed's business in the UAE and entering into new markets. Mr. Bakheet has been a member of Tabreed's Board since 2022 and currently serves as the CEO of Mubadala UAE Investments platform, where he is responsible regarding the growth and the strategic direction of a diverse portfolio of major UAE companies. With his diverse background, Dr Al Katheeri is well positioned to lead Tabreed through its next phase of growth. Alongside Tabreed, also welcome our new Board member, Mr. Mansoor Al Hamed. We are pleased to have the [ index ] and vast experience that our Board members offer to Tabreed, which will extremely beneficial as we expand our business in several countries and redirect our efforts to optimize operations. Tabreed plays a vital role in sustainable development through the provision of District Cooling Solutions. Cooling has become a critical component of modern infrastructure, District Cooling offered a compelling solution to reduce carbon emissions and enhance energy efficiency. By leveraging advanced technology, we not only meet immediate cooling demand, but also contribute to broader sustainability objectives. Our operations have yielded substantial environmental benefits. In the past year, we achieved energy savings equivalent to powering 148,000 homes and prevented the emission of 1.55 million tonnes of CO2. As we expand our operations, our positive environmental impact will continue to grow. Sustainability is central to Tabreed's long-term strategy. We are committed to reducing our carbon footprint and achieving Net Zero emissions. We are leveraging digital technologies including big data and AI to optimize our operations and enhance efficiency. Additionally, we are exploring and adopting renewable energy sources, such as geothermal and solar power. Our collaboration with HTMS on the Maxwell fluid technology and the implementation of variable frequency drive motors are examples of our ongoing efforts to improve energy efficiency. Through these initiatives, Tabreed is demonstrating its leadership in sustainable district cooling. Tabreed is committed to reducing water consumption and minimizing waste. We are implementing initiatives to conserve freshwater by utilizing treated sewage effluent and seawater in our cooling processes. Additionally, we are focused on responsible waste management, including the reduction, reuse and recycling of materials. We follow strict environmental regulations in the handling of hazardous materials. I encourage you to go through our latest ASG -- ESG report to find out more on progress made on environmental initiatives, investment in new technologies to combat sustainability challenges, employee wellbeing and workplace diversity initiatives as well as our governance practices. I will now hand the presentation over to Salik for a detailed discussion of our financial performance in the first half of the current year.

Thank you, Adel, and good afternoon, everyone. Let me take you through the financial performance, starting with the high-level overview for the first of 2024. We achieved resilient financial results, including a healthy EBITDA margin of 56% and an increase of 4% in normalized net profit before tax. While divestment of 50% stake in Dubai Park DCP and higher one-off CPI again [ ticket ] signed into 2023 by marking the underlying growth in key financial metrics, however, like-for-like growth across key business remains strong. This is clearly evident in improved EBITDA ratios, highlighting efficient financial management and value-creative initiatives. The regenerated significant cash flow enabling us to enhance shareholder value through balance sheet optimization and increased dividend payouts. Moving on to the next slide, let us delve deeper into our economic -- income statement performance for the first half of this year. Group revenue reached AED 1.1 billion, increased by 1% year-over-year from the same period. However, the growth on the normalized basis was 6% before the effect of year-over-year CPI gains on finance leases and the deconsolidation of the Dubai Park DCP resulting in a change in accounting to equity method. In 2023, same period benefited from a one-time higher CPI gain with the indexation of 4.8%, while in 2024, the CPI indexation was at 1.6%. This reduced year-over-year one-off gain on the finance leases, which had an impact on our top line growth by about 3%. Similarly, revenue from Dubai Park, which had been deconsolidated effective Q3 last year, had impacted revenue growth by another 2%. On a like-for-like basis, revenue growth is primarily organic attributed to the gross addition of 34,000 tonnes connected during the last 12 months and the rate in consumption volumes by 8%. Gross profit remains steady and an increase in operating cost reflects the growth in volumes and the new connected capacity. EBITDA reached AED 603 million with a healthy margin of 56%. The growth in EBITDA was impacted by the deconsolidation of Dubai Park and their costs related to the expansion of our operations in both existing and new markets. Looking at the [ new profit movement ], in first half the net profit before UAE corporate taxes, grew by 4% to AED 291 million, mainly driven by significant savings in finance costs, partially offset by the factors that I mentioned before, while there's surpluses [ delivered ]. With the introduction of corporate tax in 2024, the reported net profit for the first half after tax is AED 269 million. Moving on to the next slide. This slide outlines Tabreed's balance sheet as of end of 30th of June 2024. The total liabilities reduced by 6% mainly reflecting the repayment of debt and the payment of dividends as we use surplus cash to optimize our balance sheet. Key movements are movement in fixed assets and intangibles mainly reflect the depreciation and amortization during the first half of this year, partially offset by the increase in [ capital ] work in progress. Investment in associates and the JVs increased due to the profit we had during the period and the positive movement in the fair value of the derivative [ instruments ] headed by the associates. Receivables and other assets increased during this first half due to the higher receivables, partly offset by the [ inflection ] in the fair value of the derivatives. Increase in receivables was mainly related to the timing of collection and should normalize during the rest of the year. Cash balances that [ are ] partially bought back Sukuk worth AED 880 million in the first half and paid [ 33 ] dividends amounting to AED 441 million, as a result of net debt slightly increase to AED 5.1 billion by the end of first half of this year. Decrease in equity and reserves was due to the payment of 2023 shareholders' dividend and a fair value changes in derivatives, partly offset by the profit for the first half of this season. Payables and other liabilities broadly remain the same. We have 2 debt facilities as you may be aware maturing in 2025, AED 2.5 million bad debt in the first half and the remaining AED 950 million Sukuk in the second half of this year. As of first half of 2024, Tabreed's leverage ratio, net debt-to-EBITDA remains healthy at 4.2x. This robust balance sheet and strong cash flow, generate business model -- a generating business model allows us to comfortably manage refinancing, in a full year partially as required. We are closely monitoring the interest rate market and looking at various options for refinancing. We will choose the optimal refinancing option, which is in the best interest of our shareholders, as soon as the decision is reached and approved by the Board. And accordingly, we will update the market. Moving on to the next slide. This slide shows the sources and uses of cash during the first half of this year. Tabreed generated an operating cash flow of AED 608 million reflecting the robust nature of our business and sustainable profitability margins. The negative working capital during the period reflects increase in receivables, which is more related to the timing of collections, and the release of supplier payments compared to the last year. Overall, receivable date continued to stay near healthy levels, indicating efficient collection process implemented at Tabreed and a strong customer credit profile. Capital expenditure of AED 102 million that are also incurred during this period, which indicate to the expansion of operations, including the completion of new plants in Saadiyat and connecting new load in our concession areas. Overall, Tabreed generated a robust free cash flow of AED 404 million in the first half of 2024. Financing activities indicate prudent use of surplus cash in servicing our debt including buyback of Sukuk and increasing dividend payments to our shareholders. At the end of first half of '24, we reported a cash balance of AED 578 million. In addition, we have AED 600 million [ screen ] revolving credit facility, which remains as of today undrawn. This enables strong liquidity position for Tabreed and allows us to capitalize on any growth opportunities through organic and in the form of acquisitions while maintaining our balance sheet strength. With this, I conclude my part of the summary of financial results presentation. Now I will hand it back to Adel to take you through the rest of the proceedings.

Thank you, Salik. Let me now provide you an update on our cooling capacity and the future growth plans. We previously provided capacity guidance of 120,000 RT over a 2-year period of year 2023 and '24, of which approximately 60% was expected to come from consolidated entities and the remaining from equity-accounted entities, mainly Saudi Tabreed. We are now updating our capacity guidance to 100,000 RT. And on the other hand, it increases the connections expected from consolidated entities to 85%. In a nutshell, if you look at absolute numbers, we expect more capacity to come from consolidated entities and previous guidance, ensuring an increase in contribution to revenue and EBITDA. And for equity-accounted capacity, this is still expected to contribute in line with the expectations, but with a slight delay in Saudi Arabia King Salman project, Phase 1 connected loads of 20,000 RT is now expected to complete in H1 2025, rather than our previous anticipation of Q4 2024. All in all, we still remain committed to deliver on our growth expectations. As of the first half of this year, we have already delivered 58,000 RTs in the last 18 months. While the run rate in H1 this year looks below our guidance, but this is in line with the phasing of projects in H1 versus H2. There are few greenfield expansions, which are due to be completed in the second half of this year. Similarly, we have already signed loads in our existing connections, which are due to be connected during the rest of this year and will help us in achieving our guidance. Beyond this year guidance, we are targeting an annual growth rate of 3% to 5% in connected capacity over the next 3 years. This growth should be driven by ongoing projects within our existing connection areas, new projects -- new project wins anticipated in this year and early 2025, which will be completed by 2026 and potential M&A opportunities. The next slide provides a key driver of growth in the District Cooling industry due to renewed focus on accelerating climate action and advancing sustainability goals. We see strong tailwinds for the sector. Cooling typically accounts for 50% of electricity consumption and 70% of peak demand, especially in the Tabreed's key markets, which show relatively hot climate. Energy demand for cooling is expected to fast track, demanding huge investments in electricity systems. District cooling is 50% more energy efficient, more reliable, has longer asset life and is more economical over a life cycle compared to conventional cooling and thus offers huge potential to save energy and avoid massive investments. Given its high efficiency, District Cooling will be a critical enabler to meet strategic Net Zero emission targets announced by various governments in the region. Further efficiency improvements brought in by new technological developments, such as thermal energy storage, 0 water consumption solutions, renewable energy, et cetera, make District Cooling a preferred choice for smart and sustainable development. In most of our markets, economic growth is expected to speed up over the next 5 years compared to the previous 5 years. Some of these markets, such as Saudi Arabia and India hold a huge potential given relatively low penetration of DC in cooling sector and a significant size of cooling demand. There is an increasing focus on using District Cooling Systems and integrated with master urban plan. Tabreed is well positioned to capitalize on the growing demand of sustainable District Cooling solutions and we are confident in our ability to deliver consistent capacity growth and strengthen our market leadership position. Let me elaborate more on Tabreed's growth outlook and key areas of growth. In the heart of our growth strategy in line with our local markets, the United Arab Emirates, our strategy here is twofold. Focusing on organic and inorganic growth through various greenfield and brownfield opportunities such as mergers and acquisition. We have already secured additional capacity in our existing concession areas. For instance, we have about 300,000 RT to be connected over medium term in our connection areas such as Downtown Dubai, at Raha Beach, Yas Island, Saadiyat Island, Al Maryah Island, [ Masa ] and others. We also anticipate further opportunities in the form of mergers and acquisitions in the UAE, though the scale may not reflect the size of our historical acquisition. Nonetheless, these opportunities remain an integral part of our growth strategy. On UAE, Tabreed is poised to expand in new geographies, aiming to replicate our success on a regional 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 plants for internal [ to lock ] concessions by leveraging our technical expertise and proven track record. The international landscape offers suitable opportunities for growth from mergers and acquisitions as well. A prime example of Tabreed -- is Tabreed's percent in Saudi Arabia, where Saudi -- Tabreed operates over 500,000 RTs for our asset owner, highlighting potential avenues for acquiring assets and expanding our footprint in near future. In conclusion, we see exciting opportunities and promising prospects for Tabreed. Our expertise in the industry positions us uniquely to seize these opportunities, while strong financial framework and government ensures value accretion to our shareholders. And before I conclude this presentation, let me summarize Tabreed's investment position. At the core of Tabreed's strategy to deliver long-term shareholder returns is a resilient business model, designed for stability and sustainable growth. Our utility-light tariff structure forms the backbone of this resilience. These attributes enable us for long-term contracts with our clients and provide us a high degree of future revenue, deductibility and cash flow visibility, crucial for steady growth and investor returns. For instance, Tabreed's free cash flow yield is over 10%, allowing us to allocate surplus cash either to invest in accelerating growth or increased dividends. Looking ahead, Tabreed is well placed to have significant growth opportunities. Our balance sheet started deleveraging and recent years put us -- in a comfortable position to allocate capital to our growth initiatives. We actively form partnerships to venture into new markets and adopt cutting-edge technology aimed at long-term success and boosting operational efficiency. Our disciplined approach towards investment has been a key driver for our success. By meticulously managing our cash flows, we have maximized shareholder returns through strategic growth investments, optimized capital structure and increased dividends. This disciplined investment strategy is aligned with our commitment to value creation to our shareholders. In conclusion, our forecast remains dedicated on innovative solutions that are reliable, efficient and beneficial for all stakeholders. At Tabreed, we are more than just a cooling service provider. We are partners in progress towards a sustainable future. With that, I conclude our H1 earnings presentation. Thank you for your attention. We will open the lines for Q&A, and we are happy to answer any questions you may have.

[Operator Instructions] So it looks like the call was very comprehensive, and we have no questions at this point. So I'll pass the line back to the management team of Tabreed for any concluding remarks.

Yes. Thank you, everyone, for joining this call. And if you have any follow-up questions, please reach out to Investor Relations team at [email protected], and we will -- happy to respond to your -- any queries or questions. This concludes our call for today, and I wish you all a very good day. Thank you very much.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.