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

Good afternoon, everyone, and welcome to Tabreed's 9 Month 2024 Earnings Conference Call on the 15th of November 2024. Please note that this call today is being recorded. [Operator Instructions] So without further ado, I would like to pass the line over to Mr. Yugesh Suneja, the Head of Investor Relations at Tabreed. Please go ahead, sir.

Thank you, Michael. Good morning, good afternoon, everyone. Welcome to Tabreed's earnings call for the first 9 months of 2024. I am Yugesh, as Michael introduced, Head of Investor Relations at Tabreed. I am joined today by Adel Al Wahedi, CFO of Tabreed; and Salik Malik, Vice President of Finance. Before we delve into our results, I would like to remind everyone that some of the information we will be discussing today is about future performance and forward-looking in nature. These statements are based on our current expectations and are subject to risks and uncertainties. Please refer to the next slide for interpretation and limitations of these forward-looking statements. Our financial results, including a copy of this presentation, are available on our website. Video replay and transcript of today's call will also be made available on Tabreed's website under Investor Relations section. In today's agenda, we will discuss Tabreed's financial performance for the first 9 months of 2024, provide an update on our business, operations and outlook, and then take up your questions. Adel will commence with an overview of the operational and financial highlights, including progress on our sustainability initiatives. Subsequently, Salik will discuss the financial results in detail. 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.

Thank you, Yugesh. Good afternoon, everyone. Thank you for joining us today for our third quarter earnings presentation. In the first 9 months of 2024, Tabreed has seen consistent growth, stable profitability margins and enhanced its financial strength. Revenue was at AED 1.85 billion and has increased compared to the same period last year with a growth of 6% on a like-for-like basis. However, deconsolidation of Tabreed past investments and higher one-off CPI gains recorded in the previous year has led to lower reported growth of 2%. Increase in revenue was mainly organic in nature and driven by higher consumption volumes and the new loans connected over the last 12 months. Our profit margin remained stable with EBITDA margin of 50% in the first 9 months of this year. Interest charges continue to reduce as we use surplus cash to reduce leverage and optimize balance sheet. Overall, normalized net profit before tax grew by 4% versus last year. If we look at like-for-like growth, after adjusting for the impact of CPI gains last year and deconsolidation of Tabreed Parks, net profit growth will be significantly higher. Moving on to operational updates. Customer demand remained solid throughout the first 9 months of 2024 as evident of 6% growth in construction volume. The growth in the third quarter was low single digits, and we witnessed much stronger volumes in the same period last year due to relatively hot weather. During the reported period, we commissioned on a new greenfield plant at Saadiyat Island and add capacity and other plans to sell growth and demand from our customers. We saw acceleration in connected capacity with the new connections for more than 12,000 refrigeration tons in Q3 alone compared to 4,700 RT delivered in the first half of the year. During the last 12 months, we have added a new capacity of 29,000 RT. In addition to continued expansion in our core markets of UAE and GCC, we have further strengthened our global footprint. During third quarter, we increased connected capacity in India by adding 3,000 RT at our existing plant in Gurugaram. This additional capacity has been ramped up earlier than our initial expectations given strong demand in the community. We also added 1,500 RT in Egypt within the existing development of more of Mall of [ Atamia ]. These expansions clearly demonstrate strong potential of district cooling in emerging countries, which we still have a huge requirement for more energy efficient and reliable cooling solutions. While this is already highly energy efficient, Tabreed continues to set a benchmark for responsible operations in the cooling sector. In the third quarter, Tabreed verified high carbon standard for one of its plants in Abu Dhabi. This was a result of the year-long verification by independent third party. The results clearly improved a significant environmental benefits of Tabreed, the district cooling operation by way of lower carbon emissions compared to conventional cooling efforts. This certification also means that Tabreed can now trade carbon credit in voluntary market as verified the emission, prevent, becoming the first district cooling company in the world to achieve such recognition. All in all, the company's financial position remains strong with healthy returns and solid free cash flow generation profile. We remain focused on profitable and sustainable growth in domestic and international markets. At the same time, we are prudently managing surplus cash and strengthening our balance sheet and increasing dividend payout to maximize shareholders' value creation. Moving to the next slide. This slide provides an update on our operational performance and the expansion update during the first 9 months of this year. Consumption volumes continued to grow strongly with an increase of 6% year-over-year to 2.0 billion refrigeration tons hours. This growth is attributed to both higher capacity and robust cooling demand. Chilled water revenue, which is 96% of our group revenue, comes mainly from 2 components: fixed charges contributed 55% of our water revenue in 9 months of current year and experienced growth of about 3%, driven by increased capacity and CPI indexation. Variable charges, which is -- which accounted for the remaining 45% of chilled water revenue increased in line with the volume growth. Deconsolidation of Tabreed Park Investment in quarter -- third quarter of last year impacted the growth in both fixed and variable charges. The UAE remains our core market, accounting for 83% of connected capacity. Our presence in other GCC markets such as Saudi Arabia, Oman and Bahrain, that accounts for 17% of total connected capacity. Outside GCC, we have expanded in India and Egypt. Net capacity addition, which is shown in the chart on the slide, factors in disposal of plants and those adjustments. However, on a gross basis, we added close to 17,000 RT new capacity in 9 months. Most of this addition came from UAE and within our existing concession areas such as Saadiyat and [indiscernible]. Outside the UAE, we have added new connections, mainly in India and Egypt, as I mentioned in my opening remarks. 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 offers a compelling solution to enhance energy efficiency and reduce carbon emission. By leveraging advanced technologies, we not only meet immediate cooling demand but also contribute to long-term sustainability goals. Our operations have yielded substantial environmental benefits. In the past year, we achieved energy savings equivalent to powering over 148,000 homes and prevented 1.6 million tonnes of carbon emission. 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 own carbon footprint and achieving net zero emissions by 2050. We are leveraging digital technologies, including big data and AI, to optimize our operations and enhance efficiency. Additionally, we are exploring the adoption of renewable sources, such as geothermal and solar power to further decarbonize our operations and cooling provided to our customers. Our collaboration with HTMS on the Maxwell nonfluid technology and the implementation of variable frequency drive motors are examples of our ongoing effort to improve energy efficiency. Through these ongoing initiatives and further planned innovations, Tabreed is showcasing its pioneering role in advancing sustainable district cooling solutions. Tabreed is committed to reducing water consumption and minimizing waste. We are implementing initiatives to conserve freshwater by utilizing sewage effluent and seawater and our cooling processes. Wherever it is visible, additionally, we are focused on responsible waste management, including the reduction, reuse and the recycling of materials. We follow strict environmental regulations in the handling of hazardous materials. I will now hand over to Salik for a detailed discussion of our financial performance.

Thank you, Adel, and good afternoon, everyone. Let us revive our financial performance for the first 3 quarters of 2024 in greater detail. We achieved the first financial results, demonstrated by a strong EBITDA margin of 50% and a 4% increase in the normalized net profit before tax. Although the divestment of the Tabreed Parks Investment and the presence of one-off gains in the previous years have slightly impacted our overall figures this year, our core business demonstrated steady growth. This is evident in the underlying trends and the surplus cash which contributed to optimizing our balance sheet. We'll go to the next slide. Let's deep dive into our income statement for the first 9 months of 2024. Group revenue reached AED 1.85 billion, increasing 2% year-over-year. When excluding the effects of CPI gains on finance leases and the deconsolidation of the bypass DCP, normalized growth amounted to approximately 6%. Let me elaborate more on these normalized adjustments. While in 2023, we benefited from a substantial one-off CPI gain as there was an indexation of 4.8% versus the current taxation of 1.6%, this reduction in one-off gain on the finance leases compared to the last year impacted our top line growth by approximately 2%. Moreover, the revenue from the Dubai Park, which was deconsolidated effective August 14 last year, contributed to a further 2% impact on our revenue growth for this year. Our underlying basis revenue growth is primarily organic attributed to the gross addition of about 29,000 tons recorded during the last 12 months, a rise in consumption volumes by 6% and the CPI indexation applied in line with our contractual arrangements. Gross profit increased marginally as operating cost as well increased to cater to the new capacity and to meet the growth in consumption volumes. EBITDA reached AED 933 million, resulting in a healthy margin of 50%. While the growth in EBITDA was impacted by the deconsolidation of the bypass and the rising costs associated with our expansion into both established and new markets, our overall performance remains robust. Despite the impact of the divestment and increased expansion-related costs, normalized net profit before UAE corporate tax grew by 4% to AED 462 million in the first 9 months, supported by the lower finance costs. After accounting for the new corporate tax, the reported net profit for the same period stands at AED 425 million. Moving on to the next slide. This slide outlines our the Tabreed balance sheet as of September 30, 2024. Total assets and liabilities reduced by 5%, YTD, mainly reflecting the repayment of debt and the dividend payment as we use the surplus cash to optimize our balance sheet and increase dividends. Looking at the movement of assets. Fixed assets and intangibles declined marginally as the capital expenditure incurred during the period was offset by the annual depreciation and amortization charges for the 9 months. Investments in associates and joint ventures experienced a slight decline as the profit generated during the period were counterbalanced by the dividend distributions and the divestment of our stake in one of the joint ventures this year. Receivables and other assets saw an uptick due to the elevated receivables at the end of the period, which was partially mitigated by a reduction in the fair value of derivatives. The raise in receivables was primarily attributed to the seasonal in consumption volumes during the third quarter, which is equal to our summer, leading to an increase in billings. These receivables are expected to be collected in the fourth quarter, thereby normalizing by the year-end. Our cash balance was strategically reduced as we partially bought back sukuk, due in 2025 and paidout '23 during the 9 months of this year. Consequently, our net debt stood at AED 4.9 billion at the end of this period. Additionally, the net debt-to-EBITDA ratio has improved 4x, thereby -- and reinforcing the strong investment-grade credit rating. When we look into the equities and other liabilities, the changes in equity and results was attributable to the payment of '23 shareholder dividend and the fair value adjustments in the derivatives, partially mitigated by the profit generator during the first 9 months. Payables and other liabilities increased due to the higher provisions for utility payments reflecting the cyclical peak consumption volume recorded in the third quarter of this year and the introduction the income tax payable starting from 2024. Our debt includes bank borrowings and fixed income instruments, sukuk and bonds. The total debt reduced by 12% YTD as we partially bought back outstanding sukuk regarding our debt maturities, we have a bank debt equivalent to AED 2.5 billion that is due in the first half of this year -- next year, while the sukuk to AED 950 million is maturing in the second half of the same year. Our balance sheet is robust with gross debt to equity of 45%, while the strong cash flow generating business model allows us to increase our gearing ratio further. We are, therefore, confident in our ability to manage the upcoming refinancing whether in full or in part as the situation demands. We are actively monitoring the interest rate market and exploring various refinancing options. Our goal is to select the optimal refinancing strategy that aligns with the best interest for our shareholders. Once a decision made and approved by the Board, we will promptly update the market accordingly. Moving on to the next slide, showing the uses and the sources of cash generated during the first 9 months of this year. Our operations generated an impressive cash flow from operations of AED 940 million, underscoring the robust nature of our business model and our sustainable profitability margins. The negative working capital observed during the period is attributable to an increase in receivables, a fluctuation primarily associated with seasonal factors. Despite this, the overall DSO remained at healthy levels, signifying the effectiveness of the risk collection processes and the robustness of our customer credit profile. Capital expenditure incurred during first 9 months is about AED 210 million. which is related to our expansion of operations, including the completion of a new plant in Saadiyat and adding new loads in our concession areas. Overall, Tabreed achieved a substantial free cash flow of AED 603 million in the first 9 months of this year. And on annualized basis, this translates to approximately AED 900 million in free cash flow, reflecting a yield of exceeding 10%. This strong financial performance enabled us to significantly enhance shareholder value by channeling more capital towards future expansion, reducing debt and increasing cash returns to our shareholders. This year, our financing activities clearly demonstrated our commitment to financial prudence. We strategically utilized surplus cash to service our debt, including the buyback of sukuk and increased shareholder dividend. At the end of 9-month period, we reported a strong closing balance of AED 748 million. In addition, we maintain an undrawn AED 600 million green revolving credit facility. This robust liquidity position enables us to effectively execute our capital allocation strategy. With this, I conclude the summary of the financial presentation, and I will hand it back to Adel to take you through the rest of the proceedings.

Thank you, Salik. We have provided capacity guidance of 100,000 RT we achieved over '23 '24, of which 85% is expected from consolidated entity. Starting from 2023 and the first 9 months of '24, we added 70,000 RTs previously communicated. The phasing of projects is more skewed towards H2 of this year versus H1. This was also evident in sharp increase and the new connections in Q3 compared to the first half. We expect this trend to continue in the last quarter as we connect the new loads as we signed with our customers. While there are certain factors such as delays in obtaining NOC from authorities or completion delays at customer and that potentially is our short-term guidance. However, we remain committed and on track to deliver on our growth expectations over the medium term. We are targeting an annual growth rate of 3% to 5% in connected capacity over the year of 2024 to 2026. This growth should be driven by signed agreements with our customers as well as the new projects that we'll anticipate to win in the future. Lastly, potential small scale M&A opportunities also form part of our guidance. This slide provides key drivers of growth in the district cooling industry. Due to a renewed focus on accelerating climate action and advanced sustainability, we see promising outlook for the sector. Cooling typically accounts for 50% of electricity consumption and up to 70% of peak demand, especially in Tabreed key markets, which show relatively hot climate. Energy demand for cooling is expected to increase at a higher pace, demanding huge investments in electricity systems. District cooling is 50% more energy efficient, more reliable, asset light and is more economical over a life cycle compared to conventional cooling and thus offers a huge potential to save energy and avoid massive investments in grid infrastructure. Given this high efficiency, district cooling will be a critical enabler to meet strategic net zero emission targets announced various developments in the region. Further efficiency improvements abroad and by new technological developments, such as thermal storage, energy storage, zero water consumption solutions, renewables, energy and et cetera, make district cooling a preferred choice for smart and sustainable development. In most of our markets, economic growth is expected to increase over the next 5 years compared to the previous 5 years. Some of these markets such as Saudi Arabia and India present significant growth opportunities due to their vast market sizes and relatively low penetration of district cooling system. The governments of these regions are progressively emphasizing the integration of DC systems into master urban planning. This strategic focus is expected to drive substantial adoption and expansion of our services in these high-potential markets. Tabreed is excellently situated to harness the increasing demand for eco-friendly district cooling solution. We remain confident in our capacity to deliver continued growth and strengthen our leadership in the market. Let me elaborate more on the brief growth outlook in key areas of growth. In the heart of our growth strategy lies in 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 acquisitions. We have already secured additional capacity in our existing concession areas. For instance, we have about 300,000 RTs to be connected over medium term in our concession areas such as Downtown Dubai, Yas Island and Saadiyat Island. We also anticipate further opportunities in the form of merger and acquisitions in the UAE. Though the scale may not reflect the size of our historical acquisitions, nonetheless, these opportunities remain an integral part of our growth strategy. Beyond the UAE, Tabreed expects to venture into our new geographies with the ambition of mirroring our regional achievements on a global scale. Our strategic expansion plans are focused on penetrating untapped markets where the demand for sustainable cooling solutions is rapidly strong. We are actively assessing multiple opportunities in markets such as Saudi Arabia, India and the wider Asian region. Our goal is to build greenfield plans or enter into large concession by leveraging our technical expertise and proven track record. The international landscape provides significant opportunities for growth through ventures and acquisitions. A notable example of the Tabreed's robust presence in Saudi Arabia, where Saudi Tabreed manages over 500,000 RT for various assets owned. This highlights the potential of acquiring additional assets and further expanding our footprint in the near future. In conclusion, we see exciting opportunities and promising prospects for Tabreed. Our extensive expertise in the district cooling industry uniquely positions us in to capitalize on these opportunities, while our robust financial program and the strong development practices ensure sustainable value creation for our shareholders. Before I conclude this presentation, let me summarize Tabreed's investment proposition. At the core of Tabreed's strategy, to deliver long-term shareholders return -- resilient business model, designed for stability and sustainable growth. Our utility-like tarrif structure form the backbone of this resilience. These attributes enable us to form long-term contracts with our clients and provide 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 increasing dividends. Looking ahead, Tabreed is well in place to tap significant growth opportunities. Our balance sheet rapid deleveraging and recent years puts us in a comfortable position to deliver on our growth initiatives. We actively form partnerships to venture into new markets and adopt cutting-edge technologies aimed at long-term success and boosting operational efficiency. Our disciplined approach towards investment has been a key driver of our success. Through diligent cash flow management, we have enhanced shareholder returns by making strategic growth investments, optimizing our capital structure and increasing dividends. This disciplined investment strategy is aligned with our commitment to value creation for our shareholders. In conclusion, our focus remains on innovation solutions that are reliable, efficient and beneficial for all stakeholders. With this, I conclude our earnings presentation. Thank you for your attention. We will open the line for Q&A, and we are happy to answer any questions you may have.

[Operator Instructions] Our first question comes from Mr. [ Fraser Hard ] from Aberdeen.

I have two questions, if that's okay. The first one just focuses on capacity growth. So there's about a difference of 30 between the guidance and what you've achieved in 9 months to date. It would be helpful if you could be specific on where you expect that -- the delta of that to come to meet guidance. And then secondly, I noticed that there's been an increase in the waterfall graph you presented on operating costs. Could you maybe comment on wherever those are structural or -- and how maybe some of the initiatives that you're taking with respect to sustainability angle, are any of those accretive to the cost base of the company?

Yes, I will take -- yes, thank you for the question. I will take the first part. As I mentioned in my presentation today, this is procedural issue sure that we are still confident that we will achieve our guidance. And the question about from where it is expected, it will continue with the same current growth practices, UAE will remain the same, the main market for us. And others, they are contributing definitely, for sure. For example, the 17,000 we achieved over 9 months, it was around 12,000 from UAE and the remaining part, it was distributed among the others. And we expect that it will continue with the same distribution.

Thanks, Fraser. Yes, regarding your question when it comes to the movement in EBITDA. So the main movement in EBITDA is the current year-on-year CPI that impact both the revenue and the finance leases as per the IFRS earnings standards. And when it comes to the other part of increase in revenue, it's based on the volume that we have recorded. If you look at it, we mentioned the 6% growth in volume -- consumption volumes has been recorded. And it is also forming part of the revenue increase. As a result of consumption volumes increase, we have also -- there is noticed increase in utility cost because that's what we consume for producing the chilled water. So that's the increase in the operating costs that we have mentioned. And in general, in the admin and other areas, as we expand into the new markets and also to cater to the means of connecting the new connections in our concessions, we initially incurred some additional admin costs, which the benefits will be accruing as we go in future, like, let's say, between 3 to 5 years down the line, these benefits will be realized.

[Operator Instructions] We'll move into the text question by Mr. Jean-Pierre Dmirdjian from Kepler Cheuvreux. What is your current level of spare capacity? And what CapEx do you anticipate in the coming years to continue to expand your connected capacity?

Yes. Okay. The -- we mentioned in our presentation -- thank you for the question, that we have available capacity for current concession areas, 300,000 in RT. And the CapEx required for this, it is minimal. It is just a few meters for the network only for connections.

Okay. Second part of Jean-Pierre's question. You mentioned significant cooling requirements in emerging countries. Could you provide some insights on the growth potential for capacity additions in the international markets where you operate, particularly in India and Egypt?

Now it is not handy with me as when it comes into a number, but India and Egypt, it is big countries, huge population. And there, important, we are witnessing when it comes into the system, the regime there economical part of it, and there is an awareness about the DC as an option by itself versus conventional cooling. This is a big evolvement transitioning, transformation is happening. And we will be very selective and careful about our stills, which means, for example, we opened our office in India 5 years back, but we started the first land -- first project only last year. We were looking in the market. We were participating into initiatives, campaign to promote the DC option as an option there. And once we saw a prospect is available in front of us, definitely, we pursued and got successfully with a repeatable client, which is TATA Group. And Egypt, so we did the same. And we will continue to pursue and to look for the right prospects through a very disciplined process of identifying such prospects.

Our next question comes from Mr. [ William Suho ] from Vergent Asset Management. How much are you expecting very strong off-plan development activity currently in the UAE real estate markets to contribute to connected capacity growth? And what time line would you expect for this off-plan driven growth?

See, we -- yes, thank you. Thank you. I think all of us, we are in an agreement that we are witnessing a peak time into real estate and urban planning happening in UAE. Definitely, this is creating opportunities for district cooling options. Although as we check the number, the DC versus conventional cooling, which is still low, which means that there is a great potential. And we see decline, especially after COVID. After COVID we are witnessing a big awareness in the market from clients who are more maybe reluctant previously. But I can claim one of the benefits that awareness about ESG about environment, to take care of our planet. This has created a good awareness. And we see it will be a good potential. We are following the market, and we are aware that no projects that the clients, they are considering seriously to go for a DC option, whether that they would like to outsource it for people like us or they would like to have their own captive plan on infrastructure. We had also in the longer run, it will remain as an acquisition prospect for us.

[Operator Instructions] We have a follow-up question from Fraser from Aberdeen.

Yes, I was curious, you talked through 2 slides about the sustainability aspects of the company, so greater use of treated effluent water, solar energy at some of the plants and geothermal. In terms of, I guess, the operating costs of running a DC plant, do these have any sort of financial material impact? Or is it negligible in terms of the operating costs of running a DC plant? I guess, in short, should we see the margin, I guess, after the integration of these technologies for each DC plant to improve? How would you like investors to think about on this?

Yes. Thank you for the question. It's a good question. These initiatives exactly, it is the objective to create efficiency and to have a real value under the terms of the consolidated P&L. This is still in the beginning of its journey, not the scalable of it as of now. But it has really initial positive return. It requires a scale. It requires -- to reduce its cost, something new definitely is starting with high cost. Once you have a good scale of it that we can optimize it in the future with our vendors or contractors. One of the cases I can remember of is a nanofluid, we tested it and one of the plants and showed like 5% of more efficiency. So we are looking really to continue that system. But we are really optimistic for the future about that, that between the something considerable. But it will be definitely, as you can understand, to be gradual, not overnight for sure. I see -- sorry, go ahead, please.

No, please continue.

No, no, just I was looking at the screen that it was a question about Saudi Arabia and the growth...

Yes. If it's fine, I'll read that out. This was a follow-up question from Jean-Pierre from Kepler Cheuvreux. Focusing on Saudi Arabia, what is the growth potential of district cooling for this market and the level of investments required to develop it. Could you participate in new projects in the Kingdom on a consolidated basis outside of the joint venture Saudi Tabreed?

Yes. Okay. Yes. Thank you. So being a share and the Board of Saudi Tabreed, you know that we are witnessing the vision of 2030, and they are talking now to revise it to '35 as well. It is a big market. Big potential is coming there, and this is definitely subject to that they fulfill the promise and the time lines of the mega and giga projects or they can accelerate it. And as you know, PIF, they joined us beginning of the year. And we are expecting that to be adding also value operationally and financially being that they acquired 30% stake, which is considerable there. We are -- as you speak now, we are revising the strategy and the growth aspirations there. But the numbers without to cost me from that from now to 2030, I can't think of a minimum like 2 million tons. But as I said, it is subject to continue with the same speed or even to accelerate the current plans for the big projects.

[Operator Instructions] Okay. It looks like there are no questions at this point. Perhaps I'll be passing the line back to the management team for any concluding remarks.

All right. Thank you, everyone, for joining us today. And please feel free to reach out to us or write to us at [email protected] if you have any follow-up questions. This concludes our call, and I wish you all a very good day. Thank you.

Thank you very much. We'll be closing all the lines. Thank you and goodbye.