National Central Cooling Company PJSC ($TABREED)

Good afternoon, everyone and welcome to Tabreed's Q1 2026 Earnings Conference Call on the 15th of May 2026. 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. Good afternoon, everyone, and welcome to Tabreed's First Quarter Results Call. I am Yugesh, Head of Investor relations at Tabreed. Today's call is intended to provide clarity and context around our performance. We will focus on what drove results this quarter and how conditions have evolved since last quarter end and how management is thinking about the outlook. Our agenda for today is outlined on the next slide. We have with us today Adel Al Wahedi, our Chief Financial Officer; and Salik Malik, VP, Finance. We will begin with key business and financial highlights followed by a more detailed review of the financial results. At last, we will discuss guidance and outlook before we open the lines for Q&A. Now before we begin, I would like to draw your attention to the forward-looking statements disclaimer, which is presently on next slide. Part of today's discussion will include forward-looking statements based on current expectations and assumptions. I encourage you to review it as part of today's discussion will reference our current expectations. With that, I would like to hand the call over to Salik, who will walk you through the key highlights of the period.

Thank you. Good afternoon, everyone, and thank you for joining us today in our Q1 2026 earnings call. Let me start the key messages for this quarter. First, our operations remained stable with no disruption to our plants or services. We continue to deliver high availability across our virtual water network. Our assets are long term, backed by the contracts with highly creditworthy customers and diversified, which helps us manage any uncertain environment. This was evident in our stable operating profit better collections and strong cash generation during the quarter. Over the last 12 months, we have expanded our district cooling capacity by almost 245,000 RTs, which brings total connected capacity to 1.57 million refrigerated tonnes, which is an upside of 18% year-over-year. The main driver was the PAL acquisition completed in the last quarter of 2025. At the same time, we continue to focus on our expanding the capacity organically. Our diversified and largely contracted portfolio continued to perform well and cooling demand moved closer to normal weather patterns. As a result, consumption volumes also increased. The group revenue increased to $486 million, which is an upside of 4% year-over-year, driven by the fixed capacity charges and consumption revenue. EBITDA at the same time increased by 1% to $285 million with a margin of 59%. Outstanding receivables return to normalcy in Q1 2026 after recording a record collections. This supported the strong cash conversion ratios. Also the customer credit quality and the collection trends remain consistent with our long-term business model. Our underlying operations remained resilient and reported a net profit reflects a period of high investments. These effects are temporary in nature with earnings expected to normalize progressively as the new capacity becomes fully operational and our acquisition synergies are realized. The net debt to EBITDA improved to 4.5x at the end of Q1 2026, supported by the strong cash flows. This resulted in a cash balance increasing by 15% year-to-date as of the Q1 2026, which also strengthened our business model also reflected in our Moody's recent confirmation of investment-grade credit rating. Moving on to the next slide. This slide shows the operating performance of our core business. Our operating assets continue to deliver consistent results. We have added around 55,000 RTs organically over the last 12 months. In addition, Q1 were lower, but this is due to the phasing of our customer projects. Cooling demand in the quarter improved from higher humidity and temperature. This compares with a below average temperature seen in majority of the month in 2025. As a result, consumption volumes also increased year-over-year by 9% in this quarter. Moving on to the next one. I would like to give an update on the regional situation, which, after assessing the possible direct and indirect impacts on our operations and the services. On direct exposure, we do not see any material impact. Around 95% of our revenue is generated in the UAE under long-term customer contracts and about 75% of our EBITDA comes from fixed capacity charges. Around 70% of our QA capacity is in Abu Dhabi, which is less impacted by any tourism inflows. Our cooling load is well spread across residential, commercial and government customers. Our contracts include the CPI escalation and indexation and also includes any utility cost pass through, and our plants continue to operate without any disruption. We have also put in place business continuity measures, including the war insurance coverage and the data recovery plans. On liquidity, our cash balance has increased, as you would have noticed, and we have no significant debt maturities over the next 12 months. In addition, we have an undrawn revolving credit facility of AED 1.2 billion, which enhances our liquidity position. On indirect impacts, we are monitoring possible follow-on effects, this may include delay in customer construction schedules, which could push back new connections or small delays in commissioning due to supply chain or other contractor constraints. We are implementing contingency measures where required to mitigate impact of extended delivery time lines, which includes measures such as utilizing alternative shipping routes, faster procurement activities or reprioritizing our projects. Exposure to rising energy cost is mitigated through pass-through of any input utility cost and also the indexation of CPI in other costs, which is largely managed to receive in our contracts. At this stage, as I said, we do not see any clear evidence of any material delays. However, we remain in close dialogue with our customers and contractors, and we will update the market as the visibility improves. Let's go on to the next slide. This slide shows the secured pipeline that will come online in the coming years and to support our future revenues. The transactions we announced in 2025 are also included here, and they strengthen the visibility of our future growth. This chart shows that our growth is secured and supported by the long-term partnerships which gives us confidence in our outlook. Looking ahead, the UAE and the wider GCC continues to offer good opportunities, the population growth, government investments in infrastructure, net zero targets and the ongoing real estate development supports demand for efficient cooling. With a proven model and a clear pipeline, Tabreed is well positioned to deliver steady and sustainable growth. Now I'd like to take you through the next section, deep diving into the financial results. The key takeaway from the Q1 results of that, the operational core of our business continues to perform exactly as expected, which is stable, predictable and resilient. Revenue grew by 4% year-over-year to $486 million, driven by both fixed capacity charges supported by the organic capacity growth as well as the CPI indexation. And the higher consumption volumes as cooling demand normalized. Operating costs increased broadly in line with volume growth and planned maintenance activity. EBITDA reached $285 million with a margin of 59% comfortably within our guidance range. This underscores the strength of our contracted and long-term duration of our revenue base. Below the EBITDA line, the net profit was impacted by two discrete factors: First, following our debt refinancing based on the prevailing market rates in Q1 2025, and the debt funded equity on PAL acquisition and the other thing is the temporary reduction in the associate contributions. As far JV ramp, I want to emphasize these are investment cycle effects and not operational. As the new capacity becomes fully operational, and the synergies materialize, earnings will normalize progressively. Let me take you through the details on the next few slides. Group revenue rose by 4%. Our core chilled water segment, in the core business grew by 4% as well to $464 million, while the value chain business contributed to $21 million, which is up against the previous quarter by 6%. Within this, chilled water fixed capacity revenue increased by 3.5%. This was supported by approximately 35,000 of RTs of organic capacity additions at the consolidated level over the past 12 months. Along with CPI indexation of 1.25%, which was effective from the start of 2026. There was a partial offset by finance lease amortization and the lower CPI gains compared to the last year. Consumption revenue, which typically represents around 30% to 40% of our chilled water grew by 9% year-over-year as weather pattern normalized following below-average temperatures through most of 2025. This demonstrates the natural upside embedded in our variable revenue component. The seasonality chart on the bottom right illustrates that Q1 is our most fixed revenue every quarter at roughly around 71% fixed versus the 29% variable, providing strong downside protection during the cooler month. Now moving to the next slide, let me address the profitability. Gross profit increased by 3% year-over-year to $242 million, with a margin of approximately 50%. The increase was driven by revenue growth partially offset by higher utility charges in line with the increased cooling demand and the maintenance costs from our proactive asset management program. EBITDA reached $285 million in Q1, which is up by 1% year-over-year, which has a margin of 59% comfortably within our guidance corridor of 50% to 53%. The year-on-year margin movement from 61% to 59% reflects a revenue mix shift towards consumption, which carries a lower margin than the fixed capacity charges, rather than any deterioration in the cost. Whilst on the G&A, the increase of 8% year-over-year is a timing artifact. In 2025, a portion of the G&A was recognized are concentrated in Q4, whereas this year, we anticipated a more uniform quarterly run rate. There is no change to our full year cost discipline, which remains anchored to the inflationary expectations. Moving on to the next slide and continuing with the profitability, especially the net profit, despite the steady growth in operating profit, Reported net profit is behind by 32% to AED 78 million, and the normalized net profit, which excludes any one-off items was reported at AED 79 million. I want to provide a full transfer of two factors: First, the increase in net finance cost year-over-year represents two elements, which is increase in average debt following the PAL cooling acquisition in the last quarter and the reset of our funding cost. Following the Green Sukuk refinancing at the end of Q1, which were below which were raised in 2020 at exceptionally lower rates; the second is the share of results from the JVs which is mainly due to the Pall cooling JV. This is expected and as temporary because the JV is performing in line with our investment case and the contributions will improve as our operational capacity ramps up. Moving on to the next slide, which we talk about the balance sheet. As you know, our balance sheet remains healthy, reflecting an investment-grade credit profile. The total assets stood at AED 14.5 billion broadly stable quarter-on-quarter. The main movement within the assets was a reduction in the receivables, reflecting an improved cash collections after timing-related delays at the year-end. Offset by corresponding increase in cash and short-term deposits. On the liability side, total debt increased -- sorry, total debt decreased marginally by $6.4 million on scheduled repayments payables increased primarily due to the accrual of proposed dividend, which got paid in April. Our net debt to EBITDA improved to 4.5x at the end of Q1 this year. better from the year-end of 4.6x. This is well within our investment-grade thresholds, and Moody's has recently reaffirmed our credit rating. Importantly, we have no significant debt maturities in the next 12 months, only the scheduled amortization of our Islamic finance raised late last year. The debt maturity profile chart on the bottom right shows the majority of our maturities, approximately $4 billion fall in the 2029 to 2035 window, providing substantial runway from now. Moving on to the next slide. This slide talks about the cash flow generation and the capital allocation for the quarter. We have generated $284 million in operating cash flow before the working capital changes, reflecting the continued strength of our core operations. Working capital was a positive contributor of around $68 million, driven by the collections of the year-end receivables. This highlights both the high credit quality of our customer base and also our disciplined cash management. Net operating cash flow reached AED 352 million, an upside of 70% year-over-year, a particularly strong result. Whilst on the capital expenditure, we have invested $71 million towards the greenfield expansion and network capacity within the existing concessions. This is well aligned with our annual organic CapEx guidance of AED 200 million to AED 300 million. After CapEx, free cash flow was 271 million, representing a cash conversion of 124% of EBITDA, up compared to Q1 2025 by 74%. After meeting all the debt service obligations and our investment outflows, including the acquisition of noncontrolling stake in February this year. Our cash balance still increased by 15% year-to-date. This underscores the highly cash-generative nature of our business model. Turning to the capital allocation and shareholder returns. Our dividend policy reflects the Board's confidence in the strength and visibility of our cash flows. For 2025, the shareholders approved a total dividend of 13 fills per share, comprising of 6.5 fills interim dividend paid in October last year, and the remaining 6.5 fills as final dividend, which got paid in April 2026. This represents a payout ratio of close to 80% of our net profit reported and 71% of our normalized net profit. Despite the significant investments made during the year, including the PAL cooling acquisition, we maintained our dividend commitment, which underscores the strength of our cash generation. Looking back at the 5-year trajectory, dividends have grown at an annual compounded growth rate of 3%, while the payout as a percentage of net operating cash flows has remained within the disciplined range of 25% to 37%. This demonstrates that our growth investments and shareholder results are not competing priorities. Both are funded comfortably from our operating cash flows. With that, I'll move to the next section of today's program. As of Q1 2026, our connected capacity increased by 4.1% year-over-year on organic expansions, fully in line with our ambitions and growth targets and guidance that we have provided earlier. New capacity additions in the first quarter were relatively modest, reflecting the phasing of customer construction schedules, which remains consistent with the nonuniform nature of project construction across various quarters. We continue to monitor the impact of evolving geopolitical situation and are actively engaged with customers to assess any potential implications on project time lines. At this stage, taking a conservative view may result in some timing shifts of the connections with capacity growth trending towards the lower end of our guidance for 2026. Importantly, these are largely timing related of a few months and do not affect the underlying demand of the project pipeline that we have. we remain confident in our medium-term outlook and reconfirm our guidance of 3% to 5% annual capacity growth throughout 2028, with a gradual increase in additions expected starting from '27 onwards. On CapEx, we had invested $71 million during this quarter, which is closely aligned with our targeted organic capacity CapEx range of $200 million to $300 million per year. Our CapEx guidance remains consistent, and we will proactively update the market should any new projects or opportunities arise. Additionally, we are finalizing plans for new greenfield developments and expanding our interconnection network, which will allow us to unlock surplus capacity across plants and better so increasing customer demand. all while optimizing our capital allocation for maximum impact. Our EBITDA margin of 50% over the last 12 months remains stable and comfortably within our guidance range between 50% to 53%, reflecting the resilience and efficiency of our core operating model. We remain confident in our ability to sustain this robust margin in the future. As of Q1 2026, our net debt-to-EBITDA improved to 4.5x, positioning us well within the investment-grade thresholds supported by a highly visible revenue base, strong customer credit quality. And continued backing from our strategic shareholders, we remain well positioned for sustained performance. While leverage temporary increased last year in line with our growth investments, this is expected to normalize as incremental EBITDA and cash flows are realized. Our top disciplined financial management and balance sheet optimization underpins our confidence in delivering sustainable long-term value for our shareholders. Moving on to the next slide. Here on the conclusion, let me restate our confidence in the future potential of Tabreed. We continue to see significant opportunities in the DC sector. Our core business remain stable and highly dependable with a well-established platform for continued expansion. Recent strategic developments, including the Palm Jebel Ali concession and the acquisition of PAL cooling assets further strengthens our long-term growth outlook. We remain a strong financial position and firmly committed to preserving our IG credit profile. Looking ahead, we are well placed to deliver sustained capacity-driven growth, supported by a visible and expanding pipeline, positioning us strongly for the years ahead. With that, we conclude our presentation, and thank you for your continued trust and support while we open the floor for the Q&A.

[Operator Instructions]. Okay. We have our first voice question coming from Prateek from Jefferies.

I have two. The first question is on the PAL cooling, right? So you've said that you -- the profitability of that asset will increase once the plant ramp up. So my question is that this -- in PAL Cooling, there is one plant under construction. So if you just construct that plant and do not go ahead with the 3 plants, which are in the planning phase, what will be the contribution at the net income? That's number one. Number two is, could you help me explain the drivers behind your 4% revenue growth? You've said that the connected capacity on an organic basis grew 4% your consumption grew by 9%. So could you help me bridge that into your revenue growth numbers of 4%.

Thank you, Prateek. On your first question about the PAL, this was acquired on a concession level of almost 600,000 tonnes, as you -- we have mentioned it in our we call at the time of acquisition as well. So this is going to -- apart from the one plant, which is under construction, there are other 3 plants which are going to come in, which are during in the planning stage currently. All of this put together are at which this acquisition was valued and which is what we have paid. And today, when you look at our -- below the EBITDA line, the depreciation and amortization are coming because of this future value that we have paid and the debt that comes along with those project finance. So as and when these synergies as well as those new connections ramp up, this P&L net income will improve, and that is what I meant when I gave my comments With regard to your second question on the capacity increase of the revenue of 4%, 3.5% comes from the organic additions to our network of the connections and the other 1.25% from the capacity, which is 60% on our capacity mix of revenue. So overall, it is a 4%. That's the result of this increase, plus the increase of on the 40% of our consumption revenue of 9%. All of these 3 factors put together, the revenue has increased by 4%.

[Operator Instructions]. It looks like Prateek has a follow-up question. Please go ahead.

Again, two questions. The first is, could you give your exposure to the industries which might be at risk so your exposure to the tourism and hospitality industry? That's question number one. And secondly, in the previous conference call, you had said that your water availability in Dubai had not increased very much. Could you help us where -- what's the status right now? And also, where is your negotiation with the Supreme Council regarding the tariff increase because of the higher costs from the separate charges? Yes, these are the two questions. Thank you.

With regards to your first question on the impact of the tourism and hospitality and the real estate. So please note that our revenue model is -- and our major of the contracts or contractor with the B2B, which means it is the fixed capacity charges are completely insulated against any impact because of to dismount hospitality. Second, our majority of our presence is in Abu Dhabi, which has less impacted because of tourism and hospitality. All of this puts us in a better position during -- especially during this current geopolitical situation. With regard to the DSC, again, we have noticed in this -- especially during the first quarter of this year, the availability of PSC has improved both the volume as well as the quality. As a result, we have noticed efficiency improvements in our -- and the cost benefits during the first quarter of this year. And with regard to a subquestion on the service charge pass-through, the discussions, as you know, it's still ongoing, and the RSP had mentioned that they will be looking into the back end of this year better probability of pass-through starting from the start of the year.

[Operator Instructions]. Okay. We have another voice question from Jean-Pierre at Kepler Cheuvreux. Please go ahead. Your line is now open.

Yes. If we set aside PAL cooling and focus on consolidated businesses, it seems that there was no new capacity addition in Q1. And it seems that there is no guidance for capacity addition for this year. So I guess the question here is -- could you share with us what visibility you have at this stage on potential capacity growth in 2026. Could you let us know more specifically if you have any new big-ticket projects expected to start up soon? Or do you anticipate additional connections within your existing concessions to materialize. And in the end, should we expect any expansion materializing in Q2 or rather towards the end of this year? Thank you.

Thanks for your question. Yes. With regard to the -- during the Q1 this year, yes, the growth was very modest, as you have noticed and rightly so. But we are quite confident, actually, from the guidance perspective for the year to be at least -- to meet the lower end of our guidance, which is the 3%. And I mentioned in my guidance and concluding remarks. So we do expect to reach from that handle, which includes, again, and restricted to the concessions that we have currently have and we are operating. This does not include any other inorganic growth that we may be chasing again, that we will come to the market at the right time and as per their disclosure and transparency policy is concerned.

[Operator Instructions]. Okay. It looks that at this point in time, we have no further questions from the audience. So let me pass the line back to the company for their concluding remarks.

Thank you. With this, we conclude our call today, and we appreciate your interest in Tabreed, and thanks again for joining the call. If you have any follow-up questions, we are available. You can reach out to IR team. And you may now disconnect the call. Thank you very much.

Thank you. This concludes the call for today. We are now closing all the lines. Goodbye.