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Edited Transcript of TABREED.DU earnings conference call or presentation 3-Nov-19 11:30am GMT

Q3 2019 National Central Cooling Co PJSC Earnings Call

Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of National Central Cooling Co PJSC earnings conference call or presentation Sunday, November 3, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marie Therese Hajj

* Richard Rose

* Stephen John Ridlington

National Central Cooling Company PJSC - CFO

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Conference Call Participants

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* Divye Arora

Daman Investments PSC - Portfolio Manager

* Zeeshan Bagwan

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Tabreed's Third Quarter 2019 Earnings Call.

Today's speakers are Mr. Steve Ridlington, CFO; and Mr. Richard Rose, VP, Finance.

I'll hand over to your host, Madam Marie Therese Hajj.

Madam, please go ahead.

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Marie Therese Hajj, [2]

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Thank you, Greg. Hi, everyone. This is Marie Therese from strategic communications team at Tabreed. On behalf of Tabreed's management team, I welcome you all. And thank you for joining us for the Third Quarter 2019 Results Conference Call.

Before we begin our presentation, I would like to remind you all that some of the statements made in today's conference call may be forward looking in nature and may involve risks and uncertainties. Kindly refer to Slide 2 of the presentation for the detailed disclaimer.

I would now request you to turn to Slide 3 for today's agenda.

On today's call, we have with us Steve Ridlington, our Chief Financial Officer; and Mr. Richard Rose, the Vice President, Finance. Steve will first provide an overview of the third quarter and 9 months 2019 performance and key events.

Following that, Richard will discuss the financial performance in more detail. Steve will then conclude the presentation, and we will open the floor for your questions. Thank you.

And over to you, Steve.

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [3]

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Thank you, Marie. And thank you, everybody, for joining us on the conference call today.

Let me begin, as usual, by highlighting our 9 months 2019 performance.

First 9 months 2019 revenues grew by 3.5% year-on-year, led by a 3.8% increase in chilled water revenues. Across the same period, EBITDA growth was 11.2%, and as a result, our EBITDA margins expanded from 46% last year to 50% in 2019. IFRS 16 implementation had a favorable impact of 3% on EBITDA margins. Adjusted for this, EBITDA margins would be 47%, in line with last year. Richard will discuss the impacts of IFRS 16 in more detail later. Net income growth was 3.1%. However, when last year's net income is adjusted for the profit on partial disposal of Saudi Tabreed, underlying net income increased by 15% compared to 9 months 2018.

We added over 15,000 refrigerated tons of new capacity during Q3 2019, of which 15,000 refrigerated tons were in Saudi Arabia. This takes our capacity addition during the 9 months of 2019 to 30,000 RTs. We expect to meet our target of delivering 65,000 refrigerated tons of new capacity over 2019 and 2020.

Finally, we are pleased to find our investment-grade rating affirmed by Moody's during their recent review meeting. Moody's opinion is underpinned by a resilient cash flows to long-term contracts, low operating risk levels, strong market position in the Middle East and complementary shareholders.

Turning to Slide 6. This provides the usual overview of the company. Tabreed is contributing to the region's growth through efficient and environmentally friendly cooling, enabling sustainable development. As our business grows, so does our positive environmental footprint. We currently operate 75 plants across the region delivering about 1.16 million refrigerated tons of cooling. Our operations saved around 2 billion kilowatt hours of energy consumption in 2018, enough to power 112,000 homes per year and equivalent to reducing about 1 million tons of CO2 emissions.

Moving to the next slide, Slide 7. Tabreed is the only public traded and regional district cooling company in the world. The UAE is our base of operations, where we have a presence in 6 emirates, providing 780,000 tons of cooling to our customers through 63 plants. In addition to the UAE, we work with key strategic partners in 4 other GCC countries. We have a total of 12 plants outside of the UAE providing over 380,000 tons of cooling to our customers. Around 2/3 of our capacity is consolidated, while the rest is equity accounted as associates or joint ventures.

Moving to Slide 8, and this slide outlines our capacity growth trends across the region. At the beginning of 2019, we announced that we expected to have at least 65,000 tons of new capacity -- connected capacity, during 2019 and 2020. During the third quarter this year, we added 15,380 refrigerated tons of capacity, of which 15,000 refrigerated tons were added at King Khalid International Airport in Saudi Arabia. This takes our total capacity additions in 2019 to almost 30,000 tons, split roughly 50-50 between consolidated and equity-accounted entities. We remain confident of achieving our guidance of 65,000 tons of new additions by the end of 2020.

Tabreed continues to demonstrate its ability to deliver a steady increase in connected capacity in the region driven by the growth in our key markets across the GCC, and by successfully leveraging our regional network to take advantage of commercial opportunities as and when they present themselves.

Slide 9 provides the usual overview of headline performance.

And to summarize: Tabreed is a stable utility investment infrastructure business with long-term contracts with high-profile customers. This provides us clear visibility on future earnings and cash flows. We currently have 90% of our capacity contracted for at least the next 10 years. About 70% of our revenues are derived from fully government-owned and partly government-owned organizations, thereby limiting counterparty credit risk.

Tabreed has a track record of delivering profitable growth. Net income and EBITDA have increased by 7% and 9% per year, respectively, since 2016.

I'll now hand over to Richard to talk about our financial results in more detail.

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Richard Rose, [4]

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Thank you, Steve.

Let me start by highlighting the key points on our income statement for 9 months ending September 2019.

Tabreed recorded overall revenue growth of 3.5%, with chilled water revenue increasing by 3.8%. The main factors driving chilled water revenue growth were the new capacity in the UAE and the new plant in Oman which added 1.4%. CPI indexation on our capacity revenues added just over 1 percentage point.

The acquisition and consolidation of S&T in Q1 2018 added about 1 percentage point. And the last factor is consumption growth. Revenues from our value chain businesses decreased by around 2.6%.

In the first 9 months of 2019, IFRS 16 implementation resulted in reclassification of operating costs into depreciation of AED 15 million and finance costs of AED 13 million. Both depreciation and finance costs did not form part of EBITDA, resulting in 3% higher EBITDA margins. Adjusting for this, EBITDA margins would have been 47%, which is in line with last year.

Other gains last year included AED 32.6 million on account of dilution of our stake in Saudi Tabreed. Net income adjusted for this onetime gain on partial disposal of Saudi Tabreed in Q2 2018 would have grown by 15%.

We'll now turn to the statement of financial position on the next slide. Significant movements in the balance sheet as at the 30th of September 2019 compared to the end of 2018 were due to IFRS 16. This increased fixed assets primarily due to the adoption of the capitalization in operating leases under the adoption of IFRS 16. Receivables increased, reflecting seasonality compared to December 2018 as well as short-term timing delays in customer collections, but we have seen strong October collections with a large proportion of the overdue amounts received. The increase in corporate debt is primarily due to increase in lease liabilities on account of the IFRS 16 implementation.

Turning to the next slide, we'll now look at the cash flow statement. Tabreed continues to generate strong cash flows, which are being utilized to invest in growth and provide dividend returns to our shareholders.

Operating cash flow increased by 8% over September 2018 and were strong at AED 574 million, reflecting our higher profitability. There has been limited capital expenditure, so far, in 2019. Dividends received were higher last year due to a special dividend received from Saudi Tabreed at the time of the dilution of our 5% stake in Q2 2018. Our cash-generating ability remains robust, driven by long-term price-certain contracts which enable investment in growth.

Let me now turn to our slide on the debt portfolio. This slide provides the usual background on Tabreed's debt portfolio as of September 2019. Key points to note are that Tabreed has AED 2.9 billion of net debt and a gearing ratio of 40%. However, it's important to note that IFRS 16 has increased reported debt by over AED 300 million and net debt-to-EBITDA by 0.2x.

Excluding the impact of IFRS 16, both net debt and net debt-to-EBITDA are lower than the year earlier. Following the refinancing of our corporate debt through the 7-year sukuk and new corporate loans last year, we have relatively light scheduled repayments until 2025, when the sukuk becomes due.

Net debt and net debt-to-EBITDA have declined since 2016 as debt has been repaid and EBITDA has grown.

That completes the detailed review our 9 months results for 2019, and I'll now pass back to Steve.

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [5]

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Thank you, Richard.

A few closing comments before we open the lines for Q&A. First, as a stable utility business, Tabreed continues to deliver strong financial and operating performance with rising profitability, stable margins and robust cash flow. We've added 15,000 RTs with -- at our consolidated entities and 15,000 RTs with equity-accounted entities during 2019. We are confident of achieving our capacity guidance targets over 2019 and 2020.

Third, Tabreed has a flexible capital structure to fund future growth. As we have mentioned before, we will look at opportunities within and beyond the GCC. We will provide you with updates as and when such opportunities materialize.

Finally, Tabreed today is stronger than ever before. We have a stronger shareholder base and a management team with a significant industry experience. We are working on various fronts from business development to operations to help drive growth and increase profitability.

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Marie Therese Hajj, [6]

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Thank you, Steve.

Thank you all for joining us today for the earnings call. We will now take your questions. Please feel free to ask any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We don't have any question for the moment.

(Operator Instructions)

We have the first question from Divye Arora from Daman Investment.

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Divye Arora, Daman Investments PSC - Portfolio Manager [2]

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So what we have seen is that, especially in the third quarter, the -- there has been a good improvement in terms of the operating costs. So we have seen the -- there has been an improvement in EBIT margin. And the -- if you adjust for the IFRS impact, the EBIT has grown by around 11% in the third quarter. For the full year -- for the 9 months, the impact is not that big. So we just want to understand, for the third quarter, can we take it as a basis for future? Can we expect you to grow your EBIT by 11% over the next 1 year? Let's say, the revenue growth rate is around 3% to 4%, and CPI is around 1%, in that range. Can an operating profit growth of 11% is possible to continue?

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [3]

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Thanks for the question. And as you know and you won't be surprised to hear me say, we don't give guidance of that nature to you, but what we can say is that we're committed and we're confident of delivering the growth in connected new capacity that we set out at the beginning of this year, 65,000 tons.

We've delivered half of that, so far, this year; another half to go. I think we've also advised that half of that -- approximately half of that will be within the consolidated entities. You know what the CPI has been for the -- for 2019, so far, and you can probably project what that might be for next year. So I think, if you take those 2 things together, capacity growth and CPI expectations, you can come to a view on what EBIT growth might be over the next 12 months or so. Let me leave it there because, as I say, we don't provide specific guidance on financial results. Thank you.

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Divye Arora, Daman Investments PSC - Portfolio Manager [4]

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But to understand: What are you doing in terms of, let's say, cost cutting? Or the costs are not growing proportionately with the revenue, so there is something -- so there are some efficiencies that you are trying to achieve. So can we understand what exactly are those?

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [5]

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Well, the -- I think we better probably take that call -- that question offline, [to attack it]. I don't think we have that information with us here today. Certainly, our costs are not growing as fast as our revenues. That's certainly fair to say, but there are -- there is a little bit of a scale-on with the electrical efficiencies and more efficiencies within the business that we can -- that is assisting there, but that aside, there are no specific cost-cutting measures going on within the business today. So I think let's take it offline, and we can provide you with a little bit more information then.

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Divye Arora, Daman Investments PSC - Portfolio Manager [6]

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Okay. All right. And in terms of the plan for expansion into other countries, let's say, in India or Egypt. You -- so you announced a project a few months back in India. So that will take its time, but is there anything else other than that, that you think could be signed soon in Egypt or India?

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [7]

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Yes. Again, I mean, we will announce new projects as and when they are closed. So again, I'm afraid, I can't provide anything specific, but what I can say is you're absolutely right.

We announced one project in India, 5,000 tons initially, rising thereafter. And we are looking at other opportunities in India. We are looking at opportunities in Egypt. We're also looking at opportunities in Kuwait as well as in our existing business areas. As and when we close something, as and when we have something to advise you on, we will surely let you know of new projects additions.

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Divye Arora, Daman Investments PSC - Portfolio Manager [8]

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Okay. All right. Just last thing, on the dividend side. Is there any update on the policy right now? Or we have to wait till fourth quarter for that?

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [9]

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No update on the policy. The policy remains in place, that we will grow the dividends in line with our business. And we will be making announcements on our dividends once the shareholders have reviewed and approved in end of first quarter, early second quarter next year.

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Operator [10]

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Next question, from [Hamed Mehdi] from [EV Investors]

(technical difficulty)

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Unidentified Analyst, [11]

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Yes. I was -- my question is about Qatar and the business over there. The first question is there's -- given the big growth in the Qatar real estate and given Qatar 2022 World Cup. So that my question is there any benefit or there is any extra capacity additions? And is there a problem by -- bringing back the funds back to UAE from the money, from profits in Qatar?

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [12]

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Okay. Thank you...

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Operator [13]

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I think you put yourself on mute. You're not answering the question.

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Unidentified Analyst, [14]

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Me?

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Operator [15]

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No, no, no. We can hear you, Mr. [Hamed Mehdi] from [EV Investors], but we have the line from the management who just disconnect. They are going to connect. Can you wait 1 minute, please?

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Unidentified Analyst, [16]

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Of course.

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Operator [17]

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(Operator Instructions)

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Richard Rose, [18]

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Yes. Sorry about that.

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [19]

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Yes. Apologies. We got cut off, but we're back here now. So just taking those 2 questions on Qatar. And first of all, the world -- the impacts of the World Cup in 2022, that won't have a huge impact on our business. Our business is in the West Bay in The Pearl. There may be some additional business arising out of hotels, new hotel rooms and so on, but I think it'll be relatively short lived and a relatively small impact on the business. Nevertheless, the business continues to do well.

It's meeting its budgets. It's connecting new customers and it's collecting revenues from those customers. There is no -- on dividends, there is no restriction on the payment of dividends between Qatar and the UAE, so dividends can be paid as and when they're declared. The Board did decide unanimously last year not to pay a dividend for 2018, rather to retain the money in the company for potential growth opportunities. And so there hasn't been a dividend flow, but there certainly can be if, as and when the Board approves such dividends.

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Operator [20]

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Next question, from Zeeshan Bagwan from Abu Dhabi Capital Group.

[Technical Difficulty]

Okay. We will go to the next question. We have one more question from Divye Arora from Daman Investments.

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Divye Arora, Daman Investments PSC - Portfolio Manager [21]

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Just to know, is there any update on the merger and acquisition side? Is anything there up for grab in the UAE, Abu Dhabi or Dubai? A few months before we heard that Emaar wanted to sell its district cooling business. Any updates on that further?

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [22]

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Thanks for the question. Again, as I indicated in one of the previous answer to a previous question, we don't speculate on what may or may not be happening in the world of M&A.

If, as and when any deal with any potential seller is concluded, we will, of course, update the markets, as we should do and will do, but until then, as I say, we don't speculate.

We continue to talk, as we've always said, to many different players. And acquisitions are certainly on our radar, but nothing specific to update on at this point in time.

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Operator [23]

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We don't have any more questions for the moment. (Operator Instructions) Your new question from Zeeshan Bagwan from Abu Dhabi Capital Group.

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Zeeshan Bagwan, [24]

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I wanted to get some more clarity on these short-term timing delays in customer collections...

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Operator [25]

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Yes. We can...

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Marie Therese Hajj, [26]

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Can you please repeat your question?

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Zeeshan Bagwan, [27]

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Yes. So could you please give some further clarity on what is leading to these timing delays in customer collections? And should we expect this trend to improve going forward?

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [28]

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All right. Thanks for the question. I think generally we see that 1 or 2 customers can be, let's say, a bit sticky with their payments to us, but our customers are paying.

As I said in the main presentation, we had excellent collections during October of this year. And historically, we've seen that, where perhaps at the quarter end our receivables spike up slightly and then may drop very quickly afterwards. We don't have an ongoing buildup of receivables issues within our balance sheet. So what's going to happen in the future? I can't really predict. All I can say is that we're comfortable with our collections and our customers are paying.

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Zeeshan Bagwan, [29]

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Okay. But this increase which has happened, is it more towards the government side, or the private customers? Some further understanding on this.

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [30]

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I think, I mean, if you look at our customer profile: We have a significant proportion of our revenue in a relatively small number of customers. So you're seeing a spike-up in our receivables and that's -- that relates to 1 or 2 customers. That clearly relates to our larger customers, but as I say, it's not an [ongoing activation] issue. The collections in October have been excellent, and we don't have any issues with customer receivables.

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Operator [31]

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We don't have any more question [or comments]. (Operator Instructions] We have no more question. (Operator Instructions) No more question. Back to you for the conclusion...

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [32]

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Excuse me, moderator. I think...

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Unidentified Participant, [33]

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(inaudible).

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Stephen John Ridlington, National Central Cooling Company PJSC - CFO [34]

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Yes. I think -- sorry to interrupt. I think, if there are no more questions, let's leave it there for now. If there are any follow-ups, then as always, we're available on the end of the telephone line to answer any more detailed questions. But if there are no more, let's leave it there. Can we, please?

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Operator [35]

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Yes, we have no more questions. Do you have a conclusion?

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Marie Therese Hajj, [36]

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Yes. With this, now we conclude our Q3 2019 earnings call.

Tabreed looks forward to interacting with you at our next earning conference calls and investor conferences. Should you have any further questions, please do not hesitate to contact us.

Have a great day, and thank you once again for joining us. Thank you.

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Operator [37]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.