Gulf International Services Q.P.S.C. (GISS) Earnings Call Transcript & Summary

Good day and welcome to the Gulf International Services Company Q1 2022 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bobby Sarkar. Please go ahead, sir.

Thank you, Leanne. Hello. Good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Gulf International Services First Quarter 2022 Results Conference Call. So on this call from QatarEnergy's Privatized Companies Affairs Group, we have Sami Mathlouthi, who's Assistant Manager in Financial Operations; and Riaz Khan, who is the Head of IR and Communications. So we'll conduct this conference with management first reviewing the company's results followed by Q&A. I would like to turn the call over now to Riaz. Riaz, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Before we go into the business and performance updates of GIS, I would like to mention that this call is purely for the investors of GIS, and no media representatives should be attending this call. Moreover, please note that this call is subject to GIS disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call. On 27th of April, that was yesterday, GIS published its results for the 3-month period ended 31st of March 2022. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights. We have structured our call as follows: At first, I will provide you with a quick insight in GIS ownership structure, its competitive advantages, overall governance and BOD structure by covering Slides 5 till 8 and Slides 29 and 30. And secondly, Sami will brief you on GIS' key operational and financial performance metrics. Later, I will brief you on insights about segmental performance. And finally, we will open the floor for the Q&A session. To start with, as detailed on Slide #6 of the IR deck, the ownership structure of GIS comprises of QatarEnergy, with 10% stake being the parent shareholder, whereas GRSIA with 22% stake is the largest shareholder. As detailed on Slide #5, QatarEnergy provides most of the head office functions through a service-level agreement. The operations of GIS subsidiaries are independently managed by their respective Board of Directors along with the senior management team. The Board structure is detailed on Slide #7 of the IR presentation. In terms of competitive advantages, as detailed on Slide #8, all of the GIS Group Companies are strategically placed, having significant market share in their respective business sectors within Qatar. For example, drilling business is the only Qatari onshore drilling service provider, and have more than 50% market share in the offshore drilling services in Qatar. Similarly, the aviation business of GIS is a sole provider of helicopter services in Qatar's oil and gas service sector and being one of the largest operator in the MENA region. In terms of insurance business, it is one of the leading medical insurance providers in Qatar. This is supported by experienced leadership team, having expertise in their relevant business segments. In terms of governance structure of GIS, you may refer to Slides 29 and 30 of the IR deck, which covers various aspects of GIS' Code of Corporate Governance in detail. I will now hand over to Sami.

Thank you, Riaz. Good afternoon, and thank you all for joining us. Starting with the business updates within the drilling segment. So we won new contracts in Saudi Arabia and Maldives for the liftboats within the drilling segment. Also, the segment has successfully renewed contracts for certain offshore rigs with extended term ranging from 2 to 5 years. This was in addition to continued positive impact on segmental performance for the first quarter 2022 for new rigs, new rig day rates for the offshore fleet applied starting from mid of last year and the deployment of two previously suspended offshore/onshore rigs during third quarter of 2021. Aviation segment continued to witness improved set of performance with better flying activities within both domestic and international operations, also contribution from MRO and international business continue to support the segment performance. Within the insurance segment, expansion on the general line of business was noted. However, medical insurance business witnessed some loss of certain contracts. The catering segment improved its performance on the back of realization from the new contract won during last year. In addition, certain contracts have been renewed with the nonpower segments, was broader scope, improving overall service volumes for the segment. In terms of group financial performance, as detailed on Slide 12, the group total revenue for the current period improved by 18% compared to the same period of last year to reach QR 835 million. Revenue growth from the aviation, drilling and catering segments led to an overall increase in the group revenue, and this was partially offset by a negative contribution in revenue from the insurance segment. For the current 3-month period, the group averaged an EBITDA of QR 198 million, was an increase of 77% versus the same period of last year. The group reported a net profit for the current financial period amounting to QR 83 million as compared to a net loss of around QR 6 million for the same period of last year. While analyzing the profitability in more detail, as reflected on Slide 14, the main contributor towards the growth in the bottom line profitability was mainly linked to growth in revenue coupled with growth in investment income. This was partially offset by higher direct costs and G&A expenses, also foreign currency revaluation losses from quarter to quarter, Turkish subsidiary contributed negatively towards the year-to-year movement in net earnings. Moving on to quarter-on-quarter analysis. Revenue for the first quarter 2022 declined by 1% compared to fourth quarter of 2021, which is mainly on account of decline in revenue from the insurance segment. However, revenue growth from the aviation, catering and drilling segments almost offset the decline in revenue from the insurance segment. On the other hand, net profit for first quarter 2022 significantly increased by 545% compared to fourth quarter 2021, mainly due to reporting comparatively lower foreign currency revaluation losses from Gulf Helicopters' Turkish subsidiary and absence of impairment provisions relating to receivables within Gulf Helicopters, which were reported in first quarter 2021. The drilling also reduced its losses in line with improved revenue. Also, the insurance segment investments portfolio positively impacted first quarter 2022 net profit with a growth of QR 42 million noted on account of segment investment income versus first quarter 2021. On an overall basis, our base case strategy will continue to focus on market development by focusing on building our market share, reducing operation costs and continue to improve utilization of assets. I will now hand over to Riaz to cover the segmental performance.

Thank you, Sami. I will start with the drilling segment, where you may refer to Slides 16 till 18. Drilling segment reported a revenue of QR 321 million for the 3-month period ended 31st of March 2022, which increased by 62% compared to the first quarter of 2021. Revenue growth has largely been linked to new rig day rates implemented for the offshore fleet since the mid of last year. Also, redeployment of 2 onshore suspended rigs during third quarter of 2021 positively contributed towards the top line performance. Moreover, full deployment of GulfDrill JV's fleet during the second quarter of 2021 had a positive impact on segment revenue for the first quarter of 2022 on account of comparatively higher management fees. The segment reported a net loss of QR 10 million for the 3-month period ended 31st of March 2022 compared to a net loss of QR 72 million for the same period of last year. Reduction in losses was mainly attributed to growth in segmental revenue. Moving on to the aviation segment, as detailed on Slide 19 till 21. Here, the segment reported a total revenue of QR 206 million for the 3-month period ended 31st of March 2022, with an increase of 25% compared to the first quarter of 2021. The increase was mainly attributed to higher flying activity recorded within both domestic and international operations, coupled with growth in revenue noted across the international operations, mainly from the Turkish subsidiary. Also, continuous growth within the MRO business segment contributed positively towards the segment top line. The segmental net profit reached QR 79 million, representing an increase of 59% compared to the first quarter of 2021, mainly on account of growth in revenue. Moving on to the insurance segment, as discussed on Slides 22 till 24. Revenue within the insurance segment for the 3-month period ended 31st of March 2022 declined by 24% as compared to the same period of last year to reach QR 195 million. Decline in revenue was mainly linked to loss of 2 insurance contracts within the medical line of business. This decline was partially offset by growth in premiums from the general insurance and on account of new contracts and renewals of existing contracts. On the contrary, segmental net earnings increased by 22% as compared to the first quarter of 2021 to reach QR 19 million. The growth in bottom line profitability was mainly supported by a robust performance within the segment's investment portfolio on the back of surge in capital markets. A growth of QR 27 million was noted on account of investment income versus the first quarter of 2021. Moreover, nonrenewal of 2 medical insurance contracts led towards a reduction in net claims compared to the first quarter of 2021. Finally, moving on to the catering segment. As discussed on Slides 25 till 27, the segment reported a revenue of QR 113 million, an increase of 31% as compared to first quarter of 2021. Revenue increase was mainly due to the growth in revenue within the manpower segment on the back of realizations from a new contract won during last year. Additionally, certain contracts have been renewed within, again, manpower segment with broader scope, improving the overall service volumes for the segment. The segment reported a net profit of approximately QR 100,000 for the 3-month period ended 31st of March 2022 compared to a net loss of QR 0.5 million for the first quarter of 2021, mainly due to the higher revenues. Now I think we can open the floor for the Q&A session.

[Operator Instructions] And we'll take our first question from Nafez Alabbas with Ajeej Capital.

Well, congratulations, gentlemen, on the results. My question is regarding the debt. I mean, as we talked previously, you have been having discussions with the banks, I think, for the past year or over regarding the restructuring of the debt, especially for the GDI unit, do we have any update on that? Or do you have any time line? If you can share that please, it will be appreciated.

Thank you, Nafez. So far, we are still in communication with -- not only with the banks, so it's with all the stakeholders, so including the banks, customers and all the related parties on this yet. So we haven't achieved, let's say, or completed the discussions yet. We are aiming to complete this as soon as possible. So we can say, by end of this year, we should have an agreement between all the parties. And that should be in the benefits of all the stakeholders.

That was great. But I mean, is there any date that, let's say, or deadline that you'll face in terms of payments or anything just for us to have an indication of how urgent to the talk.

Well, I think the renewal has to happen by 2023. We still have enough time to continue the discussion. So our aim is to complete this topic as soon as possible, but you -- I think you may know, it's not a straightforward, let's say, discussions. So it's a little bit complicated. The exposure is very high for all the parties. And together, we are trying to reach an agreement where everyone will be contributing to this restriction. So it will be on the benefit of all the stakeholders. And this is what we want to reach.

[Operator Instructions] And we'll take our next question from Nitin Garg with SICO.

This is Nitin from SICO Bahrain. So I see you had some fair value gain of QR 25 million in this quarter on some of the investments. So if you can expand on this, I mean, which are these investments? Which are the fair value gain of QR 25million? Also from your current fleet, if you can just update us on the -- if there are any rigs which are looking for being deployed or which are idle, both from onshore and offshore segment.

Thank you, Nitin, for your question. So back to the fair value gain that you have made. So there is around QR 27 million of gain compared to quarter 1 2021. So that's mainly relating to the insurance segment, where the performance of the investment portfolio was outstanding. So first quarter 2022, so the returns were around QR 40 million on the investment portfolio through the P&L. And this is where the QR 27 million are coming. In terms of your second question relating to the deployment of rigs. So 2 rigs, as you know, has been deployed in Q3 2021. So GDI-5 and GDI-7. Beginning of Q1 2022, we had 2 liftboats that has been deployed. So one is relating to the contract in Saudi Arabia, which is starting beginning of the year, and the second one is in the Maldives, so it's starting by end of Q1 2022. We are planning to have another rig to come back to work, which is GDI-8, which is planned to start in August 2022. And we are still in negotiation with the customers regarding GDI-4. So most of the rigs, I will say, are redeployed. As you can see, this has a big impact on the utilization rates, which are standing at around 92%. And hopefully, by end of 2022, we will have all the rigs, onshore and onshore (sic) [ offshore ] rigs, fully deployed.

Two rigs are there which are idle, GDI-4 and GDI-8.

GDI-4 and GDI-8, they are idle at the moment. GDI-8 is planning to return back on August 2022. The contract is signed, and the start date will be August. GDI-4, it's still under discussion. And hopefully, by end of 2022, we will have the contract signed.

Okay. How about GDI-5, that was also, I mean, idle.

No, no, no. GDI-5 and 7, they have been back and they are fully operational in Q1 2022.

So on your day rates, so that -- what we know, the day rates increased last July, in July 2021, where the premium kicked in above a certain oil price and your ceiling, which we know is $74,000 for offshore. So now with this oil price environment, $100,000-plus, so what should we think about the day rates? Is $74,000 still the ceiling? Or if there is an upside to it?

Well, $74,000 is still the ceiling at the moment for the existing contracts. And this is, basically, $74,000 will normally expire in 30th of June 2022, but depending on the contract. So if the contract is expiring after June 2022, so the ceiling will remain. However, we are in discussion with all the customers, basically, to renegotiate the ceiling, renegotiate the formula and agree on new prices and new terms for the contract. So we have been able to reach some agreements with some of the customers where we were able to increase the term of the contracts from 3 to 5 years, and we will continue to do the same with the other contracts. And our aim is to work on 2 sides, it's the daily rates and the term of the contract.

And we'll take the next question from Nour Sherif with Arqaam Capital.

Congrats for the strong results. Couple of questions for me. My first one was on the rigs utilization rates. You've mentioned that a couple of contracts should be in August 2022. Can you give us a time line for GDI-4? And regarding -- if you can give us some guidance regarding the dates for these 2 additional rigs to be deployed.

GDI-4, it's still under discussion. So at the moment, we haven't reached an agreement where we can confirm exactly when the start date or whether the contract will happen or not. So we are aiming to reach an agreement, but it's still under discussion. That's for GDI-4. So day rates, we don't provide daily day rates per rig. In each, we provide average day rates. So I think it will be in line with the existing day rates for the offshore rigs. And it will add, for sure, also to the top line, and it will have a positive impact in both top line and net profits as well.

Yes. Can you guide us on the average day rates for the onshore versus offshore? You had mentioned...

Yes. The average day rates for the onshore, they are from [ 19 to 21 ], and that's in line with the existing rates that we have.

Okay. And for the offshore, it's currently at ceiling of $74,000?

Yes. The offshore, there are ceilings, the ceiling of $74,000. Ceiling will expire by [indiscernible] which is later, so either 30th of June 2022 or the contract date. And we are in a continuous discussion now to try to change the formula, the ceiling and to agree the contract.

Yes, clear. Okay. Regarding the aviation segment, we've seen growth in the flying hours in 2022 compared to a year earlier. Can you give us guidance where we can expect this as a run rate for 2022?

Yes. Aviation, we have seen a very exceptional quarter for -- especially in the local and outside as well. So flying hours have increased, as you have mentioned, by around 24% compared to Q1 2021. Despite that lower decrease in -- compared to Q4 2021. So I think we expect to maintain a high flying hours going forward, giving the -- what's happening actually with the World Cup. So some of the aircraft will be deployed during the World Cup. So we expect by end of 2022, we will have the similar flying hours. In addition, the top line revenue, it's not impacted only by the flying hours, but very good increase in the MRO business. And we have seen both as well the international business has contributed very well. So the subsidiary in Turkey are doing very well, and they have contributed very well to the net profit and the top line of the business.

Yes. And just because I'm new to this business, can you share with us how are the dynamics for pricing these flying hours?

The dynamics for pricing?

Yes.

Yes, yes. So the dynamics are a little bit different from what we see in the drilling segment. So contracts are based on 2 components: one fixed part and one variable part. So the fixed part, we tried to -- that's basically the availability of the aircraft to the customer. We try to cover the main part of those fixed revenue. And then the variable part is based on the flying hours, where we put an average rate per hour for each hour the aircraft is flying. So this is how the business is constructed. And this has helped us, especially during the crisis, during the COVID-19 years, where our revenues haven't been affected too much because big part of our revenue was based on the fixed rate.

And the same formula is intact?

Sorry, can you repeat that?

I thought expected revenues are based on -- yes, just to follow up is that the fixed part of the formula remains the majority of the revenue or the pricing formula?

Yes, yes, majority of revenue is based on the fixed price, and then any additional revenue will come from the flying hours. So as long as we do higher flying hours, so this will add to the profit and to the revenue.

Yes, clear. And do you have any plans for expansion in the fleet of the aviation in the segment?

Yes. There are plans to expand. So actually, we have expanded during the last few years in terms of number of aircraft, in terms of regional focus. We are planning to grow this business by at least 2 aircraft per year. And we are doing this plan and following our development. And that's the strategy. The strategy is mainly to grow this business to a much higher level and to increase our footprint in terms of division and in terms of existing segments as well.

Yes. Just one last follow-up question for me. Regarding the contracts for new aircraft, you have the client-based secured or how was it for the newly added aircraft?

Well, we have -- so having for -- so the aircraft, we have around 59 aircraft. So some of the aircraft are allocated directly to the contract in itself, for example, with QatarEnergy or with different customers. And then we have additional aircraft, they are put on hold, basically, to sell some of those contracts as well. So in case we have a new contract, so we can deploy one of the existing contracts which are grounded, and then deploy them to the new region. Otherwise, once we secure a new agreement or new contracts, we can directly try to find an aircraft to sell this new project, and then we either leave it or we buy it and then use it for the contract.

And we have our next question from [ Mithiel Butan with CBFS ].

Just one question. You had mentioned regarding the expiring of certain contracts under the offshore rig before 30 June 2022. Can I know the number, how much? Which are the rigs that -- how many rigs likely?

It's only 1 offshore rig, which is expiring before 30th of June 2022 at the moment.

And as we have no further questions, I would like to turn the call back over for any additional or closing remarks to the speakers. Thank you.

Yes. Thank you. So if we have no further questions, we can end the call today. I want to thank Sami and Riaz for taking the time to answer our questions. And Eid Mubarak, everyone. Thank you so much.

Thank you so much. Thank you, everyone.

Thank you.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.