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

Good day, and welcome to the Gulf International Services Company Second Quarter 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.

Thanks so much. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Gulf International Services Second Quarter 2022 Results Conference Call. So on this call, from QatarEnergy's Privatized Companies Affairs Group, we have Sami Mathlouthi, who is the Assistant Manager in Financial Operations; we have Rashid Al-Mohannadi, who is the Senior Financial Management Analyst; and Riaz Khan, who is the Investor Relations Officer. So we will conduct this conference with the management reviewing the company's results followed by a 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, 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 11th of August, GIS published its results for the 6 months period ended 30th of June 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 a quick insight on GIS ownership structure, its competitive advantages, overall governance and BOD structure by covering Slides 5 till 8 and Slides 29 and 30. Secondly, Sami will brief you on GIS' key operational and financial performance metrics. Later, I will provide you with insights on the 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 22.3% 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 strengths, 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 having 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 all supported by experienced senior leadership team, having expertise in 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. So within the drilling segment, new contracts are won in KSA and Maldives for liftboats within the drilling segment. These liftboats remained operational throughout the second quarter of [ 2020 ] and 2022. Also, the segment successfully renewed contracts for certain offshore rigs, with extended term ranging from 2 to 5 years. This was in addition to continued positive impacts on segments' performance for the first half of 2022 from new rig day rates for the offshore fleet applied starting from mid of last year, and the redeployment of the 2 previously-suspended onshore rigs during the third quarter of 2021. The aviation segment continues to witness improved set of performance with better flying activities within both domestic and international operations. Also, contribution from MRO and international business continued to support the segment performance. During the second quarter of 2022, international operations have witnessed further growth from Angola contract revisions with better terms on account of better asset utilization. An aircraft was mobilized to the Angolan fleet from the Qatari fleet to cover the additional flying hours as per the new contract. Also, another aircraft was mobilized to the Turkish fleet from Qatar to meet the upcoming increased demand from the market. Within the insurance segment, expansion on the general line of business was noted. However, our medical insurance business witnessed a loss of certain contracts. The catering segment improved its performance on the back of realization for the new contract, which was won during the last year. Additionally, certain contracts have been renewed within manpower segments with a 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 first 6 months of 2022 have improved by 21% compared to the same period of last year to reach QAR 1.7 billion. The revenue growth from the aviation, drilling and catering segment led to an overall increase in the group revenue, so this was partially offset by a negative growth in revenue from the insurance segment. For the current 6-month period, the group averaged an EBITDA of QAR 398 million, with an increase of 63% versus the same period of last year. The group reported a net profit for the current financial period amounting to QAR 168 million as compared to a net loss of QAR 0.8 million for the same period of last year. When analyzing the profitability in more details as reflected on Slide 14, the main contributor towards the growth in the bottom end profitability was mainly linked to group revenue. This was partially offset by higher direct costs, G&A expenses and net finance costs. Also, foreign currency revaluation losses from Gulf Helicopters Turkish subsidiary contributed negatively towards the year-on-year movement in net earnings. Additionally, decline in the investment income from the insurance segment also adversely affected the first half 2022 profitability versus the same period of last year. Moving on quarter-on-quarter performance. Revenue from the second quarter of 2022 increased by 8% compared to the first quarter of 2022, which is mainly on account of better revenue reported from the insurance, aviation and catering segments, which was slightly offset by negative movement in the top line from the drilling segment. Net profit for the second quarter slightly inched higher by 1% compared to the first quarter. Minimal growth in the gross net profit was reported as the negative movement in profitability from insurance, drilling and catering segments predominantly offset the aviation segment's continued growth in bottom line profitability. On an overall basis, our base case strategy will continue to focus on the market development by focusing on building our market share, reducing operating cost 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, as you may refer to Slides 16 till 18. Drilling segment reported a revenue of QAR 632 million for the 6 months period ended 30th of June 2022, up by 43% compared to the first 6 months of last year. This revenue growth has largely been linked to the new rig day rates implemented for the offshore fleet since the mid of last year. Also, redeployment of 2 onshore suspended rigs during the third quarter of 2022 positively contributed to the top line of the segment. Moreover, full deployment of Gulfdrill JV's fleet since mid-last year had a positive impact on segment's revenue for the first 6 months of the current year on account of comparatively higher management fees. The segment reported a net loss of QAR 23 million for the 6-month period ended 30th of June 2022 compared to a net loss of QAR 132 million for the same period of last year. Reduction in losses was mainly attributed towards the growth in segmental revenue. Moving on to the aviation segment as detailed on Slides 19 till 21. Here, the segment reported total revenue of QAR 441 million for the 6-month period ended 30th of June 2022, with an increase of 31% compared to the same period of last year. 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 locations, mainly from Turkey and Angola. Also, continuous growth within the MRO business segment contributed positively towards the segment top line. The segmental net profit reached QAR 163 million, representing an increase of 47% compared to the first half of 2021, mainly on account of higher segmental revenue despite the impacts of currency devaluation from the Turkish subsidiary. Moving on to the insurance segment. As discussed on Slides 22 till 24, revenue within the insurance segment for the 6-month period ended 30th of June 2022 decreased by 13% as compared to the first half of 2021 to reach QAR 417 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 line of business on account of new contracts and renewals of existing contracts. On the contrary, segment's net earnings increased by 7% as compared to the first half of 2021 to reach QAR 35 million. The growth in bottom line profitability was mainly supported by an overall decline in claims, which decreased by 48% on year-on-year basis. On the contrary, negative performance of the segment's investment portfolio due to volatilities in the capital markets weighed on the segment's profitability. Finally, moving on to the catering segment. As detailed on Slides 25 till 27, the segment reported net profit of QAR 249 million, an increase of 44% as compared to first half of 2021. Revenue increase was mainly due to growth in revenue within the manpower segment on the back of realizations from a new contract won during the last year. Additionally, certain contracts have been renewed within the manpower segment, with broader scope improving overall service volumes for the segment. The segment reported a net loss of QAR 1 million for the 6 months of this year, 2022, compared to a net loss of QAR 9 million for the first half of 2021, mainly due to higher revenues and better margins. Now, we can open the floor for the Q&A session.

[Operator Instructions] Our first question today comes from Mohamed Adel from AFII.

So I have a couple of questions. My first question is on the drilling segment. How many rigs are currently deployed? And I'm not sure if I heard right, did you say that the offshore rates were increased? And also for the drilling segment now, the drilling segment with increasing utilization, still it's loss-making. So if we want to draw like a [ lab ] to taking the drilling segment to profitability again, how long this will take? And will it be through increasing the rates or, for example, the offshore rates, only take them for the second quarter? I'm trying to figure out how the drilling segment would go profitability again. And for the aviation sector, how much of the revenues is coming from Turkey? Because Turkey's current situation, I think this is the main risk for the aviation sector.

Thank you, Mohamed, for your questions. So I will start with the drilling segment, number of rigs deployed. So at this stage, we have in total 7 offshore rigs, 8 onshore rigs, and we have 2 liftboats and one accommodation. This is the fleet, total fleet of GDI. So out of this, 7 offshore rigs are totally deployed. In the onshore side of business, so we have in total, so out of the 8, 6 are fully deployed. We have 1 which is under contract, and it will start soon in Q3 2022. And we have another rig which is still under discussion, and it is expected to commence operations, so probably in Q4 2022. So this is the situation with the existing fleet. In terms of your second question, which is the increase of offshore rates, so there is no increase of offshore rates. I think in the press release, we announced that the rates had increased in mid-July 2021, so that was for the offshore fleet. And the increase was based on the change of the formula to the OPI. And the formula, it's basically until the earliest of -- until the latest of 30th of June 2022 or the expiry of the contract. Some of the contracts which expired and basically have been renewed for a period of 2 to 5 years, starting from Q2 2022. And we have 3 offshore contracts. They are still under the OPI formula, where the rate is standing at USD 74,000, and some of them will expire end of 2022 and another 2 rigs will be expiring in first half of 2023. So this is in terms of rates. The -- your question in terms of the profitability of the drilling segment despite the increase in the utilization, I think you are correct. As we announced during the previous press releases, so as you can see, so revenue has increased tremendously in the drilling segment. EBITDA has increased as well in the drilling segment and -- if you compare it to the last period. And we are starting to see some positive, let's say, recovery from the losses that we have seen in the previous quarters with the deployment of the remaining 2 rigs, the onshore rigs. One, which is expecting in Q3 2022, and the expected last one in Q4 2022. And with the full operation of all the rigs, so I think we are expecting a positive result for the drilling business. We have to bear in mind that in some of the rigs, they haven't started completely in the beginning of the year of 2022, and we had one rig as well which has been under maintenance in Q2 2022 where we have lost around 45 working days for that specific rig. So I think things are on the positive side. We are seeing some improvement at the top line side with around 43% increase in revenues. Quarter-on-quarter basis as well, the things they are getting better, and we're expecting positive trend, I think, in the next coming quarters. What...

Go ahead. Go ahead, please.

About your question, what needs to be done at GDI to be a profitable business, so there are 3 components to this. So it's basically the top line side. We are working on that. So to make sure that we have full utilization of the rigs, this will increase the top line side. If we can achieve as well better rates, so this will be very helpful as well to improve the profitability. The second component, it's basically the direct cost. We are very lean. We are working with extreme procedure and policy to reduce the cost. And in the region, I think we are among the leanest companies in terms of direct costs. The third component that we are working on as well, which is the debt structure, and as you know, a huge part of the business. It's basically -- however generating positive cash flows, we still need to cover a big part of the positive cash flows to pay the debt. And if we will be able to maintain this part, so this will have a good impact as well on the profitability of the business.

Okay. In terms of a follow-up, you said that there is some rigs already contracts have ended on the offshore, and the new contract has been put in place. And there is another, I think, 3 rigs, you said, would be -- the contract will end in the end of this year. I mean, the rig that's already now a new contract is at the same rate or at the same formula, or the formula has changed? And if you can disclose this. So you said that the rate is USD 74,000 for the offshore, what is the rate for the onshore rigs?

So I think for the 3 rigs that remaining, so they are not all due for renewal in 2022. Only one will be due for renewal in end of 2022, and then the 2 other rigs will be due in 2023. For the rigs which have been renewed, so we cannot give, like, a specific rate, so we can give a range. So it's ranging from USD 70,000 to USD 74,000, and it's in line with the market prices or with the market day rates that we are seeing in the region. Yes. In terms of onshore, I think your second question was on the onshore. So the onshore, the range is from USD 18,000 to USD 27,000 per day. And again, this is as well -- it's in line with the day rates we are seeing in the region. For your last question on Redstar -- do you want to continue on the drilling?

No, I'm done on the drilling. We can go to the aviation question.

Okay. For the aviation, so on the Redstar question. So basically, we have around 10 aircrafts in Turkey. So the contribution in terms of revenue, so it's around QAR 98 million in terms of top line. And in terms of net profit, so it's around QAR 21 million, the contribution of Redstar.

Okay. If I may, just one last follow-up. So we saw something happened in the banks that have subsidiaries in Turkey, that they have to do some kind of hyperinflation accounting treatment. Will you be doing that? Did the auditors tell you anything, or there was a discussion with the auditor about it?

Thank you, Mohamed. Well, the impact of inflation, so it's already there. It's already taken into account. So as you know, so it's as per the IFRS -- IAS 29, so any country where the inflation rates on specific indexes has reached more than 100% on 3 consecutive years, so there is a no [indiscernible] obligation to apply the IAS 29. So this has been taken care, and you will see that the impact has been in place in the P&L of GIS. So the impact -- so it's around QAR 7.9 million. It's on the face on the P&L, and this is the impact for the first half year of 2022. And there is another impact, which is relating to the revaluation of the existing balance sheet items with the [indiscernible] rates. So the impact is around QAR 29 million, and this has been included as part of the retained earnings in the results. So this is taken care, and we will still continue to monitor the Redstar business. So every closing, we will have to calculate the impact of the inflation until basically the Turkey will be removed from that list of inflationary economies, which we hope.

We come to our next question now, which is from [ Nikhil Putan of CBFS. ]

Yes. Thank you for the detailed information that has been provided on the drilling segment. Just wanted to understand a little bit more so in the drilling in terms of the revenues. Now, the way it looks like suppose we compare the first quarter, previous presentation that you have given and the second half, it looks like the average revenue per rig under the offshore model, there has been a decline, where actually -- I mean, there was an increase, while there has been decline in the offshore rates -- onshore rates. So is that true? Second, in terms of your merger with SHAQAB, I mean, under your catering business, just -- I suppose you can just give a highlight about what exactly is happening currently? How it is you're planning to go about it? What likely contribution that you could be seeing in terms of merger for this particular division? And thirdly, in terms of your ForEx. I mean, you did mention that there has been QAR 7 million on your profit and other things, so it looks like it is more on CPI-based. So just wanted to understand what exactly you're seeing for the third quarter? I mean, given that 40 days have been passed, I mean, how do you foresee it going forward in third quarter on that particular aspect?