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

Good day. My name is Shantel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf International Services conference call. As a reminder, today's conference call is being recorded. [Operator Instructions] Bobby Sarkar, you may begin your conference.

Thank you, Shantel. Hello. Good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Gulf International Services Third Quarter 2022 Results Conference Call. So on this call from QatarEnergy's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who's the Acting Manager; Sami Mathlouthi, who's the Assistant Manager in Financial Operations. We have Rashid Al-Mohannadi, who's the Head of IR and Communications; and Riaz Khan, who's the IR officer. We will 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 Rashid. Rashid, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Hope all are doing great. Before we go into GIS business and performance updates, I would like to mention that this call is purely for GIS investors, 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. On 26th -- on 27th of October, GIS published its financial results for the 9-month period ended on 30th of September 2022. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today in this call, along with me, I have Abdulla Yaqoob Al-Hay, Acting Manager for Privatized Company Affair; Sami Mathlouthi, Assisted Manager for Financial Operations; and Riaz Khan, IR Officer. We have structured our call as follows: At first, I will provide you a quick insight on GIS ownership structure, competitive advantages, overall governance and BOD structure by covering Slide 5 till 8 and Slide 29 till 30. Secondly, Sami will brief you on GIS key operational and financial performance metrics. Later, I will provide you with insights on segmental performance, and finally, we'll open the floor for the Q&A. To start with, as detailed on Slide #6 of the IR deck, the ownership structure of GIS compromises (sic) [ comprises ] of QatarEnergy with 10% stake being the parent shareholder, whereas General Retirement and Social Insurance Authority is the largest shareholder with 22.3% (sic) [ 22.4% ]stake. As detailed on Slide #5, Qatar Energy provides most of the head office functions through a service-level agreement. The operations of GIS subsidiaries are independently managed by respective Board of Directors, along with senior management team. The BOD 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 a significant market share in their respective business sector within Qatar. For example, drilling business is the only Qatari onshore drilling services provider and have more than 50% market share in the offshore drilling service in Qatar. Similarly, the aviation business of GIS is a sole provider of helicopter services in Qatar oil and gas services sector and being one of the largest operator in the MENA region. In terms of insurance business, it's one of the leading medical insurance provider in Qatar. This is supported by the experience senior leadership having expertise in relevant business segments. In terms of GIS governance structure, you may refer to Slide 29 and 30 of the IR deck, which covers various aspects of the GIS code of corporate governance and further details. I will now hand over to Sami.

Thank you, Rashid. Good afternoon, and thank you all for joining us. Starting with the business updates. Within the drilling segment, new contracts are won in [indiscernible] for liftboats within the drilling segments. These liftboats remained operational for the third quarter of 2022. Also, all the 5 rigs within Gulf Drill JV continued to show improved results. Moreover, as discussed in our previous call, during the year, 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 segment performance for the first 9 months of 2022 from new rig day-rates for the offshore fleet applied starting from the mid of last year and the deployment of 2 previously suspended onshore rigs during the third quarter of 2021. Aviation segment continued to witness improved set of performance with better flying activities with overall domestic and international operations. Also, contribution from the MRO and International business continued to support the segment performance. Within the Insurance segment, expansion on the general line of business was noted on year-on-year basis. However, medical insurance business witnessed loss of certain contracts. The catering segment improved its performance on the back organization from the new contract won during last year. In addition, certain contracts were renewed within manpower segments was below the scope improving overall service volumes for the segment. In terms of group financial performance, as detailed on Slide 12, the group's total revenue for the first 9 months of 2022 improved by 19% compared to the same period of last year to reach QAR 2.7 billion. Revenue growth from the aviation, drilling and catering segments led to an overall increase in group revenue. This was partially offset by a negative growth in revenue from the insurance segment. For the current 9-month period, the group reported an EBITDA of QAR 624 million with an increase of 49% versus the same period of last year. The group reported a net profit for the current financial period amounting to QAR 266 million as compared to a net profit of QAR 45 million for the same period of last year. When analyzing the group profitability in more detail, as affected on Slide 14, the main contributor towards the growth in the bottom line profitability was the growth noted in the group revenue. This was partially offset by higher direct costs, G&A expenses and net finance costs. In addition, decline in investment income from the insurance segment also adversely affected the year-on-year profitability. Moving on quarter-on-quarter performance. Revenue for the third quarter of 2022 increased by 3% compared to the second quarter 2022 mainly on account of better revenue reported from the aviation, catering and drilling segment, which was slightly offset by negative movement in the top line from the insurance segment. Net profit for the third quarter inched higher by 16% compared to the second quarter. This growth in the group net profit was mainly attributed to positive growth in profitability from aviation, catering and insurance segments, while billing segment losses increased on a quarter-on-quarter basis. On an overall basis, our base case strategy will continue to focus on market development by focusing on building our market share, reducing operating costs and continuing to improve utilization of assets. I will now hand over to Rashid to cover the segmental performance.

Thank you, Sami. I will now start with the drilling segment, where you may refer to Slide 16 till 18. Drilling segment reported a revenue of QAR 950 million for the 9-month period ended 30th of September 2022, up by 33% compared to the first 9 months of last year. This growth has largely been linked to the new rig day-rates implemented for the offshore fleet since the mid of last year, July 2021. Also redeployment during Q3 of 2021 of 2 onshore suspended rigs, GDI-5 and GDI-7, which positively contributed to the top line performance. Moreover, full deployment of Gulf Drill JV fleet since mid-last year had positive impact on the segment revenue for the first 9 months of the current year on account of comparatively higher management fee. The segment reported a net loss of QAR 40 million for the 9-month period ended 30th of September 2022 compared to a net loss of QAR 159 million for the same period of last year. Reduction in losses was mainly attributed to growth in segmental revenue. We can now move to the aviation sector. As detailed on Slide #19 till 21, here, the segment reported a total revenue of QAR 689 million for the 9-month period ended 30th of September 2022 with an increase of 31% compared to the same period last year. The increase was mainly attributed to higher flying activities recorded within both domestic and international operations, coupled with growth revenue noted across international location, mainly from Turkey and Angola. Also, continuous growth within MRO business segment contributed positively to the segment top line. The segmental net profit reached QAR 262 million representing an increase of 50% compared to first 9 months of last year, mainly on account of higher segmental revenue despite the impacts of currency devaluation from Turkish subsidiary. We can now move to the insurance segment. As discussed on Slide 22 till 24, revenue within the insurance segment for the 9-month period ended 30th of September 2022 decreased by 15% as compared to the first 9 months of last year to reach QAR 632 million. Decline in revenue was mainly linked to the loss of 2 insurance contracts within the medical line of business. This decline was partially offset by growth in premium from general insurance line of the business on account of new contract and renewals of existing contracts. On the other hand, segment net earnings increased by 3% as compared to the month of last year to reach QAR 52 million. The growth in bottom line profitability was mainly supported by overall decline in claims, which decreased by 40% on a year-on-year basis. On the contrary, negative performance of the segment investment portfolio due to volatilities in the capital market weighted on segmental profitability along with lower revenue. We can now move to the catering sector. As discussed on Slide 25 till 27, the segment reported revenue of QAR 394 million, an increase of 53% as compared to the first 9 months of last year. Revenue increase was mainly due to the growth in revenue within the manpower segment. Additionally, certain contract has been renewed within the manpower segment with a broader scope improving overall service volume for the segment. The segment reported a net profit of QAR 1 million for the 9-month period ended 30th of September 2022 compared to a net loss of QAR 90 million for the same period of last year, mainly due to higher revenues and better margins. Now I think we can open the floor for the Q&A.

[Operator Instructions] Our first question comes from [ Nikhil Sutani with CDFS ].

Thanks for continued growth on your overall profit business. And my question actually is pertaining to, first, in terms of aviation business, which is the bulk of the profitability, which has come from. We are seeing -- of course, no trends over the last few years and especially -- again, I'm going out in -- for the last 2 to 3 quarters, revenues is increasing. I just wanted to know how it will be -- we could be seeing the same thing maybe in the fourth quarter, increasing revenue growth and quite stable direct costs, especially as you see from second quarter to third quarter? And also, of course, because of the Turkish and Angola, which is forming more and more revenue pattern, as it compared to your overall aviation revenues. My second question has got to do with your loans and borrowings, which is, of course, a sizable level. And what we've also seen is there has been an increase in your short-term investments, especially 2022. And you've mentioned right now that the markets are volatile. So I wanted to understand what is the logic behind keeping -- I mean, increasing the investments in your -- especially as you've rightly pointed out, investment income has not been great given the weak performance in the market. Third question has got to do with your receivables. Again, in 2022, we are seeing an increasing trend in receivables, say, on an ITT basis. I mean, what has been the reason for that? And lastly, actually the most important one, in terms of your performance drilling business, now at gross level, that has performed very well, but what we see is that, again, there are a lot of other expenses before interest cost, which is increasing further and further on a Q-o-Q basis. So I wanted to know what is the significant change, which is attributed. It's the same thing we are seeing on the insurance segment also. I mean, unlike your aviation, which is quite flat on your operating expenses. So can you just give us a color why there is such significant changes in your drilling and insurance business operating cost?

Okay. Thank you so much for your questions. So I will start with the aviation revenue. So I think the trend has been quite good since the previous quarter. So this segment is contributing actually to the profitability of GIS. So we have seen the increase from quarter-to-quarter, so by around 6% in terms of revenue and by around 17% in terms of net profit. And we are expecting the same trend to continue. So for the next quarter -- so the segment in itself is growing. We are trying to streamline as well the cost. So the cost is under control. And plus, as you can see, the flying hours has been increased tremendously from one quarter to another, and compared to last year, it has increased by 33%. So as you know, so the structure of the revenue in the segment, it's based on 2 parts. So one part is fixed, and the second part is variable. So any incremental revenue that you will do based on the variable part, which is the flying hours, it will increase without incurring higher direct costs. So I think if we would be able to maintain this increase in flying hours, so the performance will increase, and it will have a good incremental addition to the net revenue in itself without having a huge impact on the direct cost side. The other part, as you can see as well, is in the aviation segment. It's around 20% of the performance is contributed by the MRO business. And the MRO business is increasing. So actually, it has increased by almost 50% compared to last year, and it reached almost QAR 100 million in terms of revenue, plus around QAR 33 million in terms of net profit. So the segment, it's increasing. We are trying to increase the activity. We are implementing basically the expertise that we have in the region, and we are trying to grow this area, which could be a good potential for growth for the aviation business in addition to the aviation in itself.

I would like to add one comment here. It's Abdulla. Also, we are expecting to have a higher flying hour during this time of period related to the World Cup activities. Actually, there is 2 charter than allocated just to serve the requirement that comes from the World Cup requirement in term of medias or other activity related to tourism. So this will help us to improve their profitabilities.

Thank you, Abdulla. For the next question regarding the investment, so most of the investments are related to the insurance business in itself. And as you know, so any insurance business, it's related into 2 parts. So the first part is the insurance in itself and the underwriting business and the underwriting activities. And the second part will be the investment. So basically, most of the [indiscernible] under contracts, either general insurance or medical insurance, you will need to invest it whenever -- whatever the situation of the market. So our strategy is not to invest in real estate. Our main investments are mainly on liquid assets. And most of the impact that you will see, it's basically noncash impacts. It's nonrealized profits that are impacting the P&L. But if you look in detail of the performance, so in those -- even in those critical times -- so basically, the realization or the gain realized on the P&L is positive. It's not negative. So what you are seeing as the impact on the negative side of the investment is nonrealized losses that are impacting the P&L. This is the strategy of the business. We cannot change tremendously from what we are doing today. And the business in itself and most of the insurance companies are doing the same thing. We cannot make like a huge shift to the strategy of the business and investing in other assets or other risky assets, which could have a huge impact on the profitability of the business. That's in terms of the investment. Receivables -- yes, receivables are increasing. So basically, it's -- if you look at the revenue, revenue is increasing by almost 33%. And if you look at -- for the drilling segment. So the increase in the revenue will basically add an increase in the receivable, and it's a question of timing only, and we don't have any issues in terms of collection of those receivables. And the impact will be on the cash flow in the next few quarters.

I think there is one question that you asked about the drilling business and the cost increasing quarter-over-quarter. If you can see on quarter 2, we had a major overhaul for one of our rigs, and that's why our cost was higher on quarter 2 versus quarter 3. However, our business in GDI is a very lean business. We operate in a lean business environment. And this has been benchmarked against others that we are comfortable with this statement.

And for your last question relating to the other expenses. So the main impact is coming from Gulf Helicopters, which is around QAR 20 million. And this is relating to the foreign exchange losses that are impacting the P&L. And those are the -- basically the losses in Redstar, which is one of the subsidiaries of Gulf Helicopters. Those are the losses -- realized losses in their P&L. And those -- when they are transferred to the P&L Gulf Helicopters for consolidation will be part of the other expenses in GIS.

Okay. I mean -- so just coming back to your second loss in terms of your investments, I can understand you're not going to be changing the strategy of right -- compared to other peers also. But do you see a -- I mean possibility that in future, it will be more in fixed nature instruments. That is one question. Second, in terms of your, I mean, expenses on the operating side, the idea is that even suppose we take the entire -- I mean I remember that around 3 to 4 quarters back, you did mention that your margins are going to be improving as more and more fleet comes into operations. So of course, the revenue has improved, but what we are seeing is there is no stability in terms of your overall cost that is operating as well as your gross cost. So do we see going forward a stability in -- especially in your drilling segment, which forms a very huge portion of your COGs that's what I wanted to know.

Basically, if I bifurcate your questions, it's like 2 questions, one on the investment income and the moves in the swings which we are seeing in terms of our investment portfolio performance. And the second one is about the operating cost. So I'll take the first one, the second one maybe, Sami, chip in there on the operating costs. So in terms of investment income, basically, it's purely a market play -- a capital markets play. All of our investment securities, if you have seen our yearly disclosures, they are Level 1 securities. Level 1 securities means most of them are listed securities at any stock exchange or their courts are readily available. So the capital markets are being very, very volatile since the start of the year. We saw things going down significantly, again, things getting recovered to an extent in Q2. And again, things going back downwards. So it's a volatile market. Capital markets are volatile and that is getting reflected on our investment income because most of our portfolio is held for trading securities. And under IFRS 9, we have to recognize all of their mark-to-market into the income statement, and that is basically the moves which you are seeing. I'll ask Sami to maybe chip in on the operating cost.

Yes. In terms of operating cost, I think, in the drilling segment, specifically, so then I can comment on the GIS in itself. So if I look at the quarter-on-quarter basis and if I look at the gross profit margin for gulf drilling, so we are having almost very lean direct cost. And the gross margin is almost varying from 11% to 12%. So Q1 was 11%. Q2 was 11% and Q3, it's 11.8%. So it's almost the same gross margin, and this is based on some stability in terms of cost controls. But again, there are some variables that you cannot control, which are relating to the maintenance of the rigs. So you have 7 offshore rigs and 8 onshore rigs. And all of these rigs, they will -- from time to time, they will need a big maintenance to take place, for some of the rigs, like the one that we had in one of the rigs in later part of Q2 2022 and the first part of Q3 2022. And this will obviously affect or impact the P&L and impact the direct cost. Another impact, which is not the direct cost in itself, but the finance cost, which is increasing from -- if I compare to Q1, Q1 was around QAR 29 million. And Q3, it's around QAR 52 million. So this is something that is out of the control of the company, and this is relating to the interest rate fluctuation, which effective rate has fluctuated from 3% to almost 5% from Q1 2022 to Q3 2022. I think in terms of -- we are watching the direct costs, we are trying to be as lean as possible. And one of the main objectives actually in GIS level is to make sure that the cost is controlled well and to make sure that the company is spending its cash flows in the -- basically on a lean basis.

Okay. I really appreciate, and we only hope your rigs maintenance and other costs are kept under control. So hopefully, that will give you better margins to realize on your businesses.

[Operator Instructions] there are no further questions at this time. I'll now turn the call over to Bobby for closing remarks.

This is Bobby Sarkar. I would like to ask a couple of questions, if I may. I just wanted to find out -- get an update on the 2 onshore rigs, I believe, are not deploying. When will they deploy? And then maybe an update on the restructuring of the debt? Because as far as the things stand, I guess, with the 2 onshore rigs, you would not be -- given the interest charges, you would not be breaking even unless we see a restructuring on the drilling level. So could you please just clarify that?

Yes. So thank you, Bobby, for the question. The 2 onshore rigs, one, which is already started, as we have announced in Q2 2022. It has started end of October 2022. That's GDI-8. And GDI-4, it's -- we are in the tendering process. Most probably, the tender will be completed by end of November, and we are expecting mobilization to be in end of Q1 2022 -- 2023. I think we are expecting that beginning -- by end of Q1 2023, we will have most all the rigs deployed, and this will be a great achievement, I think, for GDI in terms of mobilization of all the rigs. In addition to being able to have a much longer contracts for the offshore and for the onshore rigs was, in some cases, better, better rig rates. For your next question relating to the restructure of the debt. I think we are in advanced discussions with the stakeholders with all the parties. But as you can know, so this is the loans that we are discussing are of huge value for all the parties and the lots of arrangement that needs to be agreed between everyone so in terms of contracted arrangements between all the parties, including GIS, as the main shareholders and the key stakeholders, which are the banks as well as the customers. We are trying to make sure that the solution that is put in place. It's first of all, will enable GDI to be able to generate the expected cash flows, to be able to pay for its debt and to be able as well to be sustainable over the next long-term period because it's a company which is considered as strategic for the state. And so -- we are in the stage, we are in the continuous discussion with all the parties. And once we reach an agreement, we will announce that to the market.

Okay. Great. I just had another question that's too with the GulfDrill JV that you have in drilling. You reported QAR 8 million in your share of profits for the third quarter. Is this the max profit that we can see from this venture? I guess all the rigs that have been deploying since the third quarter of last year and we haven't had any issues with maintenance, et cetera, right? So is this -- like QAR 8 million a quarter is this what we can expect in terms of a net earnings contribution from this JV?

Thank you, Bobby. So far, the -- what we have announced is around QAR 10 million for the year-to-date. And you are correct, QAR 8 million for Q3 2022. I believe this JV could be more profitable because, as you know, we had some impact during the last year relating to the late deployment of the rigs. So this had, let's say, an impact in terms of some penalties for the late deployment of those rigs, which were impacting last year. But I think the business for this quarter, Q3, was the full deployment of all the rigs with much more control over the cost with the elimination of the mobilization cost. I think it could do a little bit better compared to what we have provided in Q3 2022.

Okay. That's great. Shantel, do we have any external questions?

We do have one more question from Riyyas Abdulkader with Integra Asset Management.

One question was on -- if you could update us on the merger on the insurance side?

Yes. Actually, we have announced that we are at early stages to take all the regulatory approvals for that merger. We got the green light from the Central Bank, and we are right now in a stage where we are looking at the investment bank to start and to kick off the process for the valuation related to that merger. I believe we are at the very early stages. We should have a progress during the first and second quarter of the next year.

Our next question is from [ Nikhil Sutani with CDFS ].

I mean it's just a follow-up question on your reinsurance side business where the merger is taking place and really around catering, Abela catering. So just wanted to know on that where exactly the process. Is it the same early stages? Or we are seeing some -- something where we can talk about in the next couple of quarters?

All the information that we have on our hand is similar information that we have announced. We -- there is an intention between both parties, insurance -- this is related to catering? Catering, I believe there is a good progress. I thought you're talking about the insurance. In the catering, there is a good progress. Right now, we are in negotiation with the other party. Our expectation during the next AGM, we will announce to the market the status of that merger. So it is much more an advanced other than the insurance. So the catering segment, it is at advanced stage, I would say. We should have news about it during the next AGM, I would say.

[Operator Instructions] there are no further questions at this time. I'll turn the call back over to Bobby.

Thank you, everyone, for attending the call. I want to thank Abdulla, Sami, Rashid and Riaz for taking the time to do the call. And now Abdulla Al-Hay will say a few closing remarks, and we can end the call after that. Thank you.

Thank you all for joining us on this call. If you have anything or further questions, the team here is ready to take your question. We have Rashid, we have Riaz, you can approach them any time.

This concludes today's conference call. You may now disconnect.