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

Hello. Welcome to the Gulf International Services year ended 2022 earnings call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Bobby Sarkar to begin the conference. Bobby, over to you.

Okay. Thank you, Gavin. Good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Gulf International Services fourth quarter and year-end 2022 results conference call, on which we will also get an update on the merger of Amwaj. So on this call, we have from QP's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who is the Acting Manager; Sami Mathlouthi, who's Assistant Manager in Financial Operations; and Rashid Hamad Al-Mohannadi, who's the Head of IR and Communications. So we will conduct this conference with management first reviewing the company's results followed by a Q&A. I would like to now turn the call over to Rashid. Rashid, 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 statement as detailed on Slide #2 of the IR deck. We can move on to the call. In the last Monday, 13th of February, GIS published its result for the year ended 31st of December 2022. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today on this call, along with me, I have Abdulla Yaqoob Al-Hay, Acting Manager for Privatized Company Affairs in QatarEnergy. We have Sami Mathlouthi, Assistant Manager of Financial Operations, Privatized Company Affairs in QatarEnergy. We have structured our call as follows: at first, I will provide you a quick insight of GIS ownership structure, competitive advantages, overall governance and BOD structure by covering Slide 5 till 8 and Slide 29 till 30. Secondly, Abdulla Yaqoob Al-Hay will provide you with a brief -- will take you through a brief about Amwaj merger announcement and Al Koot merger withdraw. Sami will provide you on GIS key operational and financial performance matrices. Later, I'll provide you an insight on the 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 of QatarEnergy with 10% stake being the parent shareholder whereas GRSI with 22% stake is the largest shareholder. As detailed on Slide #5, QatarEnergy provides most of the head office function through a service level agreement, operation of GIS subsidiaries are independently managed by the prospective Board of Directors, along with the senior management team. The BOD structure is detailed on Slide #7 of the IR presentation. In terms of the 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 only Qatari onshore drilling services provider and have more than 50% share in the offshore drilling services in Qatar. Similarly, the Aviation business of GIS is the sole provider for helicopter services in Qatar, oil and gas services sector and being 1 of the largest operator in the MENA region. In terms of the insurance business, it's 1 of the leading medical insurance provider in Qatar. Once Amwaj merger is completed, the new Amwaj entity will be a local champion for catering services. All of this is supported by experienced leadership having expertise in relevant business segments. In terms of the governance structure of GIS, you may refer to Slide #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 Abdulla.

[Foreign Language] Thank you, Rashid. Before we go into our fourth quarter financial and business update, I would like to take this opportunity to briefly talk you through the announcement of Amwaj merger transaction as well as update you on withdrawal from merger negotiation with Doha Insurance Group. You may refer to Slide #9 of the latest IR deck that was circulated before the call. The all-share merger deal negotiated between Amwaj, Atyab and selected entities of Shaqab Abela has now completed. And now the deal is subject to the approval by the respective shareholders, including an Extraordinary General Assembly meeting approval by the shareholders of GIS, which is due on 13th March 2023. The new merged entity will be called Amwaj Catering Services Limited, where GIS own 30% stake and the merger will be efficient from -- effective from 1st January 2023. The merger will create a catering national champion and the combined entity will become the go-to player for all large scale catering needs in Qatar and potentially in the wider region. The merger will become a more solid brand and strong client base with the best-in-class management capabilities with a proven track record. Combining Amwaj with Shaqab and Atyab would be a win-win transaction for all shareholders with the new shareholders boosting top line with GIS getting access to enhanced profitability margin by way of vertical integration. Following the completion of the transaction, each shareholder of merged entity will nominate 2 members for Amwaj Board of Directors. CEO of merged entity will be independently appointed by the new Board of Directors. The merger will be value accretive for GIS and shareholders backed by forecast business plan as far as negotiation regarding the potential merger between Al Koot Insurance & Reinsurance Company with Doha Insurance Group is [ canceled ]. And after primary negotiation regarding a formation potential merger, both parties, GIS and DIG concluded that an initial principal agreement could not be reached. Accordingly, both parties have jointly decided to withdraw from this transaction and negotiation as the proposed merger would not have achieved natural interest related to the shareholders for both companies. Now I will hand over to Sami.

Thank you, Abdulla. Good afternoon, and thank you all for attending us. Starting with the business update for the financial year 2022. Within the Drilling segment, new contracts won in Saudi Arabia and Bahrain [indiscernible] in the first quarter of the year. These both remain operational until the end of 2022. Also, all the 5 rigs within the Gulf Drill JV continued to show improved operational and financial results. Another onshore rig, GDI-8 became operational during the fourth quarter. This makes 6 out of 7 onshore market rigs being online for the segment and reflected positively on the overall rig utilization. Moreover, as discussed in our previous calls, during the year, the segment successfully renewed contracts for certain offshore rigs with extended terms ranging from 2 to 5 years. This was in addition to continued positive impact on segment performance for the year. New rig day rates for the offshore fleet applied starting from mid of last year and the redeployment of 2 previously suspended onshore rigs during the third quarter of 2021. The Aviation segment continued to witness improved set of performance with better flying activities, within both domestic and international operations. Also contribution from the MRO and International business continue to support the segment performance. The segment reported the highest yield in net profit in its history. 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 continued to demonstrate improved set of results on the back of realization from the new contracts won last year and in addition to the realization from the contracts related to the FIFA 2022 World Cup. In terms of group financial performance, as detailed on Slide 12, the group total revenue for the year improved by 19% compared to last year, reached QAR 3.7 billion. Revenue growth from Aviation, Drilling and Catering segments led to an overall increase in the group revenue. However, this was partially offset by negative growth noted in revenue from the Insurance segment. For the financial year 2022, the group reported an EBITDA of QAR 807 million, was an increase of 54% compared to last year. The group reported net profit for the current financial year amounting to QAR 290 million compared to a net profit of QAR 54 million for 2021. While analyzing the group profitability in more detail as reflected on Slide 14, the main contributor towards the growth in the bottom line profitability [indiscernible] in the group revenue. This was partially offset by higher direct costs, G&A expenses and net finance costs. In addition, a decline in investment income from the Insurance segment also adversely affected the year-on-year profitability. Moving on to the quarter-on-quarter performance. The revenue for the fourth quarter of 2022 increased by 8% compared to the third quarter of 2022, mainly on account of better revenue growth reported from Insurance, Catering and Drilling segments, which was slightly offset by a negative movement in top line from the Aviation segment. On the other hand, net profit for the fourth quarter of 2022 declined by 76% compared to the third quarter. The shortfall in the group net earnings was mainly attributed to the following quarters. A reduction in revenue within the Aviation segment, mainly from international operations, and hyperinflation loss of QAR 19 million reported for the current quarter. Higher general and administrative expenses deposit was in the Drilling segment on account of higher accruals along with higher finance costs. Lower investment income from the Insurance segment due to higher unrealized losses on hand for trading securities. 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. Moreover, the Board of Director has proposed a final cash dividend of QAR 0.10 per share, amounting to QAR 185.8 million for the year ended 31st of December 2022, which is subject to approval at the Annual General Meeting due on 13th of March 2023. I will now hand over to Rashid to cover the segmental performance.

Thank you, Sami. I will start with the Drilling segment, where we may refer to Slide 16 until 18. Drilling segment reported a revenue of QAR 1.3 billion for the year ended 31st of December 2022, up by 26% compared to last year. The revenue growth has largely been linked to the new rig day rates implemented for the offshore fleet since the mid of last year, also the redeployment of the 2 onshore suspended rigs, GDI-5 and GDI-7 during the third quarter of 2021. This has positively contributed to the top line performance. Moreover, full deployment of Gulf Drill JV fleets since mid last year had a positive impact on the segment revenue for the current year on account of comparatively higher management fees. The segment reported a net loss of QAR 90 million for the financial year ended 2022 compared to a net loss of QAR 201 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 until 21, here, the segment reported a total revenue of QAR 915 million for the year ended 31st December 2022. This represents an increase of 27% compared to last year. The increase was mainly attributed to higher flying activities recorded within domestic and international operations, coupled with growth in revenue noted across international locations, mainly from Turkey and Angola. Also, persistent growth within MRO business segment contributed positively to the segment top line. The segmental net profit reached QAR 310 million, representing an increase of 40% compared to last year, mainly on account of higher segmental revenue. GHC recorded the highest yearly net profit in its history. Moving on to the Insurance segment. As detailed on Slide 22 until 24, revenue within the Insurance segment for this year ended 31st of December 2022 decreased by 9% as compared to last year to reach QAR 898 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 premium from general insurance lines of business on account of new contracts and renewal of existing contracts with wider coverage scope. On contrary, the segment net earnings increased by 18% as compared to last year to reach QAR 71 million, the growth in bottom line profitability was mainly supported by an overall decline in claims, which decreased by 37% on a year-on-year basis. On the other hand, negative performance of the segment, investment portfolio due to volatilities in the capital market weighted on the segment profitability coupled with lower revenue. Finally, moving on to the Catering segment. As discussed on Slide 25 until '27, the segment reported revenue of QAR 568 million, an increase of 57% as compared to last year. Revenue increases was mainly driven by growth noted within the Manpower segment on the back of realization from a new contract won during the latter part of last year. Additionally, certain contracts were renewed within the Manpower and Catering segment with broader scope improving the overall service volume for the segment. On the bottom line profitability front, the segment was able to significantly reduce its losses and turned to profit with a net profit of QAR 9 million noted for the year ended 31st December 2022 compared to a net loss of QAR 15 million for the last year. This was mainly due to higher revenues along with better margins. I think we can now open the floor for the Q&A session.

[Operator Instructions] Your first question comes from the line is [ Michel Tan from CBFS ].

Thanks for the presentation. I just a couple of questions. I mean, importantly related with your business price performance. Largely, your Aviation has always been a cash cow, which has done very well in the past. But in the fourth quarter, we are seeing a change, not only on your revenue front, but also on your margin front. You supposedly adjusted for the hyperinflation, still the margins have come down. So I wanted to understand what has been the reason behind this in terms of the margins. Also, I mean, I wanted to understand in terms of -- given the recent earthquake in Turkey, what could be the repercussions? I mean, could be seeing some kind of revenue flow given the fact that you mentioned international revenues has been going up. So -- but the margins are low. So how you will be seeing that in 2023, especially in the first quarter? And regarding your other performance in terms of your smaller divisions, let us say, for example, Catering, what we are seeing is revenues normally used to perform better in the fourth quarter. And -- I mean, so I wanted to understand what has happened. I mean, the business has not been seeing that kind of improvement to that extent. And especially in the light of FIFA World Cup. You've also mentioned about 1 contract, which has contributed. So I wanted to understand what has been the contribution to that 1 contract. And lastly, of course, in terms of Shaqab and Atyab merger and the economy of scale, which you have pointed out, how you see it going forward in 2023. Thank you.

Yes. I will take the first part of the -- which is relating to Gulf Helicopter. Yes, Gulf Helicopter is the cash cow for the business [indiscernible] the cash cow. So the contribution from the business is extremely high and Gulf Helicopter contributed by more than QAR 350 million in terms of net profit. And this has been the highest net profit that the company has registered in its life. Back to the performance during the fourth quarter. So the impact is mainly coming from 1 variable, which is relating to reduction in flying hours in Q4 2022. And this has impacted the top line. So basically, we had a reduction in terms of top line for the fourth quarter and at the same time -- so we have registered some exceptional items relating to the ForEx, which is relating to the Turkish subsidiaries, while we have [indiscernible] ForEx costs, which in total to around QAR 24 million for the total year. In addition to the impact of the hyperinflation in Q4, we have registered around QAR 19 million of hyperinflation impact and this is mainly relating to the registration of Turkey as hyperinflation economy starting from April 2022. The impact was basically [indiscernible] most of the noncash items and to the new purchasing power based on the [indiscernible] [ QAR 19 million ] impact in Q4 2022, but the total impact during the year was around QAR 11.4 million. Those are the main exceptional items that have impacted Q4 results. Regarding -- what is the next question?

About Catering revenue in Q4.

The Catering revenue in Q4 has increased as well. So the performance in total, I think it has been good. So it's around [ QAR 1 billion ] category in terms of net profit. And the company was able to absorb the losses that has been made until Q3 2022. So this was mainly impacted by the FIFA World Cup contract where the company was able to provide around 3,000 drivers to the World Cup and this has impacted positively the top line profit -- top line as well as the profit level. And your last question regarding [ Redstar Havacilik Hizmetleri, Turkish subsidiary ]. I think the company is just contributing well in terms of net profit despite ForEx exchange losses that are impacting the consolidated level but if we count all the impact, the company is still contributing well to the profitability of Gulf Helicopter. And it's contributing by around 25% in the revenue of Gulf Helicopter. So the net profit level, as a said, it's around QAR 45 million after the impact of the foreign exchange losses.

Very good. I believe -- we will answer your also last question related to the Amwaj merger and how's the future for it. First of all, I would like to highlight that we are almost completed the transaction. And right now, we are doing all the -- I would say, legal setup to take such decision to the AGM for the shareholder approval. We believe the merger of Amwaj with Atyab and with Tamween Capital would bring additional value to the shareholder and the Catering segment that we have. We believe the new merged entity will also be able and capable to produce dividends during the future years based on the studies that we have conducted. There are a lot of synergies that could be captured -- and the new merged entity, we trusted the new management that also will compete in the market. We will be the largest catering company in Qatar. So this is also a great indication of the success. And we hope we see the results of the merged entity very soon. Just to highlight that we're going to backdate the merge and it will be effective from 1st January 2023.

Thanks for your detailed answers. But just wanted to get since you mentioned about catering economy of scale from this new merger and you must have done your prognosis for future FY '23 given extensive merger detailed information of valuations. Can we get an idea in terms of what could be the likely top line revenue growth for category for 2023 in terms of [ 2022 ]? How -- yes.

We usually don't disclose any future numbers. However, we -- based on the status that we have, we see positive numbers compared to the current results that we have. And I would say, let's wait for it. And we can see the results in very short time, maybe in the first half of the 2023. Some of the number will be disclosed to the market.

Okay. Okay, fine. In terms coming back to your Aviation businesses. Actually, you have not mentioned about MRO, maintenance and repair division, which has seen actually a substantial decline in your quarter-on-quarter basis. Normally on a cyclical basis, fourth quarter is the best quarter. So I wanted to understand what has been the reason behind it? And you also mentioned about ForEx costs. I mean, I hope you mentioned only fourth quarter, right? Normally, fourth quarter, what we have seen is Turkey's currency rate has not changed much. So how much was the currency impact for the fourth quarter [indiscernible] in your overall profitability segment for Aviation?

The MRO business is a variable business. So it's based on the demand from the customer. And this business is not based on the fixed contract like the aviation contracts that we have, while the contract is based on 2 components: fixed part and variable part, which is relating to the number of flying hours, as long as you fly, so basically will secure yourself the fixed part and then the variable parties an add-on on the contract. So the MRO business is based on the activities and based on the requirement from the customers. And as you know, in Qatar, fourth quarter was the World Cup. And this we expect that this has affected the operations in -- at many levels. And this is the main reason. So there is nothing relating to the quality of service that Gulf Helicopter is providing. And the MRO business has been a great addition to the business. The contribution is great. And in general, if you compare it to the -- 2021, we have seen a great increase compared to last year. And the net contribution from this segment is very good. And I think the management will concentrate in this segment, will grow the segment and we are hoping that the segment will contribute much more to the profitability of the business. In terms of the ForEx. So the ForEx -- the QAR 24 million we stated is the total impact for the whole year. So it's around QAR 24 million. The impact for the fourth quarter, so it's almost similar to the previous [ fourth ] quarter. So the dividend, so it's around QAR 1 million. So QAR 3.8 million compared to QAR 2.6 million in Q3 2022.

[Operator Instructions] And your next question comes from the line of Lee Beswick of QNB.

Firstly, I'd just like to say congratulations on not doing the insurance merger. I think that was a very positive thing that you didn't do it because I don't think there was anything positive that was going to come back to that full year. Just on to the Drilling segment, I was just wondering if you could explain what the current rate -- the day rate is you're receiving for offshore drills. Your current book of business at the moment and the current 7 rigs that you have, what's the average day rate you're receiving right now?

Well, the 7 offshore rigs are operational. So all of them are contracted for the periods from -- varying from 1 to 5 years, so we were able to renew some of the contracts to a longer period from 3 to 5 years. We normally don't disclose the day rates per rig. But I will say the day rates are varying from 70,000 to 85,000 per day.

Okay. That's very helpful. And what's the -- for GDI-8, which I think was the one that was renewed most recently, presumably that then is slightly above the average because day rates are going up very significantly in the moment.

So GDI-8 is the latest rig that came into operation. And this is an onshore rig. So it started operation in Q4 2022. So as we said in the beginning, we don't disclose the daily rates per rig, but it's fair compared to the previous period.

Okay. Okay. Fair enough. And if you had to -- if you have to go into the market now to renew the rates, what's the current rates that you'll be getting? Is it 90,000, 100,000, 110,000. Where is the current contract?

Well, again, those are commercial discussions. So basically, we don't disclose per rig, but we will try to get the best rates available in the market. So we have -- our commercial team are working closely and they monitor the rates in the market. And we will discuss with our customer to be able to get the best rate available in the market and taking into consideration...

Okay. Do you publish a timetable for renewals. So when each rig comes up for renewal, can we see that anywhere?

We don't disclose that as well.

Okay. How do we know what -- there's got to be some visibility on how fast your revenue is going to grow because obviously, the renewal rates will be higher than where it is right now. So the question is, is that -- how many -- how -- is it a regular occurrence that your rigs are coming up? Is it spaced out? Or is it in a specific year? Or give us some -- a little bit more color on...

I would like to highlight that, maybe you can refer to our historical utilization for the rigs that we have. And we usually maintain 100% of the utilization related to the onshore and offshore rigs. And this has been [ persistent ] for the last decade, I would say. We very rarely keep a rig on idle capacity unless there is a real reason for that. So we are assuming full utilization of our fleet.

Okay. And your rig rates, I think you said already will presumably reflect market rates going forward. Is that correct? You would move in line with the market?

Yes, definitely.

Okay. Because -- so relative to the U.S., for example, [indiscernible] rates are about, I think, about 130,000, 140,000 at the moment if you go to the Gulf, would you be...

Yes. Our reference market is Qatar. And basically, we...

The question I had was how does the Qatar rate compared to the Gulf rate, for example. The Gulf rate has gone from about 70,000 to 130,000 in the last year. So I just wondered sort of how the rate in Qatar compares to a rate in the U.S., Gulf, for example. Is it a slight discount? Is it a slight premium? I'm not -- I just want to get a handle of that.

Yes. It depends on rigs specification. If you go to the U.S., they might require different specification for rig. So that's why you have a different rate. When you compare us to regional, as you know, some other regional competitors in the region, they are using an IRR-driven model, whereby they are guaranteeing certain IRR for the drilling company. So the rate there may not be reflecting the real market rate for drilling in the area. So I would presume that you should be looking closely to the rate that prevailing in Qatar and also others in the region, whether they are doing a tender, let's say, for drilling and they're awarding the rig to someone, then this would be a good benchmark to compare us to them. So this is, in summary, should be looked...

Regional?

Yes, regional. You can compare it to regional.

Okay. Right. Okay. So regional rate, which is sort of double what it was in a year ago, you'll be -- if you had to renew today, you'd be roughly in line with that.

Double. Maybe you're referring to the UAE rates, which are basically driven by IRR. So it's a different benchmark you're looking at.

Next question is from [indiscernible] from [indiscernible] Investments.

Just a question on the merger, please. So the GIS' ownership, 30% in the new entity with QAR 30 million, you had the liquidity of QAR 100 million in your Catering services. So is a portion of the services of your getting services not moving into the merged entity. That's my first question. Second question, if you could give us any target operating margin for the merged entity.

Okay. Just to make clear, we understand your first question. We are 30% owner of the new Amwaj and the share capital is QAR 100 million and we are QAR 300 million -- our share QAR 300 million from that share capital. This is what you are looking for?

[indiscernible] in the Catering business was QAR 100 million. So I don't know [indiscernible] Catering business that you have or you had other parts there. I'm just surprised a little bit that you don't have a larger ownership in the...

Yes, [indiscernible] authorized share capital and our share is QAR 30 million of it.

Let me if I can rephrase it, there will be no -- so this is going to be your catering business from now on, right? There's not going to be any other catering business outside of the merged entity?

All Amwaj will be -- all the services for the catering and other manpower service provider will be given to the new entity, which is the merged entity. So it is [indiscernible]

Okay. All right. Do you have any objective, any target operating margin?

We need, first of all, to [indiscernible] the synergies. And the realization of synergy, it will take at least a year to be fully merged and to be fully settled as a new merged entity. After that, maybe we can see some numbers and we believe it's going to be a much more better number than the current numbers that we have and the current Amwaj before the merger.

[Operator Instructions] And there are no further questions at this time. I'd like to hand back to Bobby to continue today's call.

Okay. Thank you, Gavin . If there are no further questions, we can end the call for today. I want to thank Abdulla, Sami and Rashid for taking the time to answer our questions and go through the presentation. Thank you very much, and we will pick this up next quarter.

Thank you, Bobby. Thank you, everybody, for having this call with us.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.