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

Hello, and welcome to the Gulf International Services Conference 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.

Thank you, Gillian. Hi, 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 2023 Results Conference Call. So on this call from Qatar Energy's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who is the Acting Manager; Sami Mathlouthi, who is the Assistant Manager in Financial Operations; and Rashid Mohannadi, who is the Head of IR and Communications. So we will conduct this conference with the 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. Kindly note that the MS Teams link is to display the IR deck on the screen. In case you want to participate in the Q&A session, you must dial in through the telephone lines on the phone numbers provided as part of the invitation. Moreover, please note that this call is subject to the GIS disclaimer statement as detailed on Slide #2 of the IR deck. On Monday 7th of May, GIS published its result for the 3-month period ended 31st of March 2023, and today, in this call, we will go through these results and provide you an update on key financial and operational highlights. Today on this call, along with me, I have Mr. Abdulla Yaqoob Al-Hay, Acting Manager for Privatized Companies Affairs; Sami Mathlouthi, Assistant Manager, Financial Operations in the Privatized Company Affairs department; and [ Saud Abdelghani ], Senior Financial Management Analyst and the Financial Operation within the Privatized Company Affairs department. 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 Slides 5 till 8 and slide 28 and 30. Secondly, Sami, we will brief you on GIS key operational and financial performance matrices. Later, [ Saud ] will provide you with insight on segmented performance. And finally, we'll open the floor for the Q&A session. To start with, as detailed on Slide #8 of the IR deck, the ownership structure of GIS comprises of QatarEnergy with 10% stake being the parent shareholder, whereas GRSI, which is the General Retirement Service Authority (sic) [ General Retirement and Social Insurance Authority ], has a stake of 21.8% stake in our company, and it's the largest shareholder. As detailed on Slide #5, QatarEnergy provides most of the head office function through a Service Level Agreement. The operation of GIS subsidiaries are independently managed by their respective Board of Directors along with 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 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 has 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 service sector and being 1 of the largest operator in the MENA region. In terms of the business -- insurance business, it's 1 of the leading medical insurance provider in Qatar. For the catering, the merger of AMWAJ and Shaqab has established a local champion in catering service. All of this is supported by the experienced senior leadership, having expertise in relevant business segments. In terms of the governance structure of GIS, you may refer to Slide 28 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, Rashid. Good afternoon and thank you all for joining us. Starting with the financial performance updates as detailed on Slide #12. During the first quarter of 2023, the group revenue reached QAR 837 million, was an increase of 18% noted compared to the same period of last year. All business segments witnessed growth in revenue. The group reported an EBITDA of QAR 230 million and recorded a net profit of QAR 9 million for the 3-month period ended 31st of March 2023. As detailed on Slide 14, the group direct cost increased by 18%, which is mainly linked to inclined commercial activity. The rise in interest rate has also negatively impacted the profitability of the group. The first quarter of 2023 finance costs has significantly increased by 128% to reach QAR 67 million. GIS is committed to maintain its financial stability and growth, and it is taking proactive steps to address the impacts of the rise in interest rates on its profitability. Moreover, performance of the insurance segment's investment portfolio was negatively impacted amid volatilities in capital markets and a decline of QAR 28 million, at 71%, was noted on account of investment income versus last year. This decline was mainly linked to unrealized losses booked on revaluation of held-for-trading investment securities. In terms of group financial performance, as detailed on Slide 13, the group total assets remained flat compared to last year and stood at QAR 10.7 billion as of 31st of March 2023. The cash and short-term investment stood at QAR 1.04 billion, down by 9% as compared to 31st of December 2022. The decline in cash and short-term investments was mainly linked to payment of dividends for the financial year 2022. The total debt at the group level amounted to QAR 4.29 billion as at 31st of March 2023. The current levels of debt continue to weigh on the group net earnings as finance cost is 1 of the key cost ingredients and specifically limits drilling segment's ability to accomplish the required profitability. GIS is already at its final stages of finalizing a deal to refinance the existing loan terms with the involved lenders with an aim to provide greater flexibility to manage liquidity and ease pressure on the group financial position. On overall basis, our base case strategy will be to continue to focus on market development by focusing on building our market share, reducing operating costs, and continuing to improve utilization of assets. I would now hand over to [ Saud ] to cover the segmental performance.

Thank you, Sami. We can start with the drilling segments. As detailed on Slide 17, the drilling segment reported revenue of QAR 337 million for the 3-month period and the 31st of March 2023, up by 5% compared to Q1 2022. Revenue growth has been driven by [ higher ] rig utilization, including deployment of an onshore drilling rig, GDI-8, during Q4 '22. In addition, GDI noted higher revenue from the liftboat segment, as both the liftboats remained fully operational during Q1 2023 versus the same period of last year where one of the liftboats became operational during mid of Q1 2022. The segment reported a net loss of QAR 23 million for the 3-month period ended 31st of March 2023, compared to a net loss of QAR 10 million for Q1 2022. Increase in losses was mainly attributed to the increase on finance costs due to higher interest rates. This was partially offset by a growth in segment's top line. Moving into the aviation segment, as detailed on Slide 20. For the 3-month period ended 31st of March 2023, the aviation segment reported a total revenue of QAR 226 million with an increase of 10% compared to Q1 2022. The increase was mainly attributed to higher flying activity recorded within both domestic and international. Total flying hour increased by 33% on a year-on-year basis, where locally the flying hours increased by 23%, while within the international segment, flying hours increased by 50%. Within international segment, the highest increase was reported from the Turkish operations, mainly as a result of local fleet expansion linked to better market penetration. Also, MRO business remained strong, despite a marginal decline in its top line. Segment net profit reached QAR 82 million, representing an increase of 4% compared to Q1 2022, mainly on account of growth in revenue. Now let's discuss insurance segment. Here important to note that comparative figure for Q1 2022 had been restated on account of adoption of IFRS 17. Revenue has been decreased by QAR 5 million, while net profit has been increased by QAR 29 million. Now moving onto the segmented financial performance. As detailed on Slide 23, revenue within the insurance segment for the 3-month period ended 31st of March 2023 increased by 44% as compared to Q1 2022 to reach QR 273 million. Increase in revenue was mainly linked to winning new contracts within the medical line of business. Segmental net earnings decreased by 29% as compared to Q1 2022 to reach QAR 33 million. The reduction in bottom line profitability was mainly driven by lower investment income recognized from the investment portfolio on account of volatilities in the capital markets, which affected the market-to-market valuations of the investment portfolio. Lastly, let's talk about the catering business, which has been classified as discontinued operation under IFRS 5 and reported separately in the consolidated financial statement. We're reporting [indiscernible] as discontinued operation, for the time being, we considered 100% result for March only. Going forward, once we complete the legal process relating to the merger, we need to consider 30% result of the combined entity with effect from 1st of January 2023, i.e., our share in the combined entity. AMWAJ reported revenue of QAR 119 million, an increase of 4% as compared to Q1 2022. Revenue increase was mainly due to the growth in revenue within the manpower segment. The segment reported a net profit of QAR 5 million for the 3-month period ended 31st March 2023, compared to a net profit of QAR 0.1 million for Q1 2022, mainly due to higher revenues. Now I'll hand over the call to Rashid.

Thank you all for presenting the operational and financial performance updates. I think now we can open the floor for the Q&A.

[Operator Instructions] Your first question comes from the line of Talal Samhouri from Aventicum Capital.

[Foreign Language] Sorry, let me speak in English. It was merged with other 2 companies. So how do you record it accounting wise? I've seen profit from discontinued operation QAR 4.7 million. So was it sold out totally or GIS still owns a share of the new combined entity? Second -- hello?

Yes, go ahead. We can hear you. Go ahead.

Okay. Second, in terms of the GDI utilization, you mentioned that it is now up to 96% rig utilization, but then it says except GDI-4. So can you elaborate a little bit on this? So once GDI-4 gets utilized, so that gets the utilization to 100% or what do you mean by that?

I think I can answer the second question. I'll hand over the first question to Sami here to address. The second question, we may refer you to the slide where we talk about the utilization rates. Basically, our utilization rate is a function of the revenue from the rigs over the contracted rigs. So whenever the rig -- when it's come back on operation and does have a contract, then it gets reflected into the utilization rate. So that's why we are carrying out that we still have GDI-4, it's not yet on operation, but our utilization is high because our utilization will take into account the rate once the rig is in operation. So we have a note there which says, rig utilization equals revenue earning days over days under contract. So I hope that answered your second question. I'll hand it over to Sami to address your first question.

Regarding AMWAJ, so as it has been announced beginning of last year that we had the intention to merge with 2 other partners. So this has been finalized, and we got the greenlight from the shareholder of GIS during the AGM that was during March 2023 to go ahead with the merger. So the merger is going on. However, the legal documentation it's a process that needs to take place after getting the approvals from both shareholders. So this has been made as per the IFRS 5 international Accounting Standards. We need to reclassify AMWAJ's investment from assets under discontinued operations, and this has to be reflected in both the balance sheet and the P&L where we have to reclassify our investment in AMWAJ. So at the moment 100% of AMWAJ is reclassified under discontinued operation. We didn't yet took into consideration our shareholding or our share of profit from the combined entities since the combined entity doesn't exist yet legally. This will be done once the shareholder agreement of the combined entity is signed between all the parties. After that we can book the AMWAJ as a joint venture or as an associate of GIS. And this will be done only once the legal process is completed.

As equity method, so you would [ report it ] as an equity method?

Yes, it will move to equity method once we complete the legal process. And in that case, it will be equity method from the combined entity that is including AMWAJ as a holding company, and then underneath AMWAJ, you will have the 2 other companies, Shaqab and Atyab, which will be owned 100% by AMWAJ.

Your next question comes from the line of [ Harveen Singh ] from [ Shariah Capital ].

Hi, can you hear me?

Your voice is a bit muffled, but we can hear you to some extent.

Okay, let me try this. I have a couple of questions. The first question relates to your insurance business, and I wanted to understand if you have some an upside in case we do have a rollout of the mandatory insurance, that's #1? And any guidance on the timeline of it? And the second question relates to your drilling business. What is the maturity on existing contracts and do you see upside in terms of rollover of the rigs from the older pricing regime to a newer pricing regime and how material is that going to be?

The mandatory insurance, I think, it has been started already. Al-Koot is 1 of the insurance provider of the mandatory insurance. The company has started already to put in place the team and the system is now is set up to take into consideration the new segment, that is [ developed ]. So this will slightly increase the revenue from the insurance business. However, as you know, this practice is still new in Qatar. So this is the first year that will be applied. And as you know, the insurance, they work always with some calculation based on the history. So at the moment the company is trying to penetrate slightly the segment by assessing the loss that will come from the segment, since the premiums are not high and the premium are dictated by the services that will be provided and by the market, which is people are charging now around QAR 50 per month. It's not a high premium. However, the expected losses are not yet accounted -- are not yet known and all is based on assumptions. So we believe that the company will explore this segment, and hopefully, in the next few quarters, we will see the impact on the revenue and the net profits of Al-Koot. For your second questions, I think, in the rig side, we are dealing with specific customers at the level of renewal, so we have now most of the offshore rigs are renewed for longer-term contracts. Some of them are expiring in 2025 and 2026, and we have only [ 2 ] rigs that are due for renewal during this year or middle of next year. I think we have good relationship with the existing customers. GDI is 1 of the preferred customers in terms of quality of service, in terms of safety records that it provides in the region. GDI has great service that it provides to the customers and it's well recognized and we don't see any issues in terms when it comes to the new wells. And we are trying our best to get the market rates that could improve the net profits of GDI.

Okay. Just to follow up on the insurance bit. On the insurance bit, you're saying that it started being implemented, but in terms of the scale of this scheme, have they actually given out the sort of expected losses? And is the combined loss on this -- combined ratio on this going to be materially different from your existing business? Any insight into what you -- how you are thinking about this because it's sort of like a very basic level of scheme and how the enrollment numbers are likely to fare considering it's sort of mandatory?

Well, as you can see from the distribution of revenue in the insurance service, our revenue makes its -- divided between general insurance which is normally in market comes with lower loss ratio. The medical business -- the medical segment in itself, it's coming from more higher loss ratio. However, [ I'll quote ] in the last few years have very well improved its loss ratio especially through much better selection of its customer, much better selection of its contract where we are looking more at the quality of the contract rather than the quantity of the contract. In terms of the mandatory insurance, mandatory insurance is totally different from the medical insurance that we serve because we have been serving in the last decades we have been serving companies and its business-to-business operations. So now we are moving more to another segment where we have to serve individuals. And we -- it's as I said, so it's still new in the country, and we cannot expect with accurate numbers, the expected losses that will come from those insurance contracts.

Your next question comes from the line of Lee Beswick from QNB.

Would it be possible to publish a timetable of the dates for the contract renewal for the rigs? I understand you wouldn't want to publish the rates that you're -- day rates that you're receiving because that's commercially sensitive information, but could you give us an idea or a very clear timetable of when the rigs are going to be renewed on the GDI website?

Lee, as we said, I think even in our previous calls, we don't disclose those detailed timetable on how our rigs will become renewed. In our calls, we provide some information about the rigs, about the date of the contract. So as I said in my answer previously, to [indiscernible] that our -- some of the rigs are extended until '25 to '26. So we have around 4 rigs. And out of the existing rigs, we have 2 rigs that they are due to renewal during this year and next year. But providing exactly detailed information when they expire of which rig could affect as well the -- our commercial discussions with our customers since we are not the only provider of the service in Qatar. And we always would like to disclose general information about this.

Your next question comes from the line of [ Nikhil Phutane ] from [ CBFS ].

Well, I've got a couple of questions. This is regarding your Drilling segment. You did mention that your finance cost has increased quite drastically during this quarter. I mean, that is the only reason for the losses to come about because what we understand from the past few, I mean con calls, you did mention that your operational cost is coming down, and we could be seeing the same trend continuing in the current year. So I just wanted to get an idea on this. My second question has got to do with your Aviation segment. Your revenue per aircraft has been showing a good progressive increase during 2022. But of late has seen signs of stabilization, say, fourth quarter, first quarter of 2023. Do you think that this is what we could assume to continue to stay, especially in the international operations or you could be seeing better margins to support the continued growth in revenues for aircraft operations?