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

Hello, and welcome to the Gulf International Services Earnings Call for first half of 2023. [Operator Instructions] I'd now like to welcome Bobby to begin the conference, over to you, Bobby.

Thank you, Reah. Hi. Good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I want to welcome everyone to Gulf International Services First Half 2023 and Second Quarter 2023 Results Conference Call. So on this call from QatarEnergy's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who is acting Manager; Sami Mathlouthi, who's an Assistant Manager in Financial Operations; and Rashid Al-Mohannadi who's the Head of IR and Communications. So we will conduct this conference with the management first reviewing the company's results followed by 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 investor of GIS, and no media representatives should be attending this call. Moreover, please note that this call is subject to GIS disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call, on Sunday, August 13, GIS published its results for the year ended for the 6 months ended 30th of June 2023. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today on the call, along with me, I have Mr. Abdulla Yaqoob Al-Hay, Acting Manager for Privatized Company Affairs, Mr. Sami Mathlouthi, Assistant Manager for Financial Operations, Privatized Company Affairs; and Mr. [indiscernible] Senior Financial Management Analyst. Today, we have structured our call in a way that grants priority to the most important news considering GDI since we made an important announcement following GIS result announcement this week. We have decided to start with an update on GDI Loan Restructuring. Without further ado, I would hand over the word to Abdulla Yaqoob Al-Hay Acting Manager, later, Sami and [indiscernible] will carry on with the financial updates. And finally, we will open for the Q&A session. I will now hand over to Abdulla Yaqoob Al-Hay.

Thank you, Rashid. Thank you all for joining us. I am pleased to start by sharing some business revenues regarding our recent financial performance for the 6-month period ended on June 30, 2023. The group achieved a notable net profit of QAR 281 million. This result represents a substantial 105% increase compared to the same period of last year. The growth in our profitability is a direct result of our concerted effort and strategic initiatives that have positively impacted overall revenue. Also, I take this opportunity to update you on our recent significant milestone pertaining to the GDI loan restructuring. We are pleased to announce that successful conclusion of the debt restructuring agreement with our lenders for GDI with pending finalization through legal documentation. Under the term of this restructuring, GDI has secured a new extended term of 25 years, coupled with a 35% balloon payment. This strategic restructuring will enable GDI to gradually deleverage its financial position over the debt tenor. This important restructure and endeavor service as a catalyst for GDI to realign its debt maturity profile, fostering a sustainable and long-term representative for its business operations. Notably, these strategic initiatives hold an eminent, significant and advancing GDI over [indiscernible] strategic repositioning, establishing robust concurrent stone of the group future trajectory. By taking this step, GDI successfully achieved a significant goal of strengthening its capital structure in a sustainable manner. The debt restructuring not only improved our financial flexibility and reinforce our liquidity position but also open up new possibilities for investment opportunity while also leading to an immediate reduction in the borrowing cost. The successful execution of this transaction is a testimony to our unwavering commitment to achieve both financial and operational turnaround goals, including strengthening the group balance sheet and accelerating our progress to maximize enterprise value. I would now leave the floor to Sami, who will provide a comprehensive financial update and provide insight to our company performance during the period.

Thank you, Abdulla. Good afternoon, and thank you all for joining us. Starting with the business update, the Drilling segment has significantly mitigated losses from the preceding period [indiscernible] asset utilization and enhanced performance of the joint venture with Seadrill. Furthermore, in the second quarter of 2023, our offshore rig GDI-4 secured a pivotal contract with a major client with the plans for operational deployment in the coming quarter. In addition, noteworthy is the awarding of a fresh contract to Al-Safliya lift boat in Saudi Arabia are combined by an improvement in the day rate. These newly acquired contracts are expected to further amplify the company asset utilization and overall financial outlook. Moving forward, the company will diligently work to maintain an optimal utilization level, prioritizing safety and performance standards without any compromise. Some Joint venture rigs have been successfully extended for a duration of 2 years, accompanied by major enhancements in the day rates. The new day rates will come into effect upon the conclusion of the current contract tenor of each rig. Now let's delve into the updates pertaining to the Aviation segment. The Aviation segment continued to experience enhanced business performance due to increased flying hours within both domestic and international operations, also contribution from the MRO segment continue to support the segment performance. During second quarter 2023, new medium- to short-term contracts have been awarded to cover diverse regions. The company have demonstrated its ability to establish and maintain a strong business relationship across multiple markets. This expansion will reinforce the aviation segment global reach and position Gulf Helicopters as a trusted partner in providing services in various countries. Within the Insurance segment, the Insurance segment continued to achieve its primary objective of expanding its medical line of business and augmenting its market share by securing new medical contracts, resulting in enhanced premium growth. The segment investment portfolio performance remained wavered due to capital market volatility. Now we can kick off with the financial update. The Group revenue for the 6-month period ended the 30th of June 2023 amounted to QAR 1.7 billion with an increase of 17% compared to last year. Revenue growth from the aviation, drilling and insurance segments led to an overall increase in the Group revenue. Catering revenue of QAR 216 million is presented separately as part of discontinued operations as per IFRS 5 requirements. Group reported an EBITDA of QAR 581 million and recorded a net profit of QAR 281 million for the 6-month period ended 30 June 2023. The growth in revenues and hyperinflation accounting in one of the overseas operations led to an overall increase in net earnings. On the other hand, the Group's direct costs increased by 9%, mainly linked to inclined commercial activity. First half 2023, the Group's finance cost increased by 93% reaching QAR 132 million, against higher interest rates and one-off loan amortization cost. However, amid concluding the refinancing deal, the second half of the year is expected to witness a decline in finance costs. Moving on the quarter-on-quarter performance the Group revenue for the second quarter 2023 amounted to QAR 875 million with an increase of 5% compared to first quarter 2023, mainly due to improved revenue reported from the aviation segment primarily driven by the growth in MRO and international segments. The Group net profit for the second quarter 2023 amounted to QAR 191 million with an increase of 112% compared to first quarter 2022. Notable growth in Group's net profit was mainly supported by the growth in bottom profitability from the aviation and drilling segments. Group's total assets remained flat and stood at QAR 10 billion as at 30 June 2023 compared to the previous year. In addition, cash and short-term investments declined by 2% to reach QAR 1.12 billion as of June 30 2023, compared to December 31, 2022. Notably, the groups' total debt stood at QAR 4.38 billion as of June 30, 2023. The recently concluded debt restructuring is expected to facilitate a gradual deleveraging, resulting in lower borrowing costs. This pivotal achievement in restructuring is significant in realizing GIS' overall strategic repositioning and lays solid foundations for the Group's continued growth and prosperity. 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 the utilization of the assets. I will now hand over to Sulaiti to cover the segmental performance.

Thank you, Sami. Starting with the Drilling segment, the Drilling segment reported a revenue of QAR 666 million for the 6 months ended 30 June 2023, up by 5% compared to the previous year. Revenue growth has been linked to new rig day rates implemented for one of the offshore rigs and higher utilization within the onshore fleet due to the deployment of GDI-8, which was off-contract during the previous year. The segment incurred a net loss of QAR 22 million for the 6 months ended 30 June 2023 compared to a net loss of QAR 23 million during the corresponding period last year. The loss reduction can be primarily attributed to the segment's topline growth and enhanced financial performance from the joint venture with Seadrill. This was partially offset by increased finance costs resulting from higher finance costs and one off loan amortization cost. On a quarter-on-quarter basis, the company reported a profit of QAR 1 million, compared to a net loss of QAR 23 million in the previous quarter. The improved result was mainly due to lower operational costs and reversal of accrual associated to crew change expenses from the prior year. For aviation, the Aviation segment reported total revenue of QAR 498 million for the 6-month ended 30 June 2023, reflecting a notable growth of 13% compared to the previous year. This increase is attributed to increased flying activity observed in domestic and international operations in terms of flying hours, the total flying hours experienced a year-on-year growth of 29%. The domestic operation witnessed an increase of 17%, while international operation witnessed a substantial increase of 76%. The international segment was predominantly driven by the Turkish subsidiary, which benefited from increased flying activities, a more significant number of aircraft and augmented flying hours in Angola and Libya operations. Moreover, the MRO segment contributed positively to the financial performance through improved performance. The segmental net profit reached QAR 229 million, representing an increase of 35% compared to the previous year. This growth was mainly due to increase in revenue, higher finance income, lower losses from currency revaluation and positive inflationary impact concerning IAS 29 adjustment. The segment revenue for Q2 2023 versus Q1 2023 increased by 20%, reaching QAR 272 million, mainly due to higher revenue from the Turkish subsidiary and additional revenue from the MRO segment. Q2 2023 profitability also increased by 79%, mainly due to revenue growth, regarding the insurance segment, revenue in the insurance segment for the 6 months ended 30 June 2023, increased by 34% compared to the previous year, reaching QAR 548 million. The increase in revenue was mainly linked to winning new contracts within the medical line of business and the growth in premiums from the general line of business. The segment net earnings increased significantly compared to the previous year's corresponding period, reaching QAR 63 million. The growth in bottom line profitability was mainly supported by improved revenue coupled with strong recovery of the segment's investment portfolio, with an increase of QAR 13 million noted on account of investment income for the first half of 2023 versus the 1st of 2022. This increase was predominantly linked to the recovery in unrealized losses and gains booked on revaluation of held-for-trading investment securities and higher finance income on fixed deposits. The segment revenue for Q2 2023 reached QAR 275 million and increased marginally by 1% on a quarter-on-quarter basis. However, segmental profitability for the second quarter declined by 17%, mainly due to higher net claims reported and lower investment income than the previous quarter. To conclude with the catering, the catering segment reported revenue of QAR 216 million, reflecting a reduction of 13% compared to the corresponding period of the previous year. The revenue reduction was mainly due to the completion of FIFA World Cup related contracts, non-renewal of certain contracts within the catering segment, and lower occupancy level experienced from the accommodation segment. However, the segment was able to reduce its losses and reported a net profit of QAR 2 million for the 6-month period ended 30 June 2023, compared to a net loss of QAR 5 million for the previous year. This improvement in profitability was mainly due to better margins on the back of lower manpower-related costs compared to last year. On a quarter-on-quarter basis, segmental revenue witnessed a reduction by 19% compared to the previous quarter mainly due to lower revenue form the manpower segment. On the other hand, the segment reported a net loss of QAR 3 million for the second quarter of 2023. I will now hand over the call to Rashid.

Thank you, Sulaiti. With that, I'd like to invite any questions or comments from our investors. Please feel free to read your questions and we will be pleased to address them.

[Operator Instructions] Once again, our first question is from Pushpitha. Please go ahead.

This is Pushpitha from United Securities. My question is with respect to your drilling segment. So do you expect any new risk contracts? The next question is your rig grid, are they based on the spot rates? Or are they based on fixed rates? And do you have any backlog?

Okay. Do you have any other questions?

Yes. One more question. So the sequential improvement in profitability was due to lower operating costs. So do you expect this to continue going forward in your Drilling segment?

Okay. Regarding the first question of the day rate of our fleet, as you are aware our rigs are contracted based on a market I would say day rate. It's not going to be a spot because the spot is a different change on a daily basis. However, our day rate is contracted. And I would say it is a market price. We are expecting the day rate will be approved whenever we come to renewing our contracts. However, right now the entire day rate is contracted and based on market price.

Regarding the quarter-on-quarter direct cost, I think it's a variable cost. And as you know [indiscernible] the utilization of rigs long as the utilization of the rigs will go, so the cost will increase as well. And this is in line with the deployment of the cost in line with utilization and operation of the rigs. If we compare Q1 to Q2, you will see that in Q2, there is a set of one of the changes, which has impacted the direct cost in Q2 2023, and the impact is around QAR 11 million. That's why you will see that Q2 2023, we have a huge increase in the net profit due to some reductions in the direct cost. So in addition to that, so you will see that in Q2, we have some of the rigs or some of the [indiscernible] have been not contracted. And one of the offshore rigs as well, one for SPS maintenance, that's long-term maintenance, and that has affected as well the direct cost because there is no direct cost linked to those rigs which were not operational during part of Q2 2023, the cost has decreased.

And on your backlog, do you have any backlog in your drilling segment?

Yes, we have backlog. So as Abdulla mentioned it during the beginning of this call, so most of our rigs are contracted, so one of the rigs will come into operation during Q3 2023. And by Q3 2023, we'll have most of the onshore and offshore operational and most of those rigs are contracted some of them until 2023.

Yes. And we are going to maintain our utilization of our fleet remained very strong. Currently, it's at 95%, I believe.

Also, do you expect any new rig contracts coming forward?

In Q3, we are expecting one of the offtake will be into operation. That's one of the rigs, which has expired in June 2023. And starting from June until end of August, it will be under maintenance. Directly after maintenance, it will start operations. We're one of the main customers. And this is a new contract which is for a medium to long term period.

And in your Aviation segment, the profitability, is it the normalized level? Or do you expect it to grow?

Well, I think we have seen a very exceptional performance of the Aviation segment during the second quarter of 2023 compared to the first quarter. I think this is relating to the improvement of the utilization of aircraft, improvement of the MRO business, with a better performance and improvement as well in the flying hours, which has increased locally by 17%. And in the international market as well, we have seen a huge increase by around 76%. So I think that's a reason for the high performance. We expect this to continue during the next quarter. But again, it's always better to use Q1 as the reference performance. And then if there is anything exceptional that comes due to the increase in flying hours that will directly an impact on the net performance.

Next question is from [ Kamal Zidu ].

Good afternoon, and first of all, let me wish you a continuing success for your results. My question again pertains to the drilling sector of the company. And looking back at the dealing contracts that you had before, most of them were taken at a depressed price, and most of them are expiring. What is the outlook for the drilling contracts going forward? And what's the outlook for pricing? I know you mentioned market pricing, but can you be more specific on that one and be more specific also on the contracts going forward and whether these are going to be recurring? Or are these going to be just a onetime off? Thank you.

Yes. If you are looking at our fleet, we have disclosed in the past since these rigs are contracted, and we have earlier announced that the day rate was around an average from $75 to $85 per day. And as you just highlighted, normally, each contract will be expiring. But however, we are, I would say, securing the very high utilization rates even in the future. And the rates right now, which has been discussed with our clients are much more better than the, I would say, the current rate that you are having. And this you're going to see the reflection of the I would say, the new contracts sooner on our box.

I'll add on what Abdulla was saying. So in 2023, we have 2 rigs which are coming to an expiry, which are 2 offshore rigs. One of them, as we highlighted, has been extended and has been contracted. The second one will be due for extension by end of this year. And as we said, yes, we are looking to have the best rate available in the market. These are market rates. And as you mentioned before, the previous rate has been during a time where the oil price has been at the lowest. It has been during the time when we have corona, it has been during the time where the offer of billing rigs is much higher compared to the demand. Now I think economics has been changing, and we are trying to catch up with that, and we will try to get the best outcome for GDI and for GIS by securing first of all, longer-term contracts and then securing the best available market. And again, here, we are speaking about the catering market. We cannot benchmark with regional and international markets, but we will try to secure the best rate in the catering market.

This explains everything but just one more question, sir. My question is about the aviation sector. And it looks like you recorded most of the increase in profits that came from the aviation and from the insurance and the assurances. As far as the aviation, is this a onetime off? Or is this going to be recurring revenue for the company?

Aviation segment has been, I think, I would say, a cash cow for GIS during the past period. So from year-to-year, you can see the evolution of the revenue and of the net profits. It has been at the expansion level, and this is due to a very good management of the business. We are trying to increase the level of activities, flank hours has been increasing a lot. Economically, we are trying to diversify the revenue that we can generate out of Qatar. So at the moment, Qatar is providing around 47% of the total revenue, and the remaining is coming either from another 27% from international business and remaining from another segment where we are putting a lot of hope, which is the MRO business, which is generating a good revenue and good net profits. I think the business will try to continue to build on its success. Yes, we cannot take at the moment, Q2 as a reference for the next quarters. But again, even with taken Q1 as a reference, the company will be making very good results.

Well, wishing you a very continuing success. Thank you very much for your answers.

Next question is from [indiscernible].

This is [indiscernible]. First of all, I would like to express my congratulations on the performance and the restructuring of the loan. If you don't mind, I really appreciate briefing us on the effective interest rate on the restructured loan, how much the effective interest rate, is it fixed or floating? And if it's a fixed rate, what is your strategy if the prevailing interest rate in the market goes down? And my second question is regarding most of the improvement in the performance came from the aviation and the insurance. And I think you covered the aviation part by saying what happened in the second quarter, it's not [indiscernible] third and fourth quarter but what about the insurance? Is it the growth in the insurance income? Is it sustainable recurring?

Thank you so much, [ Kais. ] So I think we wanted to share the good news with the shareholders despite the legal documentation relating to one of the lenders is not yet completed. So at this stage of time, we cannot disclose more information about the structure. So the main, I will say, outputs of this restructure is we were able to extend the tenor of the loan to 25 years with a 35% balloon at the end of the term. This will give GDI additional time basically to have additional cash flows coming from the operations. Definitely, the interest rate will have a positive impact on the net profit. All of that cash flows will be used, especially for the repayment of debt. So 65% of the debt has to be repaid over the term of that contract. The first installment will be paid in 2026. And then we will have additional money left for the growth of the business, so as we would like to have a sustainable business for all the stakeholders, including the lenders. So our objective is basically to have this business generating cash flows and we'll be able to sustain its business in the future. We'll be able to buy new rigs replace some of the old rigs. And the older structure is all about this. So I think in the next coming quarters once documentation is completed with the lenders, we will be able to provide additional information. For your second question regarding the aviation and the insurance, I think what I'm saying that Q2 is not a reference, but we can see a good Q3 and Q4 for the Aviation business because the business is trying tremendously to extend the existing contracts to improve the operations over the region in Qatar or outside Qatar. And we have announced to the market a few months ago, that the aviation business have a contract for the purchase of 5 new aircraft was an option to add another 5. So we have the potential to grow, and we are growing internally and externally. And I think this will have a good impact on GIS financials. On the insurance side of business, the insurance side, we said it previously, during the last year, we communicated to the market that we lost 2 of the biggest contracts in the insurance segment. And our main reason for that was we would like to be more selective the business would like to select the insurance contracts where the loss ratio is lower where we were able to study and to generate a positive net profit rather than working with having a mass, I would say, revenue. So our objective is to be selective and yet to increase and to penetrate the market with better revenue, which we are doing today. We have been able to compensate the loss of those 2 contracts, but with a better, I would say, control on the loss ratios and with a better return on the revenue that we are getting from those markets.

Based on new financials, it mentioned that the previous loans, the interest rate on the previous loan was [indiscernible] months plus almost 200 pieces points. So for the new restructured loan, the interest rate, it will be close to these terms or we will see a big difference between the interest rate on the previous loan and the restructured loan? And it will be fixed or floating?

It's totally different type of contracts that we are making today with our lenders. So as I said, we will be able to provide more information once the documentation is completed.

And there will be saving. This is what we even published in our press release that in the second half, we would expect to see [indiscernible] compared to last year.

But excuse me, according to the financials, the company mentioned that there is no gain or loss from restructuring the loans. So shall I assume it will be close to the current rate.

Let me just give you some hint. In the financial statement, I think you are referring to the interest cost in 2023 compared to 2022. And we stated as well clearly that the 2023 finance cost is including around USD 6.2 million. So it's around QAR 20 million of unamortized finance cost, which are relating to the new structure. So that cost, it's a one-off cost, and it should not be I will say, calculated as part of the interest cost that you might be calculating.

Next question is from Lee Beswick of QNB.

How many rigs expire next year? How many rig contracts expire next year?

In 2023, we have 2 rigs, 1 rig expired in June, and that has been contracted and will be starting in end of August, beginning of September. And another rig is coming to expire in December 2023.

Sorry, no, I was asking about next year 2024.

So 2024, we have one offshore rig that end of 2024, and we have some of the onshore rigs as well there coming into expiry during next year.

Next question is from [ Wu Chao of QJC ].

I have 3 questions, please, first is on the status of the contracts on the lift boats, whether they are contracted? And if not, are there any scope of them going on contract in the near future? Second question is on the insurance segment. How much of the growth is driven by pricing and how much is driven by volume? Third question is on the Aviation segment. Could you share on the time line on the 5 new aircraft? Thank you.

Thank you for the question. I think regarding the boats. So we have one lift boat which has been expired. That has been contract again in South Arabia and it's starting during this quarter. The second boat has been completed its mission in Maldives. And now it's back to Qatar, and we are in the process of finding a new contract for this lift boat. That's in lift boat, for insurance segment so at this stage, we don't have that information on the split between the impact between the volumes and pricing. But if you allow us more time, maybe off-line, we can discuss this, and we can arrange a call to discuss these in details. For the Aviation segment, what was your question, sorry, again?

So I'm just wondering what is the time line on the new 5 new aircraft?

The 5 aircrafts will start. The first delivery is in end 2024 until end of 2026. And then we have the option to acquire another 5 aircraft, and this will be extended from 2027 to 2030. Thank you very much.

We don't have further questions. I will now turn the call back over to Bobby.

It's Bobby Sarkar. Maybe if I can jump in with one last question. You did talk about the fact that some of your JV rigs are getting better rates and they've been extended for a couple of years. Can you give us a sense of how many or what percentage of the 5 rigs were extended? And what kind of uplift can we see in the rates for the JVs?

Thank you, Bobby. 4 out of the 5 rigs will be extended with a period of 2 to 2.5 years or 2.3 years. The rate is improving. I think it's in line with the market in Qatar again. At the moment, we cannot disclose how much exactly would be the increase. So the increase would be effective at the expiry of its existing agreement, which is some of them will be due in 2023. And the remaining 3 rigs will be starting from 2023. I think the increase in the day rate is in line as well with the increase in the leasing cost that we will be having. However, the increase in pricing will be much higher compared to the increase that we will see in the leasing rate.

We have [ Nikhil ] from QFS. Please go ahead.

I think so you've been given quite detail in terms of your division performance. Just on your financial side, there has been some kind of an hyperinflation impact, which you have mentioned around QAR 40 million. I just wanted to understand this. I mean, given the fact that Turkey has been going down. And last year also, you had been hit regarding this. So how it has been positive this quarter?

Thank you so much for the question. I think you will see that, yes, we have around QAR 40 million of the impact of hyperinflation in our financial statements. This is mainly due as we explained before, Turkey is going into a recession. And during the starting from April 2022, it has been considered as an inflationary economy, and the IAS 29 is triggered from that specific date. And we had to calculate and to apply IAS 29 for the hyperinflation impact. So any nonmonetary item in the balance sheet, either asset or liability will have to be calculated based on the latest applicable index, CPI index. And based on the new calculation, the new assets and liability will need to be presented to reflect the purchasing power at the closing of the period. So since the nonmonetary assets are higher in terms of value compared to the liabilities, we will have a positive impact. And again, for the next quarter, we cannot predict. So this should be based on the balance of those items at the end of the period. So it could be positive, it could be negative based on the balance of those items.

We don't have further questions. I will now turn the call back over to Bobby.

If we are done with the questions, I guess we can end the call for today. I want to thank GIS management, Abdulla, Sami, Rashid and Sulaiti for taking the time to answer our questions and a good job on the quarter, and we will pick this up again next quarter. Thank you so much.