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

Hello, everyone, and welcome to the Gulf International Services' conference call. Please note that this call is being recorded. I'd now like to hand over to our moderator for today, Bobby Sarkar. Please, go ahead.

Thank you, operator. Hi, good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Gulf International Services' second quarter and first half 2024 results conference call. So on this call, from QatarEnergy's Privatized Companies Affairs Group, we have Sami Mathlouthi, who's the Assistant Manager in Financial Operations; Saoud Abdulghani, who's the Senior Financial Management Analyst, and Rashid Al-Mohannadi, who's the Head of IR and Communications. So as usual, we'll 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 representative 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. Now we can move to the call. On Wednesday, 14th of August, GIS has published its results for the 6-month period ended 30th of June 2024. 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 Mr. Sami Mathlouthi, Assistant Manager for Financial Operations within the Privatized Company Affairs Department, and I have Mr. Saoud Abdulghani, Senior Financial Management Analyst. We have structured our call as follows. At first, I'll provide you with a quick insight into GIS ownership structure, competitive advantages and governance structure by covering Slides 6 till 8, and Slide 29 and 30. Secondly, Sami will take you into GIS key financial and operational performance metrics. Later, Saoud will provide you with the segmental performance and review. 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 comprises of QatarEnergy with 10% stake being the parent shareholder, whereby the General Retirement Service (sic) [ Social ] Insurance Authority with 22% stake, is the largest shareholder. As detailed on Slide #5, QatarEnergy provides most of the head office functions through a service level agreement. The operation of GIS subsidiaries are independently managed by the respective Board of Directors, along with senior management team. The Board structure is detailed on Slide #7 of the IR deck. In terms of the competitive advantages, as detailed on Slide #8, all 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 service provider and the majority of shareholder for the offshore drilling services in Qatar. For the Aviation business, GIS is the sole provider for the helicopter services in Qatar, oil and gas services sector, being one of the largest operator in the MENA region. In terms of the Insurance, it's one of the leading company -- leading medical insurance provider in Qatar. For the catering, the merger of Amwaj and Shaqab has established a prominent local champion in catering. All of this is supported by experienced senior management leadership, having expertise in relevant business segment. In terms of the governance structure of GIS, you may refer to Slide #29 and 30 of the IR deck, which cover various aspects of GIS code of corporate governance in detail. I will now hand over to Sami.

Thank you, Rashid. We are delighted to announce that for the 6-month period ending 30th of June, 2024, the group reported revenues of QAR 2.1 billion, marking a 9% increase compared to the same period of last year. This growth was primarily driven by increased revenues across all segments, with the exception of catering, which contributed to an overall boost in group revenue. The growth was largely due to key revenue drivers across various segments, including improved day rates, higher asset utilization in the Drilling segment, increased flying hours in the Aviation segment, and enhanced premiums in the Insurance segment, supported by significant contract renewals. The Group achieved an EBITDA of QAR 613 million and a net profit of QAR 356 million during this period. The increase in group revenues, along with a 40% reduction in finance costs, primarily from the restructuring in the Drilling segment and the increased profits deposited from Amwaj following the merger, led to an overall rise in the Group net earnings. However, the Group direct costs also rose by 8%, mainly due to increased commercial activity. Moving to quarter-on-quarter comparison. Group revenue for second quarter of 2024 saw a 1% increase from the previous quarter, largely due to improved revenues from the Aviation and Drilling segments. The Aviation segment benefited from increased revenue generation in the MRO and international segments, while the Drilling segment saw high utilization due to increased business activities and the consolidated reporting of Gulfdrill following the transaction of Seadrill. Net profit for the second quarter of 2024 rose by 21% compared to the previous quarter. So this increase was primarily driven by improved bottom-line profitability in the Drilling and Insurance segments due to increased revenue and lower net claims, respectively. The Group reported total assets of QAR 11.6 billion as of 30th of June, 2024 was a 13% increase bolstered by the acquisition of rigs that were previously leased by Gulfdrill. In addition, the cash and short-term investments reached QAR 1.1 billion at the end of this period. I will now hand over to Saoud to cover the segmental review.

Thank you, Sami. Let's proceed with the segmental revenue, starting with the Drilling segment. As shown on Slide #17, the Drilling segment reported a revenue of QAR 725 million for the 6 months ended 30 June, 2024, a 9% increase compared to the first half of 2023. This revenue growth stems from enhanced earnings from offshore rigs, lift boat and barge operations, which was driven by improved day rates for certain contracts and higher asset utilization. Overall, the increase in top line performance was partially offset by a decrease in revenue from onshore operation due to an onshore rigs going off contract in Q2 2024. The segment saw significant turnaround recording a net profit of QAR 90 million for the 6-month period ended 30 June, 2024, in contrast to a net loss of QAR 22 million for the same period in the previous year. This substantial improvement in bottom-line profitability is mainly due to the growth in segment top line and a 43% reduction on finance costs, and supported by a onetime income of QAR 14 million from the transaction with Seadrill. Quarter-over-quarter, the company reported a net profit of QAR 72 million, up from QAR 18 million in the present quarter. The improvement this quarter was primarily due to an increase in revenue driven by higher utilization of lift boat, which was fully operational during the second quarter, and the consolidated reporting of Gulfdrill following acquisition. Additionally, the segment reported a onetime income from the transaction with Seadrill. Now we can proceed with the Aviation segment review. As detailed on Slide #20, the Aviation segment reported total revenue of QAR 571 million for the 6-month period ended 30 June, 2024, marking a 15% increase compared to the same period of last year. The growth in revenue was primarily attributed to the uptick in flying activities across both domestic and international operations. Total flying hours saw a year-on-year increase of 6% with domestic flying hours up by 5% and international flying hours by 7%. The domestic segment gained from the reallocation of aircraft from international to domestic operations, enhancing the fixed revenue component. The international activity led mainly by the Turkish subsidiary saw benefits from additional flying hours and expanded fleet. Segmental net profit stood at QAR 188 million, marking an 18% decrease from the previous year. This decline was largely due to the prior year positive inflationary impact related to IAS 29 adjustment of QAR 40 million, in contrast to this year's negative impact of QAR 1 million. Additionally, increased operational costs, especially for scheduled aircraft maintenance were somewhat mitigated by a higher profit share from operation in Morocco. Revenue for the second quarter compared to the first quarter rose by 12%, driven by additional revenue from international and MRO segments. However, the second quarter saw a 12% drop in profitability compared to the previous quarter due to greater net monetary losses recorded in the current quarter. This was as a result of the accounting effects of hyperinflation in Turkey and a larger revaluation loss on foreign currency exchange. Moreover, increased operational cost for scheduled aircraft maintenance further affected this quarter profitability compared to the previous quarter. [ Let's ] review the Insurance segment. As outlined on Slide #23, the Insurance segment revenue for the 6-month period ended 30 June, 2024 saw 11% increase from the first half of 2023, amounting to QAR 607 million. This rise in revenue primarily stemmed from the renewal of significant contracts within the energy and medical sector, along with the addition of new contracts from the general business line. Net earnings for the segment showed a substantial increase compared to the same period in the previous year, reaching QAR 77 million. The enhancement in bottom-line profitability was largely due to increased revenue and the recovery of the segment's investment portfolio. Notably, investment income for the first half of 2024 rose by QAR 8 million, a 36% increase from the first half of 2023. This surge was mainly attributed to the rebound of unrealized losses and gains recorded on the revaluation of held-for-trading investment securities. Furthermore, a rise in finance income from fixed deposits contributed to the segment's high profitability for the first half of 2024, compared to the first half of 2023. On a quarter-over-quarter basis, the segment's revenue for the second quarter of 2024 decreased by 8% due to the expiration of certain insurance policies. Nonetheless, profitability for the segment in the second quarter rose by 47%, primarily due to the lower net claims reported compared to the previous quarter. Additionally, re-insurance costs were lower in comparison to the previous quarter. Now we can conclude the segmental revenue in the Catering segment. The Catering segment reported a revenue of QAR 203 million, a decrease from QAR 216 million compared to the previous year. However, the segment's net profit was QAR 11 million, marking a significant increase from the same period last year, primarily due to the merger of Shaqab and Atyab. On a quarter-on-quarter basis, the segment's revenue for Q2 fell by 10% compared to the previous quarter. This decline was largely due to the completion of contracts related to the Asian cup and shutdown services in the catering and accommodation segment. Consequently, this decrease in revenue resulted in a lower profitability for Q2 2024. I'll now hand over to Rashid.

Thank you, Saoud. That concludes our presentation as a management and we will now open the floor for the Q&A.

[Operator Instructions] Our first question comes from [ Ashish Agrawal ] from [ TFI ].

My first question is -- my understanding is that on the 2 new facilities, you renegotiated with banks in March 2023, they are at fixed rate, and they won't have benefits from possible rate reductions. So can you please confirm my understanding? That's my first question. My second question is based on the first half financials of United Helicharters that you have disclosed. Again, it won't have any material increase in margins. So can you please confirm that? My third question is, I believe you must have had consultations with your tax adviser on the potential impact from the implementation of global minimum tax. So can you please offer us an update on what's the potential impact on GISS as of that -- as of the current assessment? These are my 3 questions.

Okay. Thank you, Ashish. So for the 2 new facilities -- I will start with the first question. So the first new facilities, which are relating to the restructure, we believe that we were able to get an extremely good deal with the local banks. And even if the deal is based on fixed rate, you will see that there is almost 43% of saving that we have made compared to last year. So whatever, there will be a decrease in the market and we started to see a decrease, so decrease will not be in one way. We have seen how the increase happened. I think, over 3 to 4 years, we have seen this almost 2% to 3% increase. But we don't believe that we would be in a noncompetitive situation if the interest rate would be decreasing in the next period. So, the deal is still beneficial for GDI and for GIS. It will add value. It started to add value, actually, in the results of GIS during this first half and we'll see. And, again, this is a commercial deal, and it can be discussed at any time if we see that this is not beneficial for us in the next few years. So we will be able to re-discuss with the lenders maybe for another deal. That's for the first question. UHPL, it has not been a material asset in the investments of GIS, as you can see. So during the last few years, so the -- basically, the contribution of this investment is very minimal. I think, the deal was to just sell this company for around USD 200,000. And there is a small, I think, impact in the P&L of the company. And since the last 2 years, there is no activity in UHPL. We don't have any aircrafts there, so we have moved aircraft since the last 2 years, and activity is very minimal, and the impact is almost nil. Tax. So if you are referring to Pillar Two regulations, so the European OECD, as highlighted before so the companies -- the listed companies as per the tax rules -- and we are following the tax laws. So the listed companies are exempt from tax. However, the underlying companies like GDI, Gulf Helicopters and the companies underneath GIS, they are fully taxable. And they are paying their tax. Instead of paying these taxes to the GTA, they are paying this contribution of tax to the company, which is not taxable, so basically to benefit from this exemption from the privatized companies. So normally, the Pillar Two impact, it's basically at the -- it's impacting the beneficial owner of these companies, which is the holding company and then owned by GIS and which is studying the impact of Pillar Two. Probably, they will take some decision in this regard, but we don't see this impacting GIS at this stage.

Our next question comes from Nikhil Phutane from [ CBFS ]

I just got a few questions in terms of your division-wise performance. One, I mean, you mentioned about one-off income booked under your Drilling division for second quarter after taking over from Seadrill. So I wanted to know what has been the overall amount for that. Second, under your Aviation segment, we are just seeing that there is a run rate of, say, around QAR 40 million, which we saw per quarter under MRO and we are -- also, we have mentioned that operational costs, scheduled maintenance cost increased. So just wanted to know whether that also impacted -- I mean, MRO revenues did increase, no doubt. But that also impacted your overall MRO segment-wise contribution performance? Third, I mean, in terms of your Catering, I know you mentioned about Asian contract coming to the close and resulting in decrease and other things. So I wanted to -- what we are seeing is actually the revenue did decrease, but the change in profit has been quite high. So suggesting that margins associated with Asian cup and your other closing has been -- is quite high. So I wanted to know, I mean, how we will be seeing it going forward in the second half? I mean can we maintain the same net margins what we saw in second quarter?

Thank you, Nikhil. Very good questions. I will start with the first question regarding the one-off income. So that's relating to the transaction with Seadrill. It's -- the impact is QAR 14 million, which is divided under 2 components. So first component is relating to the de-recognition of the equity invested -- investments, which is Gulfdrill. So as you know, on 24th of June, so the transaction with Seadrill has been completed, and starting from that date, so Gulfdrill will be fully consolidated since it will be owned 100% by GDI. So up to that date, so the -- this was a joint venture. And then it was recognized under equity investment. So on the 24th, basically, we'll need to de-recognize that investment on the fair value, which is around QAR 50 million and you deduct QAR 42 million of the residual investment in the equity, which is around QAR 42 million, that's QAR 8 million. So that's one component of the -- that exceptional income. And the second part, it's relating to the recognition of the lease liabilities. So basically, you have one -- those 3 assets that we have acquired. Previously, they were leased from Seadrill. And you will register -- when you consolidate, you will register right-of-use assets. So from that right-of-use assets, once you de-recognize those leased assets, basically, you will need to offset the lease liability and that impacted by positive impact of around QAR 6.7 million. So in total, there is QAR 14 million of exceptional income that is registered in GDI. That's the first part of the question. MRO. So there is a small decline in terms of revenue, a small decline in terms of net profit. And -- but the contribution, it's still at the high level. The reason for the decline in terms of this revenue, it's because one of the contracts was completed, which is relating to the Kuwait contract, and then that has impacted slightly the revenue on the net asset and the net return. But in terms of net contribution, it's still doing a good contribution to the profits of Gulf Helicopter, and it's still a potential segment that we will try to develop in the future. It has been -- I think we had a good trend in the last few years, and the increase in terms of profits and in terms of net profit has been good so far. Catering segment, for your last question. Catering, I think there is some kind of technical, I think, minor aspects that you will need to consider. So for the first 6 months of 2024, so we are taking the proportionate method, which is based on the shareholding of GIS in the Catering segment, which is 30%. The comparative figures are based on 100% revenues of Amwaj only. And the reason for that, so technically, you cannot consolidate Amwaj up to the first meeting -- of the Board meeting of Amwaj, of the new holding company, which was on 16th of October 2023. So up to 16th of October 2023, on the accounting system, we have only Amwaj as a stand-alone. Starting from that date, so it's -- we will take the -- our share of the consolidated revenues and our share of the consolidated net profit, which are amazing if we compare it to the stand-alone of last year and of the previous years. I think we see the trend, it's still going up. The investment is still positive from the point of view of GIS. And we still -- we can consider, I think, Q3 probably as maybe to be similar to second quarter of 2024.

One more question actually regarding your -- one of the GDI, which became operational during second quarter. Can we know the reason behind it? And when exactly it happened? I mean, did you book something part of it in second quarter?

Yes. I think it happened in second quarter, in the beginning of April. And the main reason, it's basically contracted reason. So some of these onshore rigs, so they have contracts ending in 2024, and this has been announced. We are in discussion with the customers to renew the specific onshore rig, and it's still under discussion at the moment. So there is nothing specific to the rig in itself. But it's -- as you know, it's contracted arrangement. And normally, after the expiry of the contract, what we do normally, it's -- we start maintaining these kind of rigs until we agree a new contract with a new customer.

So in that case, I mean, given the fact that it has been the big thing, it looks like your rates to a certain extent has been better off in second quarter for your onshore businesses as compared to first quarter. Is it right?

Yes, that's -- yes, on the onshore side, no, because in the onshore side, second quarter was slightly less compared to the first quarter. But if you compare it to last year, yes, you are correct. Because last year have seen GDI-4 was -- in most of Q1 was not operational, and then it started operating only on the last month of the second quarter of 2024 -- 2023.

And just for a general understanding, since the offshore business, Drilling, we have got 10 rigs out of which 5 is under NFE project, right?

Yes. The offshore rigs, so we have 12 rigs in total. So 10, which are under the full ownership of GIS directly or indirectly. And then we have 2 rigs, which are leased, and they are under the ownership of external parties.

Next question comes from Seki Mutukwa from Ashmore.

2 questions, please, relating to the offshore rigs. Can I ask sort of year-to-date what you've seen in general in the region in terms of day rates on the offshore side? And then the second question is just to sort of remind us of the renewal profile for those offshore rigs. In particular, sort of when you could potentially be pushing through new day rates or needing new contracts?

Thank you. So for the first question, I think, in terms of day rates, what we see, I think, in regional side, so we cannot compare with the international side. But on the regional side, I think we are at par compared to what we see. So average rates are between USD 70 up to maybe USD 115 per day. And this is depending on the specification of the rig, depending on the customer, depending on the term of the contract, and depending on the components of the contract as well. Because in some cases, the daily rate is sometimes misleading because some of the components are not included there, like mobilization or catering revenues, and some of the other contracts or some other customer, they include everything as part of the day rate. So I think we are at par with what we see today. Maybe there is some potential for some improvement in the future, depending on the oil prices and depending on the negotiation that we have with our counterparties. But we will try to make sure that whenever there is contract which is expiring, we will try to make sure that the rate is in line with the market, and we'll try to get some rates that at least compensate the cost of these rigs. For your second question, the renewal profile, we have one rig -- for the offshore, one rig expiring in 2024, 3 rigs expiring in 2025, 2 rigs in 2026, and one rig in 2027. That's for the offshore, which are under the direct ownership of GDI for the joint venture, I mean, for the ex joint venture, so now it's Gulfdrill. So we have 2 rigs expiring in 2025. And then all the other rigs that has been transferred to under Gulf jack-up, it will be expiring in 2026. I think this is for the offshore side.

Our next question comes from Ashish Agrawal from PFI.

So there is also this insurance claim of QAR 6 million in other income. I wanted to know of which segment it pertains to. And also if you can let me know the aircraft additions which is going to happen in the second half, in which quarter it is going to happen? And if it's the fourth quarter, possibly which month it's expected in. And my final question is, can you talk about the nature of the miscellaneous income in your other income and to which business segment it pertains to? That's all from my side.

Okay. Thank you. So we'll start with the first question. I think it's relating to the insurance claim. It's relating to the helicopter business. So as you know, all of the assets that we have are insured, so either in the Drilling segment or in the helicopter business, and they are claimed against anything that could happen to these assets. So the QAR 6 million are relating to one of the aircraft to GDI. For -- if there is any fault in any of the assets, so basically, we'll make the claim for the cost of the repair, and that's part of that claim. So that's for the insurance. For your next question, regarding the helicopter business. So as we announced before, so we are planning to acquire in total 5 helicopters with the option to acquire an additional 5. So these 5 will be as we announced, so 2 will be dispatched during the second half of 2024. Most probably, it will be during Q4 of 2024. And then remaining will be during the next year, which is the year 2025. And then we'll have the option to execute the purchase of the next 5 helicopters or not. For the other income side, I think I can refer you to the Note #21. So that's including everything relating classified as other income, which are not directly relating to the activity of the group. So that's including the -- we have one compound, so -- and we are leasing some of these villas. It's 48 villas. So that income, it's going directly to that part. So in addition to that, so we have some income relating to the tax that we received from the group companies. That's included as well. And then any other income relating to the exchange rates or relating to some additional activities that we make are included as part of that additional income.

Just a follow-up there. So the aircraft additions which is going to happen in the fourth quarter, can you comment on whether it will be in the first half of the fourth quarter or the second half of the fourth quarter?

Which one? The one in 2024 or the '25 one?

2024.

2024, I already replied. So I said it will be during the Q4 2024.

Like by the first half of 4Q, like towards the end?

Yes, towards the end. Yes, towards the end of the year.

[Operator Instructions] Our next question comes from Mark Krombas from TFI.

I noticed that the claims between first in -- Insurance business between the first quarter and the second quarter have been quite volatile or quite a big difference. Could you talk about both the general and the medical? And how much visibility you have in those segments for this year pretty much? And whether or not the first half would be a good indication for the second half?

Thank you, Mark. So I will start with the second part of the question. Yes, we can't say. I think we are seeing a good trend. So in the first half of 2024, we are -- which is, if you can maybe refer to the second half of 2023, we are seeing this trend. And we are hoping that this trend will continue for the next half as well, as long as some of the other KPIs will remain under control. For the first part of the question, which is relating to the claims. So claims, yes, it has been reduced by around 42% compared to the first quarter from QAR 113 million to QAR 66 million. So the main reason for that -- and this is a trend as well that we are seeing. In most of the cases, Q1, we see that the claims will increase, because it's relating to the -- most of the people. When they will travel at the end of the year, some of them, they will have some medical interventions. So basically, when they collect their claims, so they will submit their claims in the first quarter, and the level of the claims will be much, much higher compared to all the other quarters where we don't see that kind of trend. So I think this is specific to timing of the claims, and it's specific to Q1 2024.

And in the general insurance business, which kind of exposures is it, is it fire, is it real estate, is it like property insurance? And how much of the risk is reinsured, i.e., what's the worst that could happen if things don't go well, sort of thing?

I think we have a very good insurance and -- very good reinsurance, sorry. So the risk that we insure, it's relating mainly in the energy sector, so that's risk of fires and risk of -- liability risk in the -- in these buildings. So we don't do real estate. We have very minimal exposure to real estate. So -- and the highest that could happen, so it's always capital specific for each contract, so we have a specific level that we can afford. So anything above that is reinsured. So basically, we have good reinsurance, and there is a very minimal risk in terms of the exposure [indiscernible].

As of right now, we don't have any pending questions. I'd now like to hand back over to the moderator, Bobby Sarkar, for final remarks.

Okay. Thank you. If there are no further questions, we can end the call for today. I want to thank Sami, Rashid, and Saoud for taking the time to answer our questions. And we will pick this up next quarter. Thanks, everyone.

Thank you. Thank you, everyone.

Thank you.

Thank you for attending today's call. You may now disconnect. Have a wonderful day.