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

Hello, and welcome to Gulf International Conference Call. Please note that this call is being recorded. [Operator Instructions] I would like to hand over the meeting to our moderator, Bobby Sarkar. Bobby, your line is now open.

Thank you, Mark. Hi, hello, good afternoon everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Gulf International Services Third Quarter and 9 Months 2024 Results Conference Call. So on this call from QatarEnergy's Privatized Companies Affairs Group, we have Sami Mathlouthi, who is the Assistant Manager in Financial Operations. We have Saoud Abdulghani, who's the Senior Financial Management Analyst; and we have Rashid Al-Mohannadi, who is the Head of IR and Communications. So we will conduct this conference with 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 GIS investors and no media representatives should be attending this call. Moreover, please note that this call is subject to GIS's disclaimer statement as detailed on Slide #2 of the IR deck. Moving on to the call. On Wednesday, 30th of October 2024, GIS published its results for the 9-month period ended on 30th of September 2024. 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 Mr. Sami Mathlouthi, Assistant Manager for Financial Operation in the Privatized Companies Affairs department; and Mr. Saoud Abdulghani, Senior Financial Management Analyst. We have structured our call as follows. First, I'll provide you with a quick insight on GIS ownership structure and competitive advantages and overall governance structure by covering Slides 6 till 8 and Slide 29 till [Audio Gap]. Secondly, Sami will take you into GIS key financial and operational performance metrics. Later, Saoud will provide you with 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 companies compromises of QatarEnergy with 10% stake being the parent shareholder, whereas GRSIA 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. 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 deck. In terms of the competitive advantages, as detailed on Slide #8, all of the GIS group companies are strategically placed, having a significant market share in their respective business sectors within Qatar. For example, Drilling business is the only Qatari onshore drilling service provider and the majority of the market share in the offshore drilling services in Qatar. Similarly, the Aviation business of GIS is sole provider of helicopter services in Qatar oil and gas service sector and being one of the largest operator in the MENA region. In terms of the Insurance business, it is one of the leading medical insurance providers in Qatar. For the Catering, the merger of Amwaj, Atyab has established a predominant local champion in catering services. All of this is supported by an experienced senior leadership having an expertise in their relevant business segments. In terms of the governance structures 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 Sami.

Thank you, Rashid. We are pleased to announce that for the 9-months period ending 30th of September 2024, the group reported revenues of QAR 3.4 billion, marking 14% increase compared to QAR 2.9 billion for the same period of last year. This growth was primarily driven by increased revenues across the Aviation, Drilling and Insurance segments. The group achieved an outstanding EBITDA of QAR 1 billion and a net profit of QAR 573 million during this period, representing a 38% increase compared to QAR 415 million for the same period last year. The increase in group revenues along with a reduction in finance costs, primarily from debt restructuring in the Drilling segment, led to an overall rise in the group net profits. The group earnings per share for this period stood at AED 308 compared to AED 223 for the same period of last year. Moving into the quarter-over-quarter comparison. The group revenue for the third quarter of 2024 saw an increase from QAR 1.1 billion in second quarter to QAR 1.25 billion in the third quarter, with an 18% increase. This growth was largely due to improved revenues from the Drilling and Insurance segments. Net profits for the third quarter also increased from QAR 195 million in second quarter 2024 to QAR 216 million in the third quarter, with an increase of 11%. This improvement was primarily driven by enhanced bottom line profitability in the Drilling segment due to higher revenues. The group maintained robust total assets of QAR 11.9 billion as of 30th of September 2024. The group total debt increased to QAR 5.5 billion as most of the Seadrill transaction was financed through additional loans. Now I will hand over to Saoud to cover the segmental review.

Thank you, Sami. Let's proceed with the segmental revenue -- review, beginning with the Drilling segment. Drilling segment. The Drilling Segment reported a significant revenue growth for the 9 months ended 30 September 2024, reaching QAR 1.3 billion compared to QAR 978 million for the same period of last year, a 28% increase. This increase was mainly due to improved performance in the offshore rigs, lift boat and barge operations, supported by better day rates and higher asset utilization. Additionally, the recent acquisition of the 3 jack-up rigs positively impacted revenue growth as it allowed for the full consolidation of Gulf Drill and Gulf Jack-Up revenues. The segment achieved a remarkable turnaround, reporting a net profit of QAR 179 million for the 9-month period ending 30 September 2024, compared to a net loss of QAR 23 million for the same period last year. This substantial improvement in bottom line profitability is primarily driven by the growth in segment top line, reduced finance costs and one-off income from the transaction with Seadrill. Quarter-on-quarter, the segment reported a growth in net profit from QAR 72 million in Q2 2024 to QAR 90 million in Q3 2024, a 25% increase. The improvement is primarily due to an increase in revenue, which resulted from a full quarter of consolidated reporting for Gulf Drill and Gulf Jack-Up following their acquisition. This contrasts with the previous quarter, where only a few days were consolidated. Moving to the Aviation segment. The Aviation segment reported an increase in revenue for the 9-month period ended 30th September 2024 reaching QAR 863 million compared to QAR 799 million for the same period last year, a 8% increase. This growth was primarily due to increased flying hours on both domestic and international segments. The domestic segment also benefited from the redeployment of aircraft from international segment, which boosted fixed revenues. Meanwhile, international operations, particularly those driven by the Turkish subsidiary, witnessed a growth due to increased flying hours and an expanded fleet size. The segment's net profit declined to QAR 271 million compared to QAR 340 million for the same period of last year, a 20% decrease. This was primarily due to higher operational costs largely associated to the scheduled maintenance of certain aircrafts. Additionally, there was a lower inflationary FX gain recorded as part of IAS 29 adjustments compared to the previous year. Further contributing to the reduction in profit were lower finance income due to decreased deposit rates and higher losses from foreign currency revaluation. However, this decline in net profit was partially offset by an increase in share of profit from the operations in Morocco. The segment's revenue for Q3 2024 versus Q2 2024 decreased from QAR 301 million to QAR 293 million, a 3% decline due to lower revenue reported from the MRO segment, which was partially offset by improved revenue from international operations due to higher flying hours. Q3 profitability declined versus the previous quarter was offset by higher net monetary gain recorded in the current quarter as compared to the previous quarter, which arises from the accounting impact of hyperinflation in Turkey. Now we can move to the Insurance segment. The Insurance segment reported an increase in revenue for the 9-month period ended 30 September 2024, reaching QAR 939 million compared to QAR 855 million for the same period last year, a 10% increase. This upsurge in revenue was primarily attributed to the acquisition of new contracts in the medical line of business and the expansion of premiums in the general line of business. The net earnings of the segment demonstrated significant growth, reaching QAR 104 million compared to QAR 83 million for the same period last year, a 25% increase. This enhancement in bottom line profitability can be primarily attributed to the augmented revenue stream, complemented by the robust recovery of the segment's investment portfolio. The increase in the investment income can be predominantly attributed to the recovery of unrealized losses and gains recorded in the revaluation of held-for-trading investment securities, in addition to higher finance income derived from fixed deposits. On a quarter-on-quarter basis, the segment revenue for Q3 2024 increased from QAR 292 million in Q2 2024 to QAR 332 million in Q3 2024, a 14% rise. However, segmental profitability for the third quarter declined from QAR 46 million in Q2 '24 to QAR 27 million in Q3 2024, a 41% decrease, mainly due to surge in net claims reported and higher reinsurance costs, which was partially offset by higher investment income. We can conclude our segmental review with the Catering segment. The Catering segment reported a share of revenue of QAR 301 million for the 9-months period ended 30th September 2024. The segment experienced a significant increase in net profit, reaching QAR 17 million compared to QAR 2 million for the same period last year, a 717% increase. This increase was primarily driven by the impact of the recent merger with Shaqab and Atyab, which enhanced the segment's profitability despite the decline in revenue. Quarter-on-quarter, the segment share of revenue for Q3 '24 moderately increased from QAR 96 million to QAR 98 million in the third quarter, a 2% rise. However, profitability increase was mainly due to non-accounting of income tax during the current quarter. I will now hand over to Rashid.

Thank you for your attention. I think we can now open the floor for the Q&A.

[Operator Instructions] And your first question comes from the line of [ Mark Columbus ] with [ DFI ].

I have 2 questions. The first is, under OECD tax rules or implications, which are coming in potentially next year, I wondered if QatarEnergy has nominated GIS as one of the companies that it would consider under its umbrella. That's my first question. And therefore, obviously, the tax will be payable at the QE level. My second question relates to the carve-out or spin-off of your Insurance business. If you plan to retain control and indeed, if indeed, you plan a carve-out or a spin-off of the business, what's -- is there any more information you can give us on that?

We'll start with the tax question regarding the OECD and the Pillar 2 implementations. So we are not part of QatarEnergy, let's say, environment when it comes to the application of the OECD because one of the 2 conditions that have to be applied is that there is some kind of control or majority at the level of the subsidiary. And QatarEnergy is holding only 10% in GIS. And therefore, consolidation of this tax matter will be at GIS level. And GIS normally is under the framework of the OECD. However, there are some exceptions that we are analyzing today where the tax could be reduced to an effective tax rate below the 15% when the company have some higher fixed assets, which is the case for GDI, for example, and for Gulf Helicopters. And these like benefits will have, let's say, the advantage of reducing the effective tax from 15% to below tax that will be at the level of GIS. So at the moment, as you know, there is an MOU in place where most of the tax is -- the companies themselves are taxed, but the tax is paid to the GIS Group and then the Ministry of Finance is compensating the difference of tax to the GTA. So we are still studying the impact of this OECD rules, and we will give more updates at the year-end. That's for the first question. Regarding Al Koot, so we are still again at the initial stages. So the Board have announced the listing part of Al Koot. So a decision has not yet finalized. We are still working with our consultants to determine the level and the structure of the transactions, and we will provide more updates in the next few months.

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

Well, my question is pertaining to your Drilling segment. You did mention last time in terms of your contract for one of the offshore -- onshore rig getting expired in second quarter. And so I wanted to know whether it got renewed in third quarter. Also, 3 more rigs are supposed, I believe, to be getting offline in the end by end of 2024. So can we know the status of that during the current quarter, expected renewal and all the things? Also in 2025, are you looking at any new terms in terms of contract expiry and renewal?

That rig -- you are, I think, referring to Rig 6, GDI-6 -- GDI-5, sorry. So GDI-5 is not yet contracted. We are still in discussion with the customers for a potential renewal for that rig. So all the rigs at the moment are contracted, except GDI-5. Some of the rigs, we are almost in the final stages of concluding new contracts for them and with much longer period. I think the -- our strategy, as we have announced in the past, so it's to secure much longer tenures with better rates. I think in the next maybe quarter, we'll be able to announce the renewal of some of these rigs and the conclusion of our commercial discussion with our customers for much longer tenures and better rates.

So as of now only 1 rig -- GDI-5 is not contracted. That's what you have mentioned, right?

That's correct.

Yes. Okay. Regarding your -- in terms of the new overtaking of your Seadrill business, I wanted to understand in terms of how the accounting policy has been made. I mean, right from revenue to the bottom line in terms of -- because we're seeing depreciation, interest charges also getting increased. So I wanted to understand that. And what -- if possible, you can tell us the net effect which has happened on the profit, say, in third quarter because of that consolidation?

Yes. I think from accounting point of view, you need to basically to consider 2 different kind of accounting. So up to 24th of June 2024, we have been booking all the entries relating to Gulf Drill as equity accounting. So while we have only -- well, we are only recording our share of profit or loss in the joint venture. So up to 24th of June, so we have 50-50 between us and Seadrill in the joint venture. So post the acquisition and post that date, post 24th of June, so we are fully consolidating all the costs and revenue of Gulf Drill on a line-by-line basis. So which means that we are taking -- 100% of the revenues in Gulf Drill will be consolidated in the revenue of GDI, okay? The same thing for the new entity which has been created, which is holding the 3 offshore rigs, which is Gulf Jack-Up. So we consolidate the revenues of Gulf Jack-Up. We consolidate the revenues and the cost of GDI. And then there will be some kind of elimination for intercompany transactions. If there is any like invoicing between the companies inside the same group, this will be deducted at the consolidation level. So impact will be seen, I think, if you compare the revenue of this year compared to last year, and the same thing in terms of net profit.

Okay. Fine. I mean -- okay. Coming to your Aviation business, you did mention 2 aircraft could be added up by the end of this current quarter. Are they supposed to be replaced by the old ones, suppose I'm correct, I believe. And of course, you also mentioned, I think, some new ones which are you planning in 2025. So I wanted to understand that. When will that be added? I believe, again, in the first quarter, I suppose, I recollect. So can you just give us an idea on that?

I think for -- we have already disclosed that and we announced during the last quarter that we are planning 3 aircraft to be delivered during Q4 2024. So one of the aircraft is almost completed. So inspection is done, and we are getting all the required documentation for that. So in the next coming 2 to 3 days, it will be shipped to Qatar. And the remaining second and third aircrafts will be delivered between end of November and beginning of December 2024. So we are just -- they are ready. We are just completing the documentation for those and authorization for those aircrafts. And this will be delivered as per the plan, which is Q4 2024. For the remaining aircraft, in total, there is another 5 aircraft planned for the first phase. And then there will be a second phase, which is optional. This will be decided by the Board of the group companies whether we would like to use that kind of option. But this will be post 2025. So next year, there will be -- 2 additional aircrafts will be delivered. This normally will be in the first half of 2025.

Okay. And are they going to be replacing your existing ones?

Well, these are the beginning. So there will be no replacement. So basically, they will replace the aircrafts in operation in Qatar with the existing contracts. But then the other aircrafts that will be out of that contract will be used in the international locations. So basically, when you look at the portfolio, this will be an addition to the total portfolio.

So if I'm correct -- I mean, how much could be the overall size, I mean, international fleet? How much -- say, post first half of 2025 where exactly...

Yes. At the moment, we have 62 aircrafts. So out of that, we have 11 to 12 aircraft which are preserved. And remaining, they are -- we have around 15 plus 3 in Doha. And remaining, they are spread over different locations. So we have in Morocco, we have in Libya, we have in Angola. And depending on the demand, depending maybe on the market, so any aircraft will be deployed in those locations, and in Turkey as well.

Okay. And one last final one, I mean, again, Aviation. Your MRO business as such is seeing volatility. I mean, you did mention it depends upon the -- when it comes for -- including, your own fleet. So I wanted to understand, I mean, we could be seeing this continuous kind of volatility in your MRO business going forward also?

Yes. MRO business is volatile for 2 reasons. So the first reason is depending on the requirement of the customers. So you have 2 components. So MRO business, you will provide services for your customers where you will provide the manpower. And this will be most -- in most of the cases, it's a fixed revenue that you will generate. And then the second part is the spare parts. So basically, you provide some spare parts for your customers. And this is depending on the maintenance of the aircraft for the customers, depending on the planning of maintenance for these aircrafts, which is variable in nature. So you cannot predict with accuracy how much exactly you will provide spare parts for your customer. And that's why we have this kind of volatility. In some quarters, it's high; in other quarters, it's low. But it's not predictable in nature. And plus in this kind of, let's say, business, you are not making losses. So you are providing service where that service it's -- in most of the cases, it's profitable for the business and it will add value to the business. So for us, the MRO business, so it's an additional segment where we are leveraging our expertise and our know-how to generate additional business to the main driver of the business, which is providing helicopter services.

[Operator Instructions] Your next question comes from the line of Ayushi Saraswat with RocSearch.

My first question is on the Aviation sector. I'm curious to understand how much did international segment contribute to the total flying hours in 3Q? And also, if you could give a breakdown on how many aircraft were deployed for the international segment and how many for domestic? That's one. My second question is on Insurance. The gross level was hit highly in this quarter because of the higher insurance service expense as well as reinsurance contract expense. So I wanted to understand the reason behind it and what should we expect in 4Q?

So for the first question, I think in terms of the level of activities between international and between local, so local is contributing by around 47% from the total revenue, and the remaining, it's split between international and plus other activities that we provide. So that's the split that we have. In terms of the Insurance, what was the question again? If you can repeat the question?

The question was mainly around that gross profit was deeply impacted in this quarter around QAR 3.9 billion because of higher service expense and reinsurance contract expense. So what was the reason behind it? Like why was it so high as a share of revenue in this quarter compared to previous quarters?

Yes. For the Insurance, I think the main impact that we have seen this time is relating to the claims. And the claims, again -- so since the introduction of IFRS 17, so the claims is not only relating to the incurred claims during the specific quarter, but you have to take into consideration as well the expected future value of the claims based on the existing contracts that you have. And then you will have some fluctuation coming from quarter-to-quarter. So last quarter, it has seen an increase in revenue and that increase in revenue is coming from new contracts. So any additional new contracts, you will have to calculate the expected losses that you will have over the length of that specific contract, and then you will calculate the actual value of that expected losses. And hence, you will have some additional costs for this quarter. That's the main contributor for the increase in cost in the Insurance segment.

Okay. Understood. All right. Again, on the Aviation sector, I was curious to know if you could provide a breakdown on the flying hours between international and domestic.

You check that for flying hours I provided you with a breakdown in terms of revenue, which is 47%. So I think in terms of flying hours, this is very close as well to that kind of split. But we'll provide you exactly with the percentage.

Your next question comes from the line of Ramzi Sidani with HSBC.

I have just a couple of questions on the Drilling segment. So the consolidation of Seadrill has -- comes with higher day rates and profitability. If you can just comment on the day rates and profitability of these 3 rigs. And then if you can also just remind us where offshore day rates are today and your expectations for next year ex Seadrill?

I think, yes -- so the consolidation is not the consolidation of Seadrill. It's the consolidation of Gulf Drill and Gulf Jack-Up. So basically, we consolidate now all the 5 rigs based on 2 companies. So we have in Gulf Drill 2 rigs, and in Gulf Jack-Up, it's 3 rigs. So all the activities of these 3 rigs are consolidated. So yes, as you mentioned, so this is bringing additional revenue. Revenue is higher compared to other offshore rigs for 2 reasons. So the specification of all the 5 rigs which are under the previous JV and the new created company, they are much higher compared to other rigs, which is depending on the water depth, depending on the drilling depth and depending on the technical specification of the rigs in themselves. So these rigs are on much higher daily rates compared to the other ones and they are contracted with a different customer. And plus, they are providing service to the new development of Qatar and they're bringing additional revenue when consolidated to GDI. So where the prices we are seeing at the moment, the day rates, I think we see a slight increase in the day rates compared to the previous period. We are not speaking about like a huge increase in the Qatari market. So it's 3% to 5% at the moment. But again, this will have a good impact on GDI performance.

Got it. And the 2 rigs of Gulf Jack-Ups, these are not owned by GIS, right?

No, no, the Gulf Jack-Up have 3 rigs. So the rigs that we have purchased from Seadrill are under Gulf Jack-Ups, okay? That's another entity owned 100% by GDI. The previous joint venture is Gulf Drill. So under the previous joint venture, we have 2 rigs and these they are not fully owned by GDI. So we are leasing them from an outside provider and they are contracted with the customer. All the rigs, they are contracted under Gulf Drill, okay? But Gulf of Jack-Up is -- as I said in the beginning, there are some intersegment transactions between the companies. But the contracts at the moment, all the 5 rigs are contracted between GDI and the final customer -- I mean, between Gulf Drill and the final customer.

Got it. Okay. And just in terms of renewals, I know -- I mean, you touched on it. But just do you see any risk next year that -- I believe you have 3 offshore rigs that are coming up for renewal. Any risk that there would be delays in contracting or renewal of these offshore rigs? And then should we expect that the onshore, the idle one, would go back to contract next year?

I think in terms of the offshore rigs, so far, we don't see any potential risk in terms of renewal. Actually, as I mentioned in the beginning, we are in the final touches, let's say, to conclude some of the renewals for these rigs. We don't see any risk coming in the next year. Regarding the onshore rig, yes, again, it's under discussion as well with one of the customers, and most probably it will be contracted next year.

There is no further question at this time. I would like to hand it over back to Bobby Sarkar for closing remarks. Bobby?

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

Thank you, Bobby. Thank you.

That concludes today's call. Thank you all for joining. You may now disconnect.