Qatar Navigation Q.P.S.C. (QNNS) Earnings Call Transcript & Summary

Please go ahead.

Hello, everyone. This is Shahan Keushgerian from QNB Financial Services. I want to welcome everyone to Qatar Navigation's First Quarter 2020 Financial Results Conference Call. So on this call, we have Akram Iswaisi, Executive Vice President, Finance and Investments; and Sami Shtayyeh, Vice President, Financial Planning and Analysis. And as usual, we will conduct this conference with first management reviewing the company's results followed by a Q&A session. I will turn the call over to Akram now. Thank you.

Okay. Thank you very much. Thank you, everyone, for joining our call and your interest in Milaha. We are living in unprecedented times. The COVID-19 pandemic has had a major impact on the global community, and Milaha is no exception. In response, as a company, we have implemented a significant number of measures to protect our employees to ensure the continuity of operations and to continue to support all our clients and the country overall in these very, very difficult times. We've activated our emergency response team that is responsible for managing our response to COVID-19. This group, which consists mainly of executive management team members, is constantly evaluating risks and taken preventative measures accordingly. Majority of our employees are working from home, however essential and critical staff are working either on shifts or at warehousing facilities, but with very strict health and safety protocols. We have instituted strict health and safety measures across all our operations. These include social distancing, manpower shift planning, availability of PPE, education and constant communication protocols. We remain resilient and very focused on overcoming these very difficult times and at the same time supporting our clients and our local community in any way possible. I will start off with our consolidated financial results, then I will get into the segment results, after which Sami will go over the rest of the year outlook. In the end, we will open it up for Q&A. To recap the key highlights of our financial results. Milaha's operating revenue came in at QAR 690 million for the first quarter of 2020 compared to QAR 710 million for the same period in 2019 or a slight decrease of under 3%. Operating profit came in at QAR 200 million from first quarter of 2020 compared to QAR 216 million for the same period in 2019 or a decrease of 8%. Net profit for the first quarter of 2020 was QAR 283 million compared to QAR 278 million for the same period in 2019 or an increase of 2%. And lastly, our earnings per share remains unchanged at QAR 0.25 for the first quarter of 2020 and for the same period of 2019. Now with that, I'll get into the segment results. Maritime & Logistics. Top line grew 7% or QAR 17 million with our container shipping unit driving most of the pickup. You may recall that in the middle of Q1 2019, we launched our Black Sea service. Volumes went up through a gradual ramp-up as expected. And when comparing year-over-year, this was a big part of the increase in revenue. On the expense side, we saw an increase of QAR 35 million with 2 categories worth mentioning. Operating supplies and expenses incurred increased by QAR 21 million, and this is directly related to the revenue increase coming out of our container shipping unit as well as increases in our shipyard also tied to the revenue growth. There was a QAR 7 million increase in the provision of impairment of trade receivables. This was recorded in line with IFRS standards, and we will pursue bad debts as we -- as best as we can. Lastly, our nonoperating income grew by QAR 7 million, and this was a result of QAR 4 million in lower impairments from our bulk shipping units and QAR 2 million gain on sale of a container vessel. Moving on to Offshore. Top line grew by 8% or QAR 15 million, boosted by higher utilization of both our regional fleet as well as our liftboat operating in West Africa. Operating expenses grew by QAR 3 million. And when compared to the increase in revenue, you can clearly see strengthening underlying operational performance with margins going from 11% in Q1 2019 to 16% for Q1 2020. Despite strong operations, the bottom line came in lower due to QAR 74 million increased vessel impairments. Our Gas & Petrochem segment continues to post solid results. From an operational perspective, the sale of underperforming assets in 2019 helped drive the reduction in expenses, while increased market rates essentially kept revenue flat versus Q1 2019, even with fewer vessels. On the nonoperating level, income grew by QAR 57 million as a result of 3 key drivers, and they are: a QAR 13 million drop in vessel impairments compared to the same period last year; QAR 20 million in increased profits from our share in Nakilat's income, which came as a result of their stronger performance as well as our 6% increased stake in the company made during the first quarter of 2019; and lastly, stronger VLGC shipment rates, which boosted our Gulf LPG joint venture by QAR 24 million. Moving on to our Trading segment. Despite a slight drop in overall revenue by QAR 1 million, we did see improved sales margins in our bunker nontrading agency units, which helped drive a reduction in the net loss. And lastly, moving on to capital. Lower investment and dividend income were more than offset by a QAR 31 million gain on the sale of a plot of land. Net profit ended up being up QAR 5 million versus the same period in 2019. That essentially wraps up the segments, and I would now turn it over to Sami to discuss the outlook for the rest of the year.

Thank you, Akram. Before I start, and I know Akram covered a lot of this, but I'd like to caveat things by saying that this outlook is based on what we see and know today. It's difficult, if not impossible, to know the duration and impact the COVID-19 crisis will yield on our business. Having said that, I'll now start with Maritime & Logistics. For the rest of the year. We expect volumes to come down at Hamad Port in the short term, and that would undoubtedly impact our QTerminals share of profit. The logistics warehouse, we expect utilizations to increase both from existing clients that are still transitioning their business to us as well as from new clients. On the container shipping side, volumes and rates will depend on how soon shipping flows return to normalcy, and that is difficult to predict at this point in time. In Offshore, we expect utilization to remain strong. The COVID-19 impact is expected to be marginal. The impact, if any, due to the drop of oil prices is too soon to model out. In Gas & Petrochem, our VLGCs had a very good quarter, and we're cautiously optimistic about the rest of the year. Nakilat performed extremely well in Q1 2020, and we expect that performance to also continue for the rest of the year. With regards to the wholly owned LNG carriers, since these are on long-term charter, there should be very limited volatility to earnings on this front. With regards to our tankers, charter rates have outperformed on many fronts. That can quickly turn around. So this is another area where we're cautiously optimistic on the rest of the year. And lastly, our gas carrier, she's on a long-term charter until mid-2020. With regards to trading, we expect a difficult year ahead as COVID-19 has negatively impacted demand. We have a number of internal initiatives to help optimize costs, which are already underway. And lastly, with capital, construction on the new villa compound has been complete for some time, and we are still waiting on government formalities and improvement -- sorry, and approvals. COVID-19 restricted work hours and operations has delayed this process. And our marketing efforts continue. With that, we'll now open it up for questions. Operator?

[Operator Instructions] We now take our first question.

I have just one question. We have seen -- this is Shabbir Kagalwala from Al Rayan Investment. Hello?

Sorry, we cannot hear you.

Hello? Can you hear me now?

Just a little bit better. Go ahead.

Okay. This is Shabbir Kagalwala from Al Rayan Investment. I had a question on the Offshore segment. The Offshore segment is -- as you said, it is doing well, the utilizations are improving, the revisions are improving. So -- but you're saying that you have taken provisions on vessel impairment -- on vessels in this segment, can you just help us what these impairments are and why the impairments and the division is doing well?

Okay. I will -- this is Akram. I'll take that question. The utilizations were quite well up until the end of the quarter. Now the analysis on impairment is forward-looking. So if you look at what's happening today, and I think you're reading the same news we're reading, you're seeing the impact of the drop in oil prices. Today, WTI dropped below $15. And you're seeing essentially a shakedown in the oil market, and that is going to have an impact on Offshore sooner or later. But there's going to be a lag of when that will come. So you've already seen oil companies cutting back on their CapEx, delaying projects, canceling projects, renegotiating contracts. So this is essentially going to have a major impact on the OSV market. So when you look at utilization, you look at historical, right? When you look at impairments, and again, you look at impairments, the ability of the vessel to generate sufficient cash flow in the future to cover essentially the book value, if you will. So this is how it's evaluated. So again, when you look at the outlook for the oil market, we are very, very cautiously optimistic. Now we were optimistic last year on this market and where it's headed, but now I think with the turmoil in oil markets, nobody knows exactly what it's going to look like, but what is clear based on actions being taken today by oil companies is there's going to be consequences and impact. Now when will that come? I think there's going to be delays, could potentially be Q4, maybe early next year. That remains to be seen, but there will be an impact on vessel values. So vessel values, as you see them today, for -- whether it's Milaha or any offshore company, will have to come down because the OSV market continues to change, again, as a consequence of the change in the oil markets. So -- and that's the reason. One is historical. And going back to your point, utilization is historical impairments and looking at the value of the vessel is essentially prospective forward-looking.

Sure. And on the Gas & Petrochem segment, you've seen that the VLGC rates...

I'm sorry. Repeat the question again. You're breaking up. Can you repeat the question again, please?

Hello?

Yes. Can you repeat the question again?

Yes, sure. On the VLGC -- on the Gas & Petrochem segment, we have seen that the VLGC rates are improving and -- compared to last year. What -- and you mentioned that outlook is also better, so can you just please elaborate about this?

Well, I mean, honestly, if you look at the historical performance of VLGCs, they're volatile, then they change year-over-year. So in one year, performance could be astounding and the next year could be very negative. So -- and that's the issue with VLGCs, and the rate is never constant, the performance is not the same year-over-year or at least measurable. So it changes year-over-year. And it's -- to be honest with you, the outlook for the rest of the year should be modest. But as of next year, nobody knows because it does take a few quarters for that outlook to change. So normally, we've seen it. It's at least 3 to 4 quarters before we start seeing a flip in the rates. So based on what we see right now for the next few quarters, things are looking optimistic. But again, that could change.

Let me just add to what Akram said, the outlook was cautiously optimistic. We never said that it was -- we were -- we felt things were going to remain the way they are.

We'll now take our next question.

This is Jonathan Milan from Waha Capital. A few questions on my side. On the Offshore segment, what percentage of the revenue is coming from outside of Qatar? And overall, what kind of contracts are these Offshore vessels on? Are some of them are 1- to 2-, 3-year contract? I mean is there a weighted average length of contract that you have across the Offshore segment? And also, just another question on the product tankers. I mean excuse my ignorance, but are these tankers also related to transportation of crude oil? And I simply would have thought that the rates right now would be going up given the dwindling storage space. I mean if you can just elaborate a bit on this? I'm not exactly sure what's going on there.

Okay. If you look at the Offshore, the majority of revenue is coming from domestic operations, okay? We don't disclose the international versus domestic, but I would say the majority of it, a substantial portion of it comes from domestic operations, okay? If you -- and in terms of duration, again, we don't disclose that to the market, but we have a mix of 5-year -- I mean, if you look at Offshore in general, typically, the maximum turnover contract is 5 years, maximum. You don't see much more than that. There might be some exceptional cases. So on average, it's 5 years, but typically 2 to 5 years. There may be one year, so 1-year contracts, 2-year contracts, 3-year contracts. And our portfolio has the mix of those, okay? But -- and when somebody says long term, normally, they mean anywhere from 2 to 5 years, okay? That's essentially considered long term in Offshore. So -- and our portfolio has a good percentage of 2- to 5-year weights, if you will, okay? Going back to the tankers. The tanker -- our Tanker division has done well. We've benefited from this market. And we do have -- as Sami mentioned earlier, we did sell some vessels. And we still have some tankers that's still on operations, and those tankers have done well. Performance have been better than last year. And so if you look at the crude, the crude has done well. And if you look at product tankers in general in the market, they also have done well. So tanker business, in general, has done exceptionally well because of the situation that we're in. And so to your point, yes, that is correct.

Yes, sorry, Jonathan. Let me just add one thing. So actually, the revenue you're seeing, we are short 2 vessels versus the same period of time last year, and yet revenue was essentially flat. So we did definitely benefit. If you look apples-to-apples, we did definitely benefit with the increase in the tanker rates. That's number one. And then just to clarify on what do we transport, yes, we do transport. There's one crude tanker and then the other ones are basically transport ammonia and like products.

That's specifically because of the increase down there -- all right, that's fine.

Okay. And just one last question. The dividends received from the joint arrangements, I'm guessing this is simply the Hamad Port, QAR 147 million. Barring the COVID impact, is this sustainable, the QAR 147 million? And do you think it can continue to grow beyond that level?

To be honest with you, I don't think we can comment on that because there is a Board for QTerminals, and the decision is made at the Board level every year. But keep in mind, QTerminals still has a very strong position in Qatar and is also growing internationally. And the prospect for international growth is substantial. So -- and we still have the full year ahead of us. So that remains to be seen.

[Operator Instructions] It appears there are no further questions at this time, I'd like to turn the conference back to the speakers. And there is one question after coming in. We'll now take our next question.

It's Jonathan, again. So just one follow-up question on the villas. Have you engaged in some sort of pre-renting? Do you have any pent-up demand for the villas or an estimate on how much revenues this segment could make? And with regards to the renewal of the QTower -- sorry, Milaha Tower, I believe the 10-year rent contract is due this year. Do you have an estimate on how much of a drop, if any, would we see in rental rates there?

Sure, sure. Well, first of all, in terms of the villas, we have been actively marketing those villas. And so we have been actively marketing villas to, let's say, corporates, government agencies, where we can see potentially if somebody can take the whole -- all of the villas. So this is what we're looking at or renting large blocks of the villas to certain companies together. So there's been active marketing and -- but the reality is -- and we did have some really advanced dialogues and discussions with potential clients. But after the COVID-19, much of that has really slowed down. So it's going to be maybe another 1 to 2 months before we see discussions resuming again on the rental side of the villas. But I can tell you in terms of the quality of the villas and what we put in the villas, they have been well received. And so we're optimistic that we can actually rent those villas. As soon as, let's say, we go back to the business as usual, we will pursue that again. But right now, it's essentially quite difficult in the market that we're in. That's one thing on the villas. In terms of the tower, we are in discussions with a potential tenant for the tower. And so until then, we cannot disclose really too much until we've completed our negotiations and discussions. And so potentially next quarter, we can update you on the status of the tower.

It appears there are no further questions at this time. I'd like to turn the conference back to the speakers for any additional remarks.

Okay. Well, thank you very much, everyone, for joining us on this call today and for your interest in Milaha. We look forward to having you on the call next quarter. Please be safe, and we'll see you next quarter. Take care. Thanks.

This concludes today's call. Thank you for your participation. You may now disconnect.