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

Hello, ladies and gentlemen, this is Zaid Al-Nafoosi from QNB Financial Services. I would welcome everyone to Milaha Qatar Navigation Third Quarter 2020 Financial Results Conference Call. It is my pleasure to introduce from Milaha, Mr. Akram Iswaisi, he's the Executive Vice President of Finance and Investments. We also have on the call Mr. Sami Shtayyeh, he's the Vice President of Financial Planning and Analysis. We will start this conference call with a presentation on the company's performance for the period followed by questions and answers session. I will now hand over the call to Mr. Akram Iswaisi to get us started. Please go ahead, sir.

Okay. Thank you, everyone, for joining our call and your interest in Milaha. I will start off with our consolidated results and then get into segment results, after which, I will turn over to Sami to go over the outlook for the rest of the year. And in the end, we will open up the call for questions and answers. The key highlights of our financial results. Milaha's operating revenues came in at QAR 1.7 billion. For the first 9 months of 2020 compared to QAR 1.83 billion for the same period in 2019 for a decrease of 7%. Operating profit came in at QAR 286 million for the first 9 months of 2020 compared with QAR 280 million for the same period in 2019 for an increase of 2%. Net profit for the first 9 months of 2020 was QAR 384 million compared with QAR 419 million for the same period in 2019 for a decrease of 8%. And lastly, our earnings per share were QAR 0.34 for the first 9 months of 2020 compared with QAR 0.37 for the same period in 2019. Now moving on to our business segment results, starting off with Maritime & Logistics. Top line revenue decreased by 5% or $62 million, with our container shipping, bulk and logistics units driving the decline. COVID-19 disruptions we witnessed during Q2 continued into Q3 and had a negative impact on volume rates and demand in our container shipping unit and logistics as well. Logistics, in particular, was affected as some clients took precautionary measures and shut down certain operations to avoid COVID-19 outbreaks. Our bulk unit had a drop in revenue due to the discontinuation of chartering activities earlier in the year. On the expense side, we saw a QAR 40 million drop overall with 2 main things to highlight. Our fleet and technical costs reside in this segment, and there was a drop in crewing costs and parts and repairs expenses. Due to this decrease, QAR 24 million in lower costs were allocated out lower than last year. More than offsetting the lower fleet and technical allocation and in line with our revenue drop, our operating supplies and expenses and salaries and wages dropped the combined of QAR 75 million. Moving on to Offshore, COVID-19-related expenses were less of an issue than in our Maritime & Logistics segments. Top line revenue grew by 2% or QAR 14 million, boosted by higher utilization on higher earning vessels as well as increased revenue from chartered-in vessels. Operating expenses decreased by QAR 8 million, and this was mainly attributable to reductions in third-party equipment hire and repairs and maintenance. Increased revenue with lower operating expenses grew our operating margin from 11% in the first 9 months of 2019 to 14% in 2020. Our bottom line, however, came in lower due to QAR 43 million in increased vessel impairments. Similar to offshore, our Gas & Petrochem was not severely impacted by COVID-19. The strong performance witnessed in the first half of the year continued into the 9 months ended September 30. Revenue grew 14% as a result of increased shipment rates and the sale of underperforming vessels in 2019 helped lower overall expenses. At the nonoperating level, income grew by QAR 84 million as a result of the following: QAR 13 million drop in vessel impairments compared to the same period last year; QAR 63 million in increased profits from our associates, mainly Nakilat; a QAR 14 million increase out of our VLGC joint venture due to stronger VLGC shipment rates; and lastly, QAR 6 million in and lower gain on sale of assets. Moving on to our Trading segment, revenues declined in all units, drove the QAR 1 million decrease in bottom line as continued weakness in demand hamper results, and the results were further exacerbated by the COVID-19. And lastly, moving on to Capital. Investment revenue came down by QAR 30 million, driven by QAR 20 million in lower dividends and held for trading income, which were partially offset by QAR 8 million gain in bond income. The real estate revenue was down by $35 million, and that was mainly attributable to lower rent income, which is really a function of the real estate environment that we operate in. At the nonoperating level, we recorded QAR 82 million in gain on the sale of 5 properties, along with a onetime QAR 163 million impairment related to one of our properties. With that, I wrap up the segment analysis, I will turn it over to Sami to discuss the outlook for the rest of the year. Sami?

Thank you, Akram. Starting with Maritime & Logistics. For the rest of the year, we expect overall volumes to remain steady at Hamad Port, which is the main driver of our QTerminals' share of profit. In logistics, utilizations are expected to continue increasing in the warehouse, which should have a positive impact, but we expect continued weakness in our heavy equipment division, which, thus far, has been impacted negatively by client site shutdowns. On the container shipping side, trade volumes have picked up, and we expect this to continue as things open up further. In offshore, at an operational level, we expect the rest of the year to remain consistent with the first 9 months, barring anything unexpected. In Gas & Petrochem, our tankers in VLGC both benefited from higher shipping rates thus far this year, and we're cautiously optimistic that rates will hold through the end of the year. On our wholly-owned and joint venture LNG carriers, along with our share of Nakilat's profit, we expect little to no downward volatility to earnings, if anything, upside. Similarly, our gas carrier earnings should be stable through the rest of the year. On to trading, the outlook is heavily dependent on local demand, which is extremely difficult to predict. There are active tenders we are bidding on, but history proves that the timing of awards sometimes doesn't go as planned. Lastly, with capital, on both the investment and real estate fronts, we expect similar results as Q3 from an operating profit level. And with that, we'll now open it up for questions. Operator?

[Operator Instructions] And now we take our first question from Lee Beswick from QNB.

Just a question on container shipping. We've seen what looks to be sort of the initial signs of a sort of new up cycle in the container shipping market. Obviously, we've seen huge consolidation globally in the last 10 years or so. Can I just ask about how your rates will adjust in relation to global rates, which are, obviously, rising very, very quickly at the moment? And also, the second question is just with regards to the sort of logistics market within Qatar. And obviously, Qatar Airways retrenchment, for obvious reasons, has led to a big decrease in the availability of air cargo market. So how much are you benefiting from that shift from the air cargo market, maybe a little bit of that is coming for container shipping? Just if you could explain what's going on there as well.

Okay. Well, I think if you're talking about global container rates, the global container rates obviously is an indicator. However, we operate a theater network which is different. And the rates are dependent on the service that we provide. So if you look at our various services and the ports that we serve, they're impacted by competition on that -- on these service calls. So fundamentally, we are expecting rate upticks. We should expect to see that. But like I said, I want to clarify that global container shipping rate do not necessarily reflect -- or necessarily reflected in our theater network. And it really depends on where you operate. But we are optimistic, and we are seeing the same trend. And so we're optimistic that rates could potentially go up. But again, there are a lot of dynamics that come into play and those impact container shipment rates. I think the other question you had was on how much business are we picking up as a result of what's happening with Qatar Airways. I think that's a very difficult question to answer. I think the way we have -- I'll answer it a different way. Now we -- if you look at our logistics business, we have lost clients, but we have also picked up clients. We picked up clients that have been looking at stable logistics companies, especially in this environment. Companies are looking for stable companies that have the infrastructure, who will be around next year and the year after to support the supply chains. So as a result, we've lost clients who have gone out of business or have reduced their volumes or shut down operations. And we've also picked up clients, brand names, larger clients, who are looking for stable, strong clients, who will be around next year and the year after to support the supply chain. So I think, again, we've lost some clients, and we've picked up a variety of other clients. So I think, net-net, there is an uptick in our business. But I think Q4 will provide us with a better view of how the logistics market really is performing. As I mentioned, again, there's some losses and some gains. And so Q4 will give us a better picture of what the logistics market will look like going forward. Hopefully, that answers your question away. But I think in terms of how that -- the impact from Qatar Airways, that's not a very -- that's not a question I can answer, but I can tell you in terms of the market, we've been able to pick up new clients, but we've also lost clients because of the impact of COVID-19 and how it impacted our operations.

All right. Great. So the withdrawal of Qatar -- effective withdrawal of Qatar Airways in the air cargo market just through simply running fewer planes is obviously...

Well, I mean, but there has been reductions of volume.

Obvious in the market, yes.

That's not obvious, to be honest with you. I mean if you look at volumes in general, they have remained steady, right? So if you look at port volumes, they've been relatively steady. So you haven't seen a significant uptick, so I think it's not -- we don't see it in the market. It's not that obvious, okay? So if you just go look at the port statistics, you'll see that container volumes have remained relatively steady. And so if we use your line of thinking, you would have expected a significant pickup in container volumes coming into the port, but we're not seeing that. So I think there's been some wins and some losses. And I think net-net, I think volumes have remained the same.

Okay. Fair enough. I would have actually expected volumes to fall in a what has been a recession year globally rather than flat. So flat is actually quite good.

No. I mean, I think the port statistics are out there. And when you look at the port statistics, they've been relatively steady. Obviously, on a month-to-month or quarter-over-quarter basis, there have been some swings. But to a large extent, they've been relatively stable.

[Operator Instructions] And we'll take our next question from Shabbir Kagalwala from Al Rayan Investment.

And I had a couple of questions. If you can just give us some more color on the Turkish port, which the QTerminals JV has recently been awarded funds? And second question is on the logistics side. You mentioned about acquiring a lot of new customers and that some customers went away, some customers were acquired. How has been the rates doing? Is these customers being acquired mainly on discounts? Or what was the situation there on rates which can come in?

Sure, sure. Now as it relates to QTerminals, to be honest with you, we can't comment on that. I think there's a public disclosure from QTerminals and there's not much more we can comment on that as Milaha. Now in terms of the logistics business, we have -- obviously, it really depends on the client, and it depends on the service offering. So we do provide a bundled service offerings that -- integrated platform that includes everything from customs clearance to freight forwarding to warehousing. So -- but I think, in general, I think we've seen, depending on the type of service, whether it's ambient, whether it's chilled, I think rates have remained relatively stable, to be honest with you. So -- and so I don't think we've seen big drops in rates. Obviously, depending on your pricing strategy, you may offer discounted pricing to clients to pull them in, but that's part of our pricing strategy. So I would say that I think you have to look at it from a holistic approach, and this is the way we're looking at our business. It's not just about offering warehousing rates, it's about offering a bundled service offering that includes everything from customs clearance to distribution to warehousing to value-added services. That's how we have positioned ourselves in the market. So when I look at that, and when we look at that, we see a lot of upside down the line, and that's how we are positioning our business. So hopefully, that answers the question that you posed.

And I had a question on the finance costs as well. So we have seen a reduction in finance costs sequentially in second quarter and then more in the third quarter. Do we expect more of it coming down? Or have you been able to renegotiate rates? Or if you can give some color on that, please?

Yes, sure. I mean if you look at our loan book, we've benefited from the low interest environment. So I would say maybe roughly around 50% of our loan book is unhedged, so we've managed to benefit from that. On top of that, we have sold vessels that were financed. So as -- obviously, as a consequence, some of the financing cost has gone down. So that's basically sort of an explanation for why you've seen interest costs going down.

And do you have any floors in your interest rate? When you get a loan, are there any floors which get hit? Or there are no floors? It's purely based on the rate movement?

No floors, exactly. That's it.

And now we take our next question from [ Anatacio Stacia Nacis from Faisal Investments ].

Just basically on impairment. I wanted to inquire, we have the book value approximately -- we closed full year '19 with around QAR 3 billion book value for the vessels and barges and similar items and we took QAR 400 million impairment year-to-date for 2020. So we are around QAR 2.6 billion book. Do you consider this as a realistic now level? Or would you expect further impairment on the current residual value?

Thank you for the question. I think if you look at the shipping market and offshore market, it's -- a lot of that -- I mean, again, you can value the vessels based on -- a large extent, on charter-free valuation, or you look at the value in use. So fundamentally, we primarily use value in use. So it looks at the future cash flow, the earnings potential of the vessels. So if you look at -- basically, our biggest exposure today is the offshore market. And the offshore market, if you look at it, we've taken additional movements on Halul this quarter because the offshore market has not improved, and we've had certain issues with certain vessels. Some of our vessels are warm-stacked. We have some vessels that operate in a spot market, which, at a given point in time, may have a good prospect for full-time or long-term deployment but then the market changes. Now we've seen a lot of market changes in the offshore market. We've seen, let's say, CapEx expected E&P projects. There was initial projections of QAR 116 billion that got cut in half to QAR 60 billion. We've seen delays in a lot of development programs. So a lot of logistical challenges. And even in terms of utilization of the offshore market compared to last year, utilization, in general, as an average, has gone down. And so these are the factors that we look at. And we look at -- so fundamentally, it's difficult for me right now to tell you if there's additional impairments. We evaluate this every quarter. And so historically, we used to look at this market once a year in Q4 and make an assessment. And now we're making a concerted effort, and we're much more diligent about looking at this on a quarterly basis because the environment that we're in really necessitates that. And I think COVID-19 really has not helped us any and has not helped shipping market in general, especially even the OSV market, let's say, not shipping, let's say, OSV. So from -- as of right now, we don't foresee it. But again, the market is evolving monthly, quarterly. So in the next quarter, we'll evaluate the market again.

It appears there are no further questions at this time. Mr. Al-Nafoosi, I would like to turn the call back to you for any additional or closing remarks.

Okay. Well, thank you very much for your interest in Milaha and for your questions, and we look forward to hosting you next quarter. Thank you very much.

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