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

Good day, and welcome to the Qatar Navigation First Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bobby Sarkar. Please go ahead.

Well, thank you, Diane. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Navigation's or Milaha's First Quarter 2021 Financial Results Conference Call. So on this conference call, we have Akram Iswaisi, who is the EVP in Finance and Investments at Milaha; and Sami Shtayyeh, who is the VP of Financial Planning and Analysis. So as usual, we will conduct the call with management, first, reviewing the company's results, followed by a brief Q&A session. I would like to turn the call over now to Akram. Akram, please go ahead.

Okay, thank you very much. Welcome, everyone, to Milaha's First Quarterly Earnings Call -- and your interest in the company. And first of all as well, Ramadan Kareem. I'll start with our consolidated financial results and then dive into the segment results. After that, I'll turn it over to Sami to go over the outlook for the rest of the year, and then we'll end the call with questions and answers. The key highlights of our financial results are as follows. Milaha's operating revenues came in at QAR 675 million for the first quarter of 2021 compared with QAR 692 million for the same period in 2020, for a decrease of 2%. Operating profit came in at QAR 131 million for the first quarter of 2021 compared with QAR 200 million for the same period in 2020, for a decrease of 34%. Net profit for the first quarter of 2021 was QAR 297 million compared with QAR 283 million for the same period in 2020, for an increase of 5%. And lastly, our earnings per share was QAR 0.26 for the first quarter of 2021 compared with QAR 0.25 for the same period in 2020. Now moving on to the segments. Milaha Maritime & Logistics top line revenue decreased by 4% or QAR 10 million, but operating profit increased by QAR 18 million, and this was primarily driven by our container shipping unit. We rightsized capacity to better align with volumes, which allowed us to, number one, shed costs we otherwise would have borne; two, get rid of unprofitable revenue. Additionally, at the segment level we recorded a QAR 6 million drop in the provision for bad debt, as compared with same period last year. At the nonoperating level, we had a drop of QAR 5 million as a result of not recording a gain on sale of vessels which we did last year, along with lower profit from our JV company. These factors drove the 40% increase in net profit we recorded this year. Now moving on to offshore. Operating revenue dipped by 6% or QAR 12 million and operating expenses increased by QAR 9 million, both of which drove the drop of QAR 22 million in operating profit compared with the same period in 2020. Higher revenue from the addition of new vessels compared to the same period last year and higher third-party chartered-in vessels were -- more than offset the negative impact of vessel dry-dockings, maintenance issues and COVID-19 off-hires. Now COVID-19 is not fully behind us yet, and although we've done a very good job at mitigating the impacts on our operations, it still affected Q1 offshore results. Now QAR 99 million in lower impairments recorded last year versus 2020 -- versus 2021 boosted our overall performance for the segment. So last year, we had close to QAR 99 million recorded impairments. This year, we did not. That has helped improve the financial results going from a loss of QAR 77 million to a profit of QAR 3 million in Q1 of 2021. Moving on to gas and petchem. Operating revenue and operating profit both dropped, and we -- were the results of plummeting tanker rates. As a point of reference and to give you an idea of the magnitude of the drop: In Q1 of 2020, tanker rates averaged $20,000 to $30,000 per day, and that's kind of a range. And in Q1 of 2021, it fell to about $10,000 per day. On the nonoperating level, income increased by QAR 15 million through QAR 10 million additional coming from our share of Nakilat; and QAR 5 million additional from our VLGC joint venture, which is Gulf LPG, which benefited basically from higher VLGC rates compared to the same period last year. Net profit for the segment ended down QAR 7 million from QAR 150 million in 2020 to QAR 143 million in 2021. Now moving on to our trading segment. A 29% increase in revenue coming from virtually all units under that pillar improved the bottom line by QAR 1 million versus the same period in 2020. Margins are thin in the segment, so revenue and volume growth are key to improving results. And lastly and moving on to Milaha Capital. Investment income decreased by QAR 27 million with around QAR 40 million drop in -- lower dividend income partially offset by QAR 5 million in higher bond income and QAR 9 million in reduced losses recorded last year in our held-for-trading portfolio. Real estate revenue decreased by QAR 7 million (sic) [ QAR 17 million ], driven by lower rent income. And at the nonoperating level, we recorded a negative or a lower -- negative -- a negative QAR 31 million in lower gains on the sale of property that was sold in 2020. And that wraps up the segments, and I will now turn it over to Sami to discuss our outlook. Sami?

Thank you, Akram. Starting with maritime and logistics. We expect overall volumes to remain steady at Hamad Port, which is a main driver of our QTerminals share of profit. On the container shipping side, we were quite optimistic about the rest of the year, and then India imposed a lockdown last week as they try to manage through their COVID-19 situation. To the extent that does not turn into a prolonged matter, we expect the unit to continue to outperform 2020. In logistics, utilizations are expected to continue increasing in the warehouse. And client sites that had been shut down due to COVID-19 are gradually reopening, allowing us to work on site again. Both of these are good news. In offshore, although Q1 results came in weaker than expected, we feel cautiously confident that operations will perform better in the rest of the year. We do have many dry docks scheduled this year. [ And then ] COVID-19-related expenses and downtimes could alter that view, but as we stand today, we feel good about offshore's outlook. In gas and petrochem, the majority of our business is fairly predictable due to the long-term nature of contracts. 2 parts of our business that are less predictable are the tankers and our VLGC joint venture, which are both exposed to volatile spot prices. How spot prices fluctuate the rest of the year is difficult to predict, and so there is some uncertainty on these 2 units. In trading, we saw a decent pickup in revenue in Q1 and are cautiously optimistic on the rest of the year given sales efforts and what we're seeing currently in the pipeline. And lastly, on to capital: On both the investment and real estate fronts, we don't foresee any major changes up until the new tenancy contract on our new villa compound starts up in Q3, which will have a positive impact. With that, we'll now open up for questions and answers. Operator?

[Operator Instructions] And we will take our first question from Divye Arora with Daman Investments.

When we look at your profitability. Most of your profit is coming from 3 -- I would say, 3 places. One is obviously the Hamad Port. And then it's the -- and then [ it's QCT, and then ] third is the capital business, but if you exclude these 3, then the other businesses which is maritime and logistics and the offshore and gas and petrochemicals, they're not -- none of these are contributing much to the profits. And that also reflects sort of in the valuation of the company, so we just want to understand what is the strategy in each and every business. And what -- if you can just go business by business and tell us what do we see. What sort of operating profit can we expect from, let's say, offshore marine business, gas and petrochemical business? Given these are asset-heavy business, gas and petrochemical, offshore marine, but they don't have that much profitability. So what sort of profit do you expect from these businesses 5 years down the line -- or 3 years down the line, if there is not that much visibility? And also on the other business which is maritime and logistic.

Okay, thank you for the question. I think it's obvious, and it's been obvious before, that most of our profitability is coming from Nakilat; capital; and let's say, maybe nonoperating businesses. And we've alluded to this before, that number one, if you take Milaha Maritime & Logistics, we have been making investments in our logistics business and that's been paying off. And if you notice right now, this business -- and I think I was asked that question as well last quarter. When will this business become profitable? Now if you look at 2021, Q1, this business has already -- is already profitable. Now we were showing a loss last year and that loss has turned around. So a lot of investment has been made in this business, from optimizing [ your ] asset base, from bringing in new talent to be able to execute on the company strategy. Within MML, we focus primarily on the [ feedering ] -- I mean we are -- from a container shipping perspective, we're a [ feedering ] company. And so we've worked on optimizing our network, reducing costs and really focusing on profitable growth; and that's the key. From a logistics perspective, we've made a lot of investments in optimizing our logistics facilities. We increased occupancy significantly, so utilization is extremely high. We've focused now on adding value-added services, creating logistic solutions and rolling those out to the market, but again it takes some time to actually bear the fruits of our investment. But you're beginning to see that right now where we're beginning to turn a profit on MML. And we're optimistic that, over the next couple of years, Milaha's maritime and logistics profitability will continue to grow. Now if you look at the offshore business. This is not unique to the Milaha Offshore, okay? This is not unique to Halul. Globally the offshore market has been struggling for the past 2 to 5 years, if not even more. Now -- but the reality is, if you compare Halul to other companies, we have been much more lucky, if you will. Our business has survived and we are profitable. Barring impairments, the business is doing quite well. And today, this business right now, there's a big -- I mean asset ownership by itself doesn't generate profit, so we've been focused primarily as well on adding services that can generate margin. So in addition to asset ownership, which is critical, you need to start investing in services. And we've been investing a lot in services, but it's going to take time to show those results in our P&L. Now we're also optimistic, over the next couple of years, of -- hoping to see improvements in oil prices, which will translate in a -- let's say, in a -- more improved market conditions for the offshore, for OSV market. So I think those factors right now are going to help us over the next couple years.

Sorry. On the offshore business, do you see this business as strategic given -- you were saying that oil prices can improve. They can improve [ over in a ] year, but they can again fluctuate downwards given the move towards EVs and all. Do you see this business as strategic in your portfolio? Or is it better to -- maybe you can also think about [ in sometime ] to offload this business if the profitability in next 1 to 2 years doesn't recover...

No, it's Strategic. It's strategic to us. It's strategic for the country, so it will stay.

But how much patience you will keep. For how many years can you -- if by any chance this doesn't turn around and this continue to be sort of a loss-making business or more or less, net-net, not making much money to you and justify the return on assets...

I don't think a question I can answer -- I don't think that's a question I'm going to answer right now, okay? As I said, as I mentioned to you, right now it's a strategic asset to the company. We believe in this business. And it's also critical for the country, and this business will remain. So at this point, I'm not going to answer any more questions on that topic, okay?

Okay, all right.

Thank you very much. I appreciate -- next question, please. Do you have another question?

And the third one, gas and -- no, no. I said like the gas and petrochemical division is the third division.

Well, the gas and petchem division. We are focused -- we've changed the strategic direction of that business unit, and we're primarily focused on niche markets like FPSOs and FSOs. And so this is an area that we're focused on these days. We're not investing in traditional maritime shipping assets like tankers, like MRs, LRs. We've seen a lot of volatility in the sector. And that market is still way oversupplied, so we are focused on investing in assets that are of -- that are backed by long-term contracts. So this is where we're investing right now, especially in that segment. And that segment, from profitability perspective, it's relatively stable, but from a growth perspective, this is the area that we're looking at, that we're investing in right now.

And I think a lot of the contracts in this business are on the spot market, right, 4 VLGCs that you have there. They're on the spot market.

They are -- well, they were on contracts, and then now they're tied to the spot market, yes. So the situation changes every couple of years [indiscernible] within that segment -- yes...

What guidance you can give us -- sorry. I was saying, any guidance you can give us? In 3 years, what sort of a profit, operating profit, you can see from this business.

I can't give you a guidance in 3 years from now, to be honest with you, but if you look at that business, again the only volatile aspect -- I mean within that business the VLGC is a volatile market. That's a known fact. If you look at the [indiscernible] which -- I mean we've been selling our tanker business, so our volatility or exposure to the spot market has been slowly reduced. And as I've mentioned, we're changing the mix to continue to invest in assets that are backed by long-term contracts, FPSOs, FSOs, so you'll begin to see less volatility to spot market rates going forward. That's all I can say at this point.

So what is the visibility on putting these VLGCs in the charter market? Can we see that happening? And what are you waiting for, the rates to stabilize or the rates to go higher from here...

I'm not waiting for anything. That depends on the market. So it's a view. It's the market -- again the market for VLGC is very volatile, and it really depends on the market dynamics and the view of the clients. So when clients expect rates to go up, they tend to want to lock in rates. So again it depends on market dynamics. And we're always looking at -- if there are opportunities to take advantage of rising spot rates, we will do so. If there isn't, then we will lock it in and fix the rates as much as we possibly can. So -- but I can't give you visibility on that right now because, again, this sector is volatile and it changes month by month actually, same as in the tanker business. You can't predict what the tanker business will do. As I mentioned, tanker market was doing exceptionally well last year. And this year, the rates [ sank ] significantly. So it's very -- again, this business in general, tankers and VLGCs, it's a very, let's say, tactical business, and you have to manage it on a day-by-day basis or month by month, okay?

Okay, [ all right ].

All right, thank you very much, appreciate it.

And it appears there are no further questions at this time. [Operator Instructions] All right, we do have another question now, from Bijoy Joy with Qatar Insurance.

This is Bijoy Joy from QIC. My first question is on your operating supplies and expenses. Can you...

If you don't mind, can you speak up a little bit? We can't hear you. Can you speak up a little bit, if you don't mind? Thank you.

Sure. So my first question is on your operating supplies and expenses. Can you give some color as -- what is happening with Qatar queries -- or quarries? And why is the expenses going up?

Listen, Qatar quarries, they've -- revenue has gone up as well, and so has operating supplies and expenses. So in that kind of business, it's more like a trading business, so it's natural that revenue is going to go up, operating supplies and expenses. Cost of goods sold has developed as well. It's that simple.

Okay. So I see that happening on your trading side, the trading side as well. So I -- yes, I understand it's a thin-margin business and the cost of -- expenses will also go up, so are you guys aggressive on that side? Is there opportunity that is going on in the market? How does it look [ for the year ]?

Listen. I think, if you look at -- what we've done with that business unit is we have restructured that business unit. We've sold the travel agency -- or we shut it down, not sold it. And we have been focusing primarily on serving the Qatar marine market as a supplier, as a service provider. Now we've had all the building blocks. We've been -- we sell lubricants. We do fleet and technical services, ship repair; and so a big part of what we have tried to do is focus on serving the Qatar marine market. And so that includes [ this world ship sheltering ]. So building the supply chain for vessel owners in Qatar has been an area that we're focused on. And we've been investing in that, to be honest with you. So if you ask me about the outlook for the company: This is one of the areas that's going to be growing over the next couple of years, yes, because we see a market for this in Qatar. And we've been doing it in chunks, if you will, but we have built a -- been working on building a structured supply chain to be able to serve in the Qatar marine market, so you're going to start seeing more activities in the area. So this is sort of a buildup to that, to be honest with you.

Okay, understood. My second question is on the capital side. When do you think the villa -- the rental from the villa project's will start to come in, in the numbers?

August of this year, August or September. Barring any delays, August or September.

Okay. And what kind of a tenure it will be, 5 years? Is it fair to assume that?

5 years, yes, 5 years.

Okay. So other than that, anything on the warehousing side which you think will start picking up? What is your expectation on that side?

Listen, on the warehousing side, to be honest with you, well, the first thing we've done is -- we wanted to fill the warehouse, okay, to generate cash flow. So we've done a good job of that. Now we're working on optimizing the warehouse that we have to squeeze more value out of it. So now it's about sweating the assets, and we've done that across the board. So if we build warehouses, we're going to build them to make money, but you already know that the capacity in the market is -- there's already enough capacity in the market, so -- but we are constantly looking at what warehouses to build. And if you look at talking about additional capacity, we still have a large plot of land that's been developed. So we've -- it's got the infrastructure. It's well secured. And we have the capacity to continue to build, but we're only going to invest in profitable growth going forward. We're not going to follow the "build and [ when they will come ]" approach, but we are going to focus on profitable growth. So right now what we're focused on is sweating the assets as much as we can. And then we could eventually look at -- as our client base continue to expand, to grow; as our client needs continue to grow, then we'll look at building the additional facilities and additional warehouses, but right now the main focus has been on sweating the assets. And we've done a good job of that. So sweating the assets, filling that, maximizing basically the usage of that facility, adding more value-added services. So it's not just about renting warehouse space. It's about the movements of inventory in and out. It's about the value-add services that clients need. So this is how we're looking at that business today.

Got it, understood. And how do you see the offshore market? And do you see any pickup expected or anything moving on that side?

Honestly, I mean, I think you're reading the same information that [ you're ] reading and we're looking at the same research that you're looking at. There's a lot of optimism, next year and the year after, about a global recovery, about potentially -- I mean oil prices have gone up this year as well but -- the continued increase in oil prices over the next few years, which bodes well for the offshore market. And we're already starting to see some potential, let's say, CapEx programs being sanctioned compared to the past couple years where there's obviously a moratorium or a freeze. So there is some movement and it looks quite exciting. And like I said, as I mentioned earlier, we are also expanding into services and new things. And if you noticed from our announcement in the market: We've announced about our -- let's say, our relationship with Schlumberger and our foray into well stimulation. And so we're doing a lot more things to enhance our value offerings, our service offerings to our client base; and invest in capabilities. So I think we're quite optimistic, over the next couple of years, offshore will look better than it did in the past couple of years. Will it go back to the old days? I'm not quite sure, but I think we're headed in the right direction. And definitely there is optimism about an improvement in that market.

Okay, but can you give me some color what -- there's a 20% or maybe 17%, 18% increase in fleet and technical expenses. Is it something...

I can't hear you. Can you [ post the question ] again?

Yes. There's some increase in expenses on the fleet and technical expenses side for offshore. Can you give us some color as to where is it coming from?

[ Akram, do you want me to ] take that one?

[indiscernible] -- go ahead. Yes, go ahead. That's fine.

Yes. So the increase is primarily because we added some new vessels last year. So naturally, when you have new vessels, you're going to have crew costs associated with the vessels. You're going to have spares and maintenance expenses, all of that. So that all falls under the fleet and technical and that's why you see an increase there. The vessels were primarily in the offshore segment.

Okay. And we have one more question, from Adil Rashid with Daman Investments.

You guys mentioned that the lockdown in India is an area of concern for you within container shipping. Could you elaborate on sort of the exposure India has to the maritime and logistics revenue?

Yes, I can take that. So what -- India is a huge trading partner of Qatar. That's a common known fact. We opened up direct routes from India several years ago, so when they instituted the lockdown last year when COVID first started, it definitely took a hit on our container shipping volumes and numbers. They instituted a similar lockdown just late last week because of the huge surge in cases there. So that's what we mean by that. Now how long that's going to last, there's no indication. I think initially they said a couple weeks, but it's hard to tell. It's all going to come down to how well they manage or how well, or not, the COVID situation eases up there. So like I said, I mean, it's a concern. India is a huge trading partner. We have ships coming from there on a regular basis, so to the extent the lockdown falls into weeks and potentially months, then that will definitely have an impact on our container shipping volumes and profitability.

But -- so if you look back at 2019, what was -- would you be able to sort of mention what was the exposure before COVID? So it could give us some perspective of -- and then maybe year-on-year 2020, how is it looking.

When you say exposure, I mean, are you asking how much of that...

In terms of revenues. So how big is -- yes, how big is India as a contributor to your revenue within the segment?

I don't know off the top of my head. I don't want to say something incorrectly. The best I can tell you to do is get ahold of me off-line. And I'll have to do some research to get that information for you. I -- honestly, I don't know it off the top of my head.

Sure, all right.

Can I add just a point to that? If you -- operations will not shut down. What will happen is simply a slowdown, so there may be congestion. There may be a delay. And that will have an operational cost impact, which is what we had last year as well. And we've managed through that, so we're not expecting a complete shutdown because the business will still continue but perhaps at a slower pace. There will be some congestion. Social distancing will be an issue, yes. Processes will be a little bit more prolonged and lengthy, but regardless, business will still continue. And so we don't expect the impact to be material, but there could potentially be an impact. We had it last year and we dealt through it and we recovered from it as well. And that's the way we're looking at it. I don't -- we don't expect it to be that severe, but regardless, there will -- probably will be congestions if it happens. If it becomes strict, there will be congestion. There'll be prolonged processes. There will be delays for paperwork, social distancing, and that will have an impact.

And there are no further questions at this time, so I would like to turn the call back to our hosts for any additional or closing remarks.

This is Bobby Sarkar again. So if there are no further questions, I guess we can stop the call now. Thank you, Akram. Thank you, Sami, for taking the time to answer all our questions. And we will pick this up next quarter. Thank you so much.

Ladies and gentlemen, this is all for today's call.

Thank you very much, appreciate everyone's -- thank you very much, everyone. [ Thank you ].

Thank you for your participation. You may now disconnect.