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

Good day, and welcome to the Qatar Navigation Q2 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, sir.

Thank you, Diana. 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 Second Quarter 2021 Financial Results Conference Call. So on this call, we have Akram Iswaisi, who is the EVP, Finance and Investments; and Sami Shtayyeh, who is the VP of Financial Planning and Analysis. So we will conduct this conference call, first, with management reviewing the company's results, followed by a brief Q&A. I would like to turn the call over now to Akram. Akram, please go ahead.

Thank you very much. Yes, thank you, everyone, for joining Milaha's first half earnings call and your interest in the company. I will start with our consolidated financial results and then dive into the individual segments. After that, I will turn it over to Sami to go over our outlook, and then we will end the call with questions and answers. The key highlights of our financial results. Milaha's operating revenue came in at QAR 1.37 billion for the first half of 2021 compared with QAR 1.23 billion for the same period in 2020, for an increase of 12%. Operating profit came in at QAR 144 million for the first half of 2021 compared with QAR 254 million for the same period in 2020, for a decrease of 43%. Net profit for the first half of 2021 was QAR 438 million compared with QAR 300 million for the same period in 2020, for an increase of 46%. And lastly, our earnings per share was QAR 0.39 for the first half of 2021 compared with QAR 0.26 for the same period in 2020. Now moving on to our segments. Starting with Milaha Maritime & Logistics. Operating revenue increased by QAR 59 million or 13%, and operating profit increased by QAR 39 million. Our container shipping and logistics unit drove most of the increase. Container shipping got a boost from increased shipping rates and various cost optimization measures we have been focused on since the latter part of the year. Logistics performance has also improved, as volumes and jobs have picked up. On the costs side, aside from variable expenses that are highly correlated to revenue, we had QAR 11 million of onetime claim-related provision that we recorded. At the nonoperating level, we had a drop of QAR 15 million as a result of not recording QAR 5 million gain, yes, on sale of vessels which occurred last year. It's a nonrecurring item, along with QAR 13 million in lower profits from our QTerminals joint arrangement. Overall, our net profit ended up 52% higher than the same period last year. Moving on to offshore. Operating revenue increased by QAR 77 million or 19%. However, the strong top line performance was more than offset by a higher increase in operating expenses, which caused margins to erode. The increased revenue came from the addition of new vessels compared to the same period in 2020; higher third-party chartered-in vessels; and more diving and engineering services income, which has been a focus area for the company. Expenses were out of alignment with revenue and can be summarized in 4 main categories. Due to COVID restrictions last year, many dry-dockings got pushed into 2021. This effectively meant we had less revenue-generating assets than we normally would, but yet we carried essentially the same level of expenses. COVID-19 expenses continued to weigh down on results. Crew salaries have shot up, as we have to overlap crews during sign-offs. One crew was in quarantine while the other was getting ready to sign up. This has also increased our hotel and accommodation expenses. We recorded a QAR 16.4 million tax provision, which will not recur. That's a onetime provision. Our liftboat was newly employed off the coast of West Africa last year, but it has been off hired since Q1. We are in the final stage of evaluating options on the vessel, but when compared to last year, obviously we did not have revenue this year. But we didn't have revenue last year, but we're essentially carrying the same level of expenses until we take a decision on what's going to happen with that vessel. Then QAR 149 million in lower impairments recorded versus 2020, which boosted overall performance of the segment. Now moving on to gas and petchem. That segment's performance was dragged down by tanker rates which have been much lower than 2020. Revenue dropped QAR 33 million or 20%, and this fell through to the bottom line. On this topic, it's worth mentioning that in the second quarter of this year we sold 2 tankers. And we only have 1 remaining, but it's operating in the spot market. The sole remaining tanker will be converted to an FSO later in the year and ultimately hired on a long-term contract. This will remove the volatility that we've witnessed in the [ tanker ] market over the years. So expecting that this conversion -- converted vessel will be on a long-term contract so we'll have less volatility. On the nonoperating level, income increased by QAR 13 million with QAR 20 million additional coming from our share of Nakilat, QAR 3 million less from our VLGC joint venture and QAR 4 million less coming from a loss on the sale of the tankers we just spoke about. Moving on to trading. In this segment, we had a very strong first half with revenue up QAR 69 million or 78% versus the same period last year. Bunker and heavy equipment sales drove most of the increase and helped improve the bottom line by QAR 2 million versus the same period in 2020. Lastly, moving on to capital. Investment income decreased by QAR 26 million, with QAR 48 million in lower dividend income partially offset by 12 -- higher QAR 12 million in bond and other income and QAR 10 million in reduced losses recorded last year on our held-for-trading portfolio. Real estate revenue decreased by QAR 22 million, driven by lower rent income. And at the nonoperating level, neither the QAR 163 million impairment nor the QAR 73 million in gains on sale of properties we recorded last year recurred, which contributed heavily to the year-over-year improvement. And that wraps up the segments. I will now turn it over to Sami to discuss our outlook.

Thank you, Akram. Starting with maritime and logistics. We expect overall volumes to remain steady at Hamad Port, which is the main driver of our QTerminals share of profit. On the container shipping side, strong shipping rates that we've witnessed thus far this year will eventually come down once supply chains normalize. When that is exactly is dependent on several things yet to be seen. In logistics, we expect a pickup in volumes and business, barring any unforeseen COVID-related closures. In offshore, we feel cautiously confident that operations will perform well into the rest of the year. And in gas and petrochem, now that much of the volatility has been removed by virtue of selling 2 of our tankers, the majority of our business becomes fairly predictable due to the long-term nature of contracts. In trading, sales are sporadic, but based on our pipeline, we believe we can carry forward with the growth from the first half. And lastly, on the capital, on both the investment and real estate fronts, we don't foresee any major changes up until the new tenancy contract on our villa compound starts up in Q3, which will obviously have a positive impact. That essentially sums up the outlook, and with that, we'll now turn it open for questions. Thank you. Operator?

[Operator Instructions] There's -- there are no questions at this time. [Operator Instructions]

Diana, it's Bobby. While we are waiting for questions, maybe I can just start with a question of my own. Akram or Sami, if you can just explain. In the marine, you had very strong revenue performance year-over-year because of increase in services revenue. Could you just explain the nature of this increase that says diving-related projects, how permanent this is? And could we expect a similar kind of trend going forward in the second half? And then excluding the -- staying in offshore: Excluding the one-off VAT, et cetera expenses, do you feel that operating supplies and expenses will also remain at that heightened level given the liftboat is still idle? Or we can expect something better in terms of expenses in the second half.

Okay, thank you for the question, Bobby. As we've indicated, operating revenues have increased, but even with that increase, we've had a large number of vessels in dry-docking. And that has impacted revenue, and so -- and obviously largely that's related to the fact that we deferred dry-docking from last year to this year. And so the expectation is, once vessels come out of dry-docking, we anticipate revenues to normalize. In terms of operating expenses, as I mentioned in the segment explanation, vessels are in dry-docking, but we still have to incur certain operating expenses. So obviously there is a correlation between expenses and revenue, so as you see revenue, the increased operating supplies and expenses become easier to explain. At the same time, as we've mentioned, the liftboat that was in Nigeria was generating revenue last year. It's no longer generating revenue, but we still have to incur certain operating expenses. If we decide to sell that liftboat, those expenses will go up -- will go down, apologies. And if we deploy the vessel elsewhere, obviously you will see a corresponding revenue pickup. And so those are the items that have essentially -- I mean, aside from, let's say, net profit. If we look at operating profit: We were impacted by these 2 main events. At the same time, we are still impacted by COVID-related expenses because the crew changes -- primarily coming from crew and crew changes. They -- we have to maintain certain standards of [indiscernible] procedures, and so that has had an impact on our operating profit. Now as COVID subsides or as things normalize, we will see certain operating expenses go down, but it's tough to predict right now when that's going to happen. And so that's sort of the view on the rest of the year. Hopefully, that answers the questions.

Yes, that's fine. I just had a quick follow-up. In terms of the dry-docking, do you have a sense of what percentage of the fleet was dry-docked? And like what's the progression going forward? Are we going to see us with similar level in terms of dry-docking in the second half? Or is -- most of it's done. Or what additional color, if anything, you can provide on that, that would be helpful.

So I mean here is the reality. I mean 2020 was an exceptional year, right? So when we were hit last year with, let's say, COVID, if you will, and a lot of restrictions on operations, that impacted our ability to operate, so we've to a large extent learned how to deal with these issues. And so -- and we are managing our dry-dockers' schedule much more effectively than we did last year because last year was, I think, a learning year, if you will, for everybody. So we don't anticipate having major issues going forward. However, dry-docking days have been extended. And so you might be able to schedule some -- a dry-dock or maintenance, but it takes longer than usual, again because of restrictions, policies, procedures wherever you take the vessels to get dry-docked or maintained. And so -- and it's -- and I don't want to give you a percentage of the vessels because different vessels generate different -- each -- so if you look at -- for example, diving vessels generate a lot more revenue than a small [ PSP ]. So we have different sizes of vessels, different capacities. Each one of them generates different revenues. So some of them are higher earners than others. So it's tough to say, "Well, it's 30% of the fleet," because that may not have a big impact on revenue, but we've had these old vessels that generate substantial revenues that have [ impacted the topic ].

Okay. Diana, do we have any questions?

Yes, we do have a question from Bijoy Joy with Qatar Insurance Company.

My question is on the offshore side, if you can please give us some color on the vessels, number of vessels which are not generating revenue. And what is the impairment status on these vessels?

Well, I mean, we don't have a lot of vessels that are not generating revenue. I mean if you're talking about idle. Or are you talking about dry-docked?

Yes, idle.

Idle, we only have a handful. I mean, aside from the liftboat which is essentially idle, we have a few vessels that we are planning to dispose of or sell, but the majority of our vessels operate either in the spot market; or on, let's say, medium- and long-term contracts, so our utilization is quite high. So because vessels sometimes may work -- I mean so we have certain types of vessels. Because if you look at the offshore vessels, there are certain types of vessels that are customized or are -- have certain specifications. So depending on our ability to deploy those vessels, some of them are worked on 3-months contracts, 6-months contracts, but the majority of our vessels are medium- to long-term contracts. In terms of idle, we don't have a whole lot. Let's say at least less than 10%, okay? So -- and just I don't remember the exact number, but I will say it's probably less than 10%. The number is probably, I would say, between spot and idle because, again, we flip and flop between -- we flip-flop between spot and idle. And where we find opportunities, we -- to deploy our vessels and generate revenue, we do so. And some of the vessels -- just to put this in context as well. We keep some vessels as backup vessels for some of our contracts. So we cannot have 100% utilization with no backup vessels because, in the event of a breakdown of any of the vessels, we need always a backup vessel to be able to come in and continue the contract. So there is always cushion there in terms of vessels. And those vessels are typically deployed. Again, we keep them in the spot market just so we have some flexibility there.

So these vessels which are idle, are they fully impaired? Or they have -- impaired [ in the net-related value ].

I mean we go through an impairment exercise. And you've seen that we have been -- we've gone through an extensive impairment exercise on a lot of the offshore vessels. So we annually and even -- not annually. We periodically look at impairments and take impairments when necessary and when needed as per IFRS standards. So...

Okay. My second question is on the warehousing. So you did -- took some impairment on that side. Well, is it completed? Is it fully done? And what is the current status of that segment?

When -- you're asking if impairments are done. Or is the warehousing facility done? [ Well, it's ] impairments, right...

Yes. The first question is impairment is done. And what is the, well, status in terms of...

Okay. So we're not taking any more impairments. On the warehousing, it was a onetime adjustment. That's it. And in terms of the warehouse, it's occupancy is extremely high. As we've mentioned in previous earnings calls, we have -- during COVID, we have picked up a lot of new clients. I think the name of the game now is resilience. And the market sees Milaha as a resilient supplier, a resilient service provider; and that has transformed into new clients and additional business for us. And you've seen that on the containers side and you've seen that in logistics as well. And as I alluded to earlier in the segment results, logistics has done well this year compared to same period last year.

Okay. So just one follow-up on the offshore side. I see in the presentation that there is a one-off QAR 16.4 million on the VAT provision, but if I remove that from the operating expenses, I see that the operating expenses have, well, increased more than what the revenue has come for the first half. So is there something other than these provisions? Is there something which is one-offs and which will not repeat in the future?

Well, I mean, let's focus on operating profit, if you look at operating profit. Last year, I mean, obviously we've -- if you look at operating profit. There is a decrease from the same period last year, right? And as we've alluded to, number one, we have vessels that are dry-docking. And so we have some lost revenue there. Two, we have the liftboat which still incurs operating expenses but no revenue. And we also chartered in new vessels. So if I recall the number exactly, I think it was 6 new vessels or 7 new vessels that were chartered in compared to the same period last year. So again we are chartering new vessels because we are bidding on a lot of work, yes. As we alluded to earlier, we have been largely an asset owner, and so we've been expanding into services. So when we approach clients, we offer now bundled services or platforms, services plus assets. And so chartering vessels gives us flexibility. As we win contracts, we can convert those chartered vessels into Milaha-owned vessels. And that's the approach. So we have a mix of Milaha-owned vessels and Milaha chartered-in vessels, and so that gives us more flexibility rather than having to [ buy CapEx ] in the beginning. [ We win, like, tender ]. We're using chartered-in vessels and then eventually convert those into Milaha-owned vessels, depending on the business case and the economics, but that would explain -- like I say, that would explain also an increase in operating supplies and expenses. We have a lot of chartered-in new vessels. And we have [ one new Milaha-owned vessel ] as well compared to the same period last year.

Okay. So got it. And one last one...

And I've also mentioned COVID, right? And one more thing, I've mentioned also COVID expenses. So we've been hit. COVID expenses have been significant in this segment as well. And so coming primarily in terms of crew wages, hotel expenses. So we've been hit with that as well, but that's a necessary evil, unfortunately. That's not going to go away until COVID subsides.

Got it, okay. On the pricing side for offshore, how do you see the pricing? And how do you see the margins? Would you be -- was it fair to assume the same kind of margins in the previous like 3 or -- 3 years before, what margins you used to enjoy is the same kind of margins that could be expected in future for the segment?

Well, I mean, it's tough to predict what the future will look like. It's tied to obviously the global oil and gas market and also the supply of vessels, right? And so as I mentioned earlier, a big focus of offshore is expanding into services to complement our asset base. And that's where we'll begin to see margins. So again right now we do have asset ownership where we charter contract -- we charter vessels to clients, but we're also providing services. And our focus is to continue to focus on adding a portfolio of services to complement our asset base, and that's where we hope to continue to grow our margin.

Yes, which was not there in the previous years, right...

Well, historically -- I mean we've been building it up. We've been building it up, but historically we've been primarily an asset owner. We -- because owning asset and chartering assets still made money in the past, fantastic returns. I mean I don't have to tell. You look at the OSV market globally, and you will see the kind of margins that we're generating. So the market has changed and now we're focused on complementing. And again it's not also, but -- it's about generating revenue, but it's also about being able to serve our clients coming in with a bundled approach allows us to, let's say, better [indiscernible] customer, better serve our customers. And so it's a different approach that we're taking right now, but it's being built up. And we have been doing some work that we've never done before, building knowhow internally, even looking at joint ventures with various partners, to build capabilities. And that has worked well for us.

There are no further questions at this time. [Operator Instructions] And we do have another question now, from [ Mustafa Ameer ] with Al Rayan Investments.

Just wanted some color on the real estate, the villa compound that's going to be rented out. What are the numbers you are looking at? And how substantial is it going to be going ahead? So just some color on the villa compound contract.

Well, I mean, we've -- obviously we've rented out the compound. It's a 5-year contract. Unfortunately, we can't -- because of confidentiality, we can't disclose rates or any information at the moment because we signed a nondisclosure agreement, but again, we've -- we deployed it at reasonable market rates. So let's put it that way. So starting from August of this year, the compound is fully contracted to one client, which then for us that's a success because the ramp-up to be able to rent 178 villas will take a long time, but from day 1, the compound is already rented to one client. So that will have a good impact on top line and as well as bottom line, but I -- at this moment, I can't disclose any information.

[ Okay ], yes and no problem. I understand. How many villas you said were in total?

178 villas, yes. I mean you can [ back into the ] numbers. I mean look at market rates, 178 villas, expected margin...

Yes. So all of them have been contracted, let's say. It's one -- sorry. Is it one...

One contract to one client.

Yes, one contract -- one client taking up all of them, yes.

That's correct.

And it appears there are no further questions at this time. [Operator Instructions] It appears there are no further questions for today's call, so I would like to turn the conference back to our speakers for any additional or closing remarks.

Okay, thanks, Diana. This is Bobby Sarkar again. If there are no further questions, we can end, wind up the call for today. I wanted to thank Akram and Sami for taking the time to answer our questions, and we'll pick this up next quarter. Thank you very much, guys.

Thanks, everyone.

Thank you, everyone, yes.

Ladies -- this concludes today's call. Thank you for your participation. You may now disconnect.