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

Please go ahead, sir.

Thank you, operator. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Navigation or Milaha's Fourth Quarter and 2021 Results Conference Call. So on this call, we have Akram Iswaisi, who is the EVP in Finance and Investments; and Sami Shtayyeh, who's the VP of Financial Planning and Analysis. So we will conduct this conference with, first, 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. Thank you, everyone, for joining Milaha's earnings call and your interest in the company. Let me start by saying that we closed 2021 on a high note despite various hurdles faced throughout the year. Net profit came in at the highest level we've seen in 6 years and provides us with good momentum going into 2022 and beyond. Now as usual, I'll get into consolidated financial results, and then we will move into the individual business segments. And then, Sami then will go over our outlook, and we'll end with questions and answers. The key highlights of our financial results. Milaha's operating revenue came in at QAR 2.78 billion for the full year of 2021 compared with QAR 2.27 billion for the same period in 2020 for an increase of 23%. Operating profit before impairments came in at QAR 253 million for the full year of 2021 compared with QAR 279 million for the same period in 2020 for a decrease of 9%. Net profit for the full year of 2021 was QAR 724 million compared with QAR 59 million for the same period in 2020. And lastly, our earnings per share was QAR 0.64 for the full year of 2021 compared with QAR 0.05 for the same period in 2020. Now moving on to our segments, starting with Maritime & Logistics. Operating revenue increased by QAR 257 million or 30%, and operating profit before impairments increased by QAR 109 million. Very similar to what I discussed in the previous quarters in '20 and '21, our container shipping unit drove most of the increase as it benefited from higher shipping rates. To a lesser degree, revenue grew in our logistics units as well as volumes and job disruptions from 2020 due to COVID-19 eased up. Overall operating expenses increased QAR 149 million versus 2020 and were mainly variable in nature and grew as a result of the increased revenue. At the nonoperating level, we had an increase of QAR 12 million from lower vessel impairments compared to last year and higher profit from our QTerminals joint arrangement. Overall, our net profit ended up being 157% higher than last year. Moving on to Offshore. Operating revenue increased by QAR 202 million or 27%. However, as seen for much of 2021, the strong top line performance was more than offset by a higher increase in operating expenses. Increased revenue came from the addition of both owned and chartered in vessels and more diving and engineering services income. Expenses being out of alignment with revenue are essentially for the same reasons I explained last year with the following 4 -- with the following being the main 4 categories. Due to COVID-19 restrictions and outbreaks, our dry dockings took longer than usual, meaning the assets couldn't return to employment and earn the same revenue as it did in the past, thus, not reaching its full potential. Although COVID-19 expenses started coming down in the second half of '21, they crept back up again after the Omicron outbreak. Quarantines and accommodation of crews and special salary increases shot up, among others. In addition, we recorded a QAR 16.4 million VAT provision, which is a onetime charge that will not recur next year. The liftboat that was employed off the Coast of West Africa was off-hired essentially most of 2021, thus, negatively impacting the top line as well as the bottom line. Transfer and mobilization costs together to Qatar, readiness and other costs made the situation much worse. We had no revenue increase but increased expenses. Lastly, we have $473 million in lower impairments recorded in '21 versus '20, which boosted overall performance for the segment by 79%. Moving on to Gas and Petchem. Revenue dropped QAR 44 million, and operating profit before vessel impairments dropped to QAR 47 million, primarily as a result of lower tanker rates versus 2020. We sold 2 tankers mid-last year, mid-2021, and we only have 1 tanker remaining, which is currently being converted into an FSO unit, and we'll be essentially going live mid-2022 on the long-term charter. On the nonoperating level, income increased by QAR 119 million with higher profit from our share of Nakilat and lower overall vessel impairments, more than offsetting QAR 8 million in losses on the sale of 2 tankers in the second quarter of last year. Our Trading segment posted an 87% increase in revenue, with the majority of that coming from increased bunker sales. Having reduced margins decreased overall performance of the segment by QAR 1 million. And lastly, Capital. Investment income decreased by QAR 23 million with QAR 48 million in lower dividend income, partially offset by an increase in -- QAR 15 million increase in fixed income and other income and $10 million in reduced losses recorded last year in our held-for-trading portfolio. Real estate revenue decreased by QAR 15 million, driven by lower rental income as a factor of market -- changing market conditions. And on the expense side, there was a decrease of QAR 5 million in depreciation mainly from our new villa compound, which is now on a 5-year lease. At the nonoperating level, neither the QAR 163 million impairment nor the QAR 82 million gains on sale of properties we recorded in 2020, we didn't have those, didn't recur, which contributed heavily to the year-over-year improvement. And that wraps up the segment. In addition to the financial results, I would like to highlight a few nonfinancial achievements that were accomplished this year. The first bullet point is expansion of services. In Maritime & Logistics, the container shipping business unit expanded its network into the Far East by introducing a new China-India Express service, connecting the Far East with India and the Arabian Gulf. In Logistics, our warehousing hub, Milaha Logistics City, became the first customs-bonded zone in Qatar, enabling us to offer abundant logistics services and operate as an international shipment hub. In Offshore, we entered and signed agreements in the geophysical and geological space, furthering our focus on specialized services. In Gas and Petchem, in line with our strategy to expand into the FSO and FPSO segments, we've been awarded our first FSO contract that will commence mid this year. And in Trading, we have expanded new offerings in the ship chandlering field. In addition, as a company, we embarked on this journey a few years ago and successfully completed the transformation to Oracle cloud-based fusion system for our main ERP modules and select operational system. This is a journey, a digital transformation journey, that we started, and it will take multiple years to complete. But we're confident it will enhance client and supplier experiences and give us more efficiencies internally. And it's in line with our objective and our goals to do more with less by leveraging technology going forward. And in '21, we undertook a major optimization initiative to create a leaner, more agile organization. As part of this optimization initiative, we streamed our container shipping and freight logistics operations through a lean transformation where we disposed of underperforming assets, both vessels and equipment, renegotiated major supply contracts and reduced structural organizational costs. I wanted to highlight these nonfinancial achievements because they basically set the stage for next year. We've made a lot of -- signed a lot of agreements, entered into new initiatives, developed new products that will yield benefits in 2022 and the following years. And with that, I will hand it over to Sami to discuss outlook for the year.

Thank you, Akram. Starting with Maritime & Logistics. On the container shipping side, we expect the strong shipping rates that we witnessed thus far last year to continue until at least the middle of 2022. In Logistics, we expect an uplift in volumes and business based on new global network partnerships signed last year as well as North Field expansion projects that should contribute positively to the segment. In Offshore, we believe a lot of the issues we faced in '21 are behind us, and we're optimistic on the unit's prospects going forward. We'll continue to look at optimizing the fleet and its composition and, on the services front, grow specialized engineering and subsea offerings. In Gas and Petrochem, without the volatility posed from the tankers that have been sold or being converted to an FSO unit, the business becomes fairly predictable due to the long-term nature of the contracts. In Trading, we expect positive benefits from the segment reorganization and investments made in our commercial capabilities. We grew the ship chandlering business, and we'll continue to focus on this marine service offering going forward. And lastly, on to Capital. On investments, our focus will continue to be on enhancing yields. And on the real estate front, we don't foresee any major changes. With that, now, operator, we'll open up for questions.

[Operator Instructions] We can take our first question from Ashish Prajapati from United Securities.

First of all, congratulations of retaining your net profits, one of the best in the last 6 years. So many, many congratulations on that. I had one query on your impairments. What would be the size of -- what would be the trend there, if you can give a little more guidance? Because that was one concern, what we have been seeing since last few years. So a little more clarity on that would be highly appreciated.

Okay. Thank you very much for your comments. I appreciate it. And first off, I mean, if you look at the impairment trend, it is significantly lower than the prior year. And going forward, and obviously, this is an accounting exercise that we have to go through every year and obviously vetted as well and looked at by our external auditors. But I think we're in a position. I'm quite confident in saying that, going forward, our impairments should be immaterial, negligible. Obviously, impairments are tied to future cash flows of assets, so value in use. So barring any unforeseen events or major events or black swans, I expect impairments to be negligible, to be frank with you.

[Operator Instructions] We can take our next question from Riyas Abdul Kader from Integra Asset Management.

I have 2 questions. So one is you mentioned some cost-reduction initiatives and optimization exercises. Could you tell us what sort of impact we can expect from this in this year? And the second question is...

I'm sorry, what -- can we take one question at a time? Could you repeat the question?

Yes. What sort of impact...

I mean, obviously, we -- we haven't disclosed that in -- to the market, to be honest with you. But we've had part of this cost-reduction initiative. Number one was looking at all our supplier contracts, looking at our OpEx base and going back and renegotiating a lot of the contracts. That's number one. So we felt like there was value there in going back and renegotiating contracts, number one; number two, we've looked at our manpower and organizational cost structure. And where we had some fat, we went ahead and cut the fat out. And also, we put the foundation as well. I mean, again, if you can see from all our press releases, we're very much focused on technology and embedding technology into everything we do, with the idea that we want to be able to do more with less and build scalability into operations. So transaction -- there's no reason that transactions or transactional work cannot be automated. And so our vision is to continue to invest in technology to be able to do more with less. But I can't -- to be frank with you, because we have not disclosed it, but it was -- I would say that because of the impact of COVID, which, again, in our view, '21 was supposed to be a better year, but again, with Omicron and again, additional precautionary managers that we had to take, issues with crew changes, the logistics aspect of managing shipping operation is quite complex. So when you throw that -- when you throw a pandemic like COVID into that, it makes things far more expensive and make it much more expensive to operate. So the impact of the cost-cutting initiative we did this year helped us mitigate some of that cost. Now our results, in my opinion, could have been much, much better had it not been for the pandemic. And so we're optimistic that as the pandemic disappears, it will have a positive impact on us in terms of lower operating costs and our ability then to turn vessels around fairly quickly when it comes to maintenance. So vessels that take longer to get repaired or to do the usual maintenance obviously cost us money because they're idle. It doesn't -- it's not available. It can't work. So these things have had an impact on our business this year. And so the cost-cutting we've done have helped us mitigate the losses from -- or let's say, partially mitigate some of the losses from the -- as a result of the pandemic.

Okay. Right. And the other question was on -- given the size of your balance sheet, you have a sizable balance sheet and listed equities, et cetera, what's the strategy on this? Would you be better off perhaps looking at other strategic assets in your line of business, for example, which are probably, I guess, there are a lot of distressed assets, for example, which you can give on your balance sheet stake?

There are a lot of what, distressed assets?

Yes. In the sector, in the line of services and offshore, et cetera. Just looking at the financial, because you have a sizable equity book that...

If you look -- I understand your question. In terms of our equity book, we will deploy this capital where it makes sense, where we can make money. And so we're constantly looking at strategic assets. And just because there's a distressed asset, it doesn't mean it's a good investment. So we've been looking -- we've mentioned earlier that we won our first FSO contract, and that's a segment we're looking to invest in. If we find a good asset, we will deploy our balance sheet to acquire this asset. And so again, distressed assets doesn't mean -- again, we look at the sector. We look at strategic fit. Can we make money or not at the end of the day? So we're not going to deploy capital where we don't make any money. And so in terms of Offshore, like I said, our focus right now, there's a lot of business in the region. And you guys see that from a lot of the activities in oil and gas sector, basically recovering from the impact of COVID from last year. That's our primary focus. And like I said, that was mentioning earlier, Sami mentioned as well, we're expanding our portfolio of services and offerings into more services. If you look at MMO, we're expanding at MMO because it allows us to leverage our asset base to continue to generate more margin, and that's the direction we're headed. So there's a lot of low-hanging fruit that we're focusing on right now, and that's where we're going. So going out and buying the distressed asset is not necessarily the right approach going forward, let's say, in Offshore unless...

No, I didn't distressed in the -- go ahead, go ahead. No, I believe that...

I get your point. I understand your point. And...

Yes. Because the QAR 3 billion...

I understand your point...

This is the maybe 1% last year, right?

Yes. Well, even this portfolio -- and we're working right now on optimizing that portfolio, and you'll see the results of that over the next 12 months and next year. So yield enhancement is a focus for the financial portfolio as well. So again, we will deploy, reallocate this capital to strategic investments where it makes sense. And otherwise, we will continue to focus on yield enhancement, which is sort of a mandate over the next few years as it relates to the portfolio.

We can take our next question from [ Mustafa Amiya ] from Al Ryan Investments.

Just wondering on your CapEx plans for this year. What are they like? How substantial are they? And in relation to that, your dividend policy, I mean, your clean payout ratio has been sort of similar to what was there last year. Will you continue on that trend? And then I'll have a couple of questions more, but I'll ask them once we're done with this.

Listen, in terms of CapEx, we -- if you look at our business in general, it's a CapEx-based business. So in order for us to grow, we have to invest in CapEx, be it vessels, be it equipment. And so in order for us to grow, we have to invest. And that investment will come either through M&A, inorganic or organic, through the acquisition of assets and equipment. So we do have a CapEx program that's, let's say, more aggressive this year. And so that's really all I can comment. We don't typically disclose the number, but I can tell you it's much more aggressive than this year. But again, provided that there's a rigorous process for capital budgeting within Milaha and so provided it achieves the minimum acceptable return, we will deploy that capital accordingly. So that's the answer to the CapEx. The second question is on dividends, right? Listen, the Board has decided on -- made the decision on the dividends. If you look at -- again, as I mentioned, we have growth plans. If you look at -- I mentioned earlier, the initiatives that we've got in place, our freight-forwarding arrangements, the new one, if you look at the bonded warehouse, all the investments we're making in Offshore. And so we are looking to make more investments to grow the business. Otherwise, the business will remain stagnant. So there's a big focus right now on growing the top line and optimizing operation through the leverage of technology and a proven -- the way we deliver services. So in light of that aspect, the Board has decided on paying the same as last year. And to be honest with you, that's all I could comment on.

Sure. Just a couple of other questions. One on the liftboat. Obviously, liftboat got taken off, and then there were the costs that you had to bring it back to Qatar. Any plans on that? Will it be still hampering the bottom line going forward? And secondly, on the rental income, your villa compound has now gone on lease from Q3. How material will that impact be going forward?

Okay. First of all, on the liftboat, and we've had challenges with this liftboat. And where it was operating off the coast of West Africa, we brought it back to the region. And as I mentioned earlier, I am personally quite optimistic about the oil and gas activities in the region. And we're already talking to various clients about potentially chartering these vessels -- this vessel, along with other services that will go along with that. So our plan is -- there are opportunities we're working on, and we set the time line for ourselves. If we can't deploy it, we'll just get rid of it, okay? So -- but there are opportunities in the region. And like I said, I'm quite bullish on oil and gas in the region, and we're seeing a lot of momentum and a lot of activities. So -- and then the last question was on the compound. I guess...

The rental income, yes.

Yes, the rental income, I mean, listen, if you look at -- I think you can do quick back at the napkin, look at the average rent per villa times 178 villas, and you can quickly arrive at a number that will give you a sense of how much of an impact that will have on our bottom line. There's a confidentiality clause in the contract because it's 1 client that rented the whole compound. So unfortunately, we cannot disclose the impact. But I think you could back into it by looking at market rates times 178 villas. That will give you a view -- a ballpark of what kind of an impact that will have on the bottom line.

We can take a follow-up question from Ashish Prajapati from United Securities.

I had a query on dividend, but then that has been answered, so thank you.

There appears to be no further questions in the queue at this time. So I'd like to hand the call back to our hosts for any additional or closing remarks.

Okay. Thank you. This is Bobby Sarkar again from QNB FS. So if this is all in terms of questions, we can end the call for today. I wanted to thank Akram and Sami for taking the time to answer our questions, and we will pick this up next quarter. Thank you so much, guys.

Thank you, everyone. Appreciate it.

Thank you. Thank you.

Thank you. This concludes the call -- today's call. Ladies and gentlemen, you may now disconnect.