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

Good day, and welcome to the Qatar Navigation Q1 2022 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, Sergey. 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 2022 Results Conference Call. On this call, we have Akram Iswaisi, who's the EVP of 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 to Akram. Akram, please go ahead.

Thank you very much. Thank you, everyone, for joining Milaha's first quarterly earnings call for 2022 and your interest in the company. As usual, I will 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 our outlook and we will end the call with questions and answers. Key highlights of our financial results. Milaha's operating revenue came in at QAR 913 million for the first quarter of 2022 compared with QAR 675 million for the same period in 2021 for an increase of 35%. Operating profit came in at QAR 194 million for the first quarter of 2022 compared with QAR 131 million for the same period in 2021 for an increase of 48%. Net profit for the first quarter of 2022 was QAR 360 million compared with QAR 297 million for the same period in 2021 for an increase of 20% -- 21%. And lastly, our earnings per share was QAR 0.32 for the first quarter of 2022 compared with QAR 0.26 for the same period in 2021. Now on to our business segments, starting with Maritime & Logistics. This segment had one of its best performing quarters in recent times, led primarily by continued strong container shipping rates. Top line revenue increased by 53% or QAR 126 million with variable expenses flowing very much in line -- with very much in line resulting in an operating profit increase of QAR 57 million. To a lesser degree, our Logistics business also picked up as a result of increased volumes and jobs. At the nonoperating level, we had a drop of QAR 12 million coming primarily from our 2 terminals joint arrangement. All in all, we ended the quarter up 180% and net profit of QAR 46 million. Moving on to Offshore. Similar to Maritime & Logistics, operating revenue soared by 52% or QAR 99 million versus the same period in 2021. We had more vessel capacity from third-party chartered-in vessels, the employment of our liftboat, which was idle last year and additional project work in our diving unit drove the increase in revenue. With respect to operating expenses, however, increased by QAR 95 million, which eat into the top line growth. We faced multiple COVID-instigated issues in Q1 of 2022 that not only added costs, but in fact, inhibited further revenue growth. Overall, operating profit grew QAR 16 million and net profit increased from QAR 3 million to QAR 8 million for Q1 and 2022. As for Gas and petrochem, the performance can be summed up in 2 parts. On the operational side, we saw a decrease of QAR 11 million in operating revenue versus the same period in '21 but an even larger decrease of QAR 18 million expenses, and that is attributable to us selling 2 tankers last year and converting the third to FSO. Those tankers performed poorly last year due to near, record low shipping rates in the tanker market and the divestment helped us boost our operating profit from QAR 15 million to QAR 23 million. On the nonoperating level, income increased by QAR 14 million, with QAR 29 million additional coming from Nakilat and slightly reduced by QAR 16 million, coming from our VLGC joint venture Gulf LPG, that's attributable primarily to lower shipping rates. Net profit for the segment ended up QAR 21 million from QAR 143 million to QAR 164 million. Moving on to our Trading segment, 8% decrease in revenue, coming mainly from our bunker sales unit which negatively impacted the bottom line. And bottom line went from a negative QAR 1 million in '21 to negative QAR 2 million in 2022. And lastly, Milaha Capital, investment income increased by QAR 11 million and real estate increased by QAR 5 million coming from the villa compound, which was rented out in Q3 of '21. However, both were offset by a QAR 16 million bad debt provision. And basically, that wraps up the segments. And I will now turn it over to Sami who will discuss the outlook for the rest of the year. Sami?

Thank you, Akram. Starting with Maritime & Logistics. We expect the strong shipping rates to continue through at least mid-2022, but we have begun to see signs of rate pullback. How fast that pullback happens, particularly in the routes we operate is difficult to predict. In Logistics, we expect uplift in warehousing and freight forwarding activities from new global network partnerships as well as work related to the North Field expansion. In Offshore, on the vessel side, we expect improvement in financial performance due to deployment of vessels that were under maintenance in the first quarter. On the services side, we also expect further scaling up in specialized subsea services and maintenance modification and operations and thus, improvement in that area as well. And in harbor, we don't expect any major deviations of performance from what we witnessed in Q1. In Gas and Petrochem, the performance of the majority of our operating business units are fairly predictable due to the long-term nature of contracts. We will be having one scheduled dry docking for 1 LNG vessel. But aside from that, we expect no major deviations. On the nonoperating side, our VLGC JV is difficult to predict as rates are exposed to very volatile spot prices. In Trading, we remain cautiously optimistic on growth in the ship chandlering space and improving operating margins across the board. And lastly, on to Capital. On the investment front, we will continue to focus on yield enhancement. And in real estate, we will continue to see through the third quarter of this year, the positive year-over-year impact of the villa compound that was rented out in Q3 of last year. And with that, we'll now open up for questions and answers.

[Operator Instructions] There are currently no questions in the queue. [Operator Instructions] Our first question comes from [ Nihal Butane ] from CBFR.

We just like to know in terms of your Offshore in which you mentioned about support vessels, which is going to be adding up. How much revenue increase do you see in this Offshore business? And of course, on your expenses, will you go to be seeing a decrease, which has largely been part of your maintenance, other things? So overall, I just wanted to get an idea in terms of revenues and operating profit, please.

I'm sorry, the question -- can you repeat the question? You're asking what were our results for that segment? Or what is the outlook for the segment?

Sorry, we just like to know the trend on your Offshore business in terms of your overall revenue business, I mean, given the fact that you mentioned about some support vessels, which is going to be adding up. And also in terms of expenses, which had been quite high, relatively in terms of revenues. So will you see a drop-down impact in second quarter as [indiscernible].

Sure, sure. Listen, I think the outlook for Halul or Offshore is promising. We're winning a lot of contracts. Q1 -- the projections for Q1 actually were higher than results. I mean we got impacted by as was alluded to just operational issues. And we have a pipeline of projects. The liftboat that was idle last year is working. So a lot of the assets now are working. And so we have a much more optimistic view on Halul's performance for the rest of the year. So aside from the outlook for the sector overall, the sector in general, is much more promising than it was before on the back of strong oil prices, if you will. And so from our perspective, optimistic on the sector. But Halul, again, it's much more promising for the rest of the year than it has been last year, if you will. And so this quarter, we have positive earnings but it's not where we wanted it to be, but we're much more optimistic that the trend will look better in subsequent quarters.

Okay. So you can't -- I mean you can't push a number on the revenue type cycling for the second quarter?

We can't -- I mean, if you look at the revenues are I mean, again, revenues have gone up significantly. We're focused now on optimizing costs and improving margins much, much more. So we are picking up a lot of contracts, so a big part of this now is how do we continue to optimize margin. I can't give you an exact number.

Okay. And apart from that, in terms of your LNG, you mentioned about docking of one LNG vessel, which is going to be there largely. So will that impact on your LNG revenues? Can we have some color on it?

Yes, I can take that. It will have an impact, but it's not a major impact. I just wanted to give you as much information and be as transparent as possible, but nothing major that's going to throw the segment off.

[indiscernible] Insurance Company.

I just have 2 questions. The first one is on the Capital segment. Just wondering where the nonoperating income was down by QAR 4 million -- sorry, there was a bad debt provision of QAR 16 million, I'm sorry. And I'm just wondering where that is coming from? And the second question is on the Maritime segment where the nonoperating income was down QAR 12 million. So could you just provide us some color on that?

Yes, sure. The impairment or the bad debt we took, we had some legacy investments from a number of years ago. We sold some of these investments and part of the sale was a contingent -- part of the price was contingent on achieving certain milestones. And some of these investments were in shipping sector. And so there was cash plus contingent payments based on achieving certain milestones and these investments were in the shipping space. And based on the outlook of that specific segment, we were -- let's say, we're cautiously optimistic about the payments, but we have doubts on the ability of Milaha to collect these contingent payments. So that's why we took a bad debt on that.

Yes. And on the second question is on the Maritime.

What's the second question?

On Maritime, the nonoperating income was down by QAR 12 million, which is coming from the QTerminals joint arrangement. Could you just provide us some color on that?

Yes. I mean, listen, QTerminals is currently making investments into -- and it has an expansion strategy, an aggressive expansion strategy. And it's making investments throughout the world. And so as part of that, there is some initial investments that you have to make to ramp up for that growth. So as a result, QTerminals was impacted slightly in terms of some of their admin expenses and operating expenses because they're building up and beefing up their team. And obviously, as they make investments, there are certain costs that they have to incur as a result of these making these investments. So in terms of volumes, if you look at the volumes, the volumes are still healthy, but where they got impact slightly is mostly on expenses tied to growth initiatives or building up the organization, which is really expected when you have a company like this that's still really in a growth mode, right?

And we're going to move now to our next question from Mustafa Amer from Al Rayan Investment.

This is Shabbir Kagalwala from Al Rayan Investments. I had a couple of questions, if I may. We have -- in the Maritime & Logistics segment, you mentioned about that there are higher shipping rates from the container shipping side of the business. In terms of outlook, are we expecting to see any pullback coming in from this rate? And the second question is on the bunkering volumes. So you see -- sorry, if you can -- go ahead, sorry. I will ask the bunkering one later.

Let's answer one at a time. Let's answer one at a time, yes. I think on the shipment rates, if you guys are tracking the global rates and versus the various indices out there, you'll see that there is -- we've reached the peak and now we're coming off that peak. So we expect shipping -- container shipping rates to moderate, start decreasing. Now we don't have a view on what will the rates look like next quarter or the quarter after. But we expect that the rates will start coming down. They may not come down to pre-COVID levels, but they will come down. But generally, in terms of our segment because we are a feeder, a shipping company, there's usually a lag between what you see on the global arena, if you will, and what really then trickles down to us. So -- but we do anticipate that rates will come down from now -- from here on basically and towards the end of the year. By how much? It's difficult to predict. Again, that also depends on COVID, what happens with COVID. If we start having increase in COVID and port congestion and port lockdowns then that has a, let's say, positive impact, if you will, on container rates. So again, other things being equal, we do see container rates coming down.

Okay. And in terms of the volume decline in the bunkering -- bunker sales, is this because of you losing market share to some other players? Or it's like the overall business has fallen. The market has fallen basically.

Honestly, this is I mean, honestly, it's -- it really -- I mean in terms of bunker, we're expanding our market share. We're growing, but it really depends on a variety of different factors. But the reality is, if you think about this business, it's a very, very thin margin business, right? So the impact on bottom line is, I would say, insignificant. It has a much bigger impact on top line, but the impact on the bottom line is insignificant. So it's more about the change of mix in our business and our client base. That's what it's about.

Right, right. And my final question on the logistics side with the World Cup coming up, are we seeing improvement in the utilization of the warehouses and the logistics business? What's the outlook? And what do you see from now until the end of the year?

Sure. But I want to emphasize something else on the bunker that is critical. Now this business is strategic for us because we are building up our ship chandlering business. And so when you look at ship chandlering, these are services or a portfolio of services that are offered to vessel owners and ship owners. So bunker, lubricants are part of a portfolio of offerings that we are offering as part of the ship chandlering platform that we launched last year. So even though the margins are thin, it's an enabler, and it's part of an offering that we have to provide the vessel orders. So just wanted to articulate that point, just to make sure that it's clearly understood. Now as it relates to FIFA, our utilization, if you look at -- we've -- during COVID, we picked up -- our utilization went up significantly, and we've been able to pick up some large clients. So large clients who were looking for a stable name like Milaha. And so what has happened is, over time, we have focused on profitability and in warehouse and again, it's about movement of inventory. So the more that we touch the product, whether it's stuff and the stuff is value-add services, labeling. All these things for us, the more we touch it, the more the inventory turns, the more that we make money. So we made a conscious decision to focus on certain segments of the market that have higher margins, and therefore, they contribute to our profitability. So -- and there's a conscious decision now. It's not about less. So in other words, it's not necessarily about just filling the warehouse. It's about filling the warehouse and achieving a much higher profitability. And so we've been able to change our client mix, and that's working quite well for us. And we've got a pipeline of clients on the back of a lot of the FIFA activities that are coming on board, and we'll be boarding these clients in the next few months.

Right. And with the competition catching up, do you expect margins to be diluted? Or do you expect the margins to stay strong on the logistics business?

Well, when you say competition catching up, what do you mean in warehousing or logistics overall?

Logistics overall with warehousing [indiscernible].

Well, I mean, listen, we have a bonded warehouse. I don't know of anyone else that has a bonded warehouse, any of the competition that has a bonded warehouse in Qatar. And that gives us a competitive advantage. And so there's always been competition. We've always competed with other players. And so we're trying to focus now on, again, the margins -- the competition is fierce. There are players in the market. There's always been competition, but we do have a competitive advantage. Like I said, we have a bonded warehouse. We're more embedded in the shipping value chain, owning a container shipping company being able to provide bundled services rather than just 1 or 2 services, that gives us competitive advantage. And so we're really focused more on providing solutions to our clients and becoming much more value add. And so I think the name of the game has changed where -- in the past, I think the competition, there's plenty of business and so went around to everybody, now it's about value creation, and we're really focused on how do we add value to our clients. Like I said bonded warehouse, gives us a very much competitive advantage, and we're beginning to see the value of that.

Thank you. And it appears there are no further questions in the phone queue at this time.

Okay. Great. This is Bobby Sarkar again. So if there are no further questions, we can end the call for today. I want to take a moment to thank Akram and Sami for taking the time to answer our questions. And we will pick this up next quarter. Thank you very much.

Thank you. See you next quarter.

Thank you. Thank you, everyone.

This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.