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

Hello, and welcome to the Qatar Navigation Milaha Conference Call. I would like to advise all participants that this call is being recorded. I'd now like to welcome Bobby Sarkar to begin the conference. Thank you. Please go ahead.

Okay. Thank you, operator. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Milaha's Third Quarter and 9 Months 2023 Financial Results Conference Call. So on this call from Milaha's management, we have Akram Iswaisi, who is the Executive Vice President in Finance and Investments; and Sami Shtayyeh, who's the VP in Financial Planning and Analysis. So we will conduct this conference with the management first reviewing the company's results followed by a Q&A. I would like to now turn the call over to Akram. Akram, please go ahead.

Okay. Thank you very much, Bobby. Thank you, everyone, for joining Milaha's year-to-date Q3 2023 earnings call and your interest in the company. I'll be starting by going over our consolidated financial results, and then I will go through our various business segments before turning it over to Sami to go over our outlook. As usual, we will end the call with Q&A. The key highlights of our financial results. Milaha's operating revenue came in at QAR 2.23 billion for the first 9 months of 2023 compared with QAR 2.56 billion for the same period in 2022 for a decrease of 13%. Operating profit came in at QAR 404 million for the first 9 months of 2023 compared with QAR 424 million for the same period in 2022 for a decrease of 5%. Net profit for the first 9 months of 2023 was QAR 870 million compared with QAR 851 million for the same period in 2022 for an increase of 2%. And lastly, our earnings per share was QAR 0.77 for the first 9 months of 2023 compared with QAR 0.75 for the same period in 2022. Now moving on to our segments, starting with Maritime & Logistics. Maritime & Logistics results continue to be dragged down by the large decline in container ship at rates when compared to 2022. If you recall, rates reached peak levels mid-2022 and have been on a steady decline since then. In Q2 of this year, rates stabilizes. However, in Q3, rates began trending downward again. Overall, revenue for Maritime & Logistics dropped by QAR 377 million, versus the same period last year with QAR 392 million of that coming from container shipping, mainly due to reduced rates along with a decline in volumes. Expenses came down by QAR 173 million with QAR 15 million of that coming from reduced trade receivables provision due to successful recovery of outstanding debt and the balance remaining primarily relates to the drop in container shipment volumes. Overall, we ended this year with net profit down QAR 245 million or 96% versus 2022. With respect to offshore, offshore continues to steadily increased top line with operating revenue shown consistent growth. Year-to-date September revenue increased by 12% or QAR 105 million versus the same period in 2022. Increased utilization of key diving assets and our lift boats, along with additional subsea and engineering-related projects more than offset a drop in third-party chartered vessel income. Overall, expenses increased by QAR 10 million with lower chartering in costs related to the drop in revenue, along with the benefit of a QAR 15 million tax provision reversal were more than offset by higher variable expenses tied to the increased revenue. The net income result was a year-over-year growth of QAR 87 million or 132%. As for Gas and Petchem, this segment recorded a 12% increase in revenue driven by a one-off increase in LNG vessel income, along with increases from our FSO that became operational in the middle of 2022. Those 2 more than offset lost revenue from the sale of our gas carrier last year. Overall expenses came down by QAR 21 million, primarily from the gas carrier divestment along with the nonrecurrence of mobilization related costs incurred last year for the FSO. At the nonoperating level, income decreased by QAR 4 million, mainly as a result of lower income from our associates and the nonrecurrence of a gain on sale of the gas carrier last year. Net profit for the segment ended up QAR 37 million or 8% versus the same period in 2022. In our Trading segment, we were able to reduce bottom line losses by QAR 6 million versus same period in 2022, by increasing sales of higher-margin goods and services namely marine-related ship chandlering products. And lastly, for Milaha Capital, revenue slipped by 60% or QAR 68 million with QAR 97 million of that related to Qatar Quarries sales. Obviously, that was partially offset by higher overall investments and real estate income. Total expenses came down by QAR 109 million, driven by QAR 91 million of lower Qatar Quarries cost of goods sold, which is tied to the drop in revenue, along with a QAR 15 million reduction and bad debt provisions. The nonrecurrence of an QAR 86 million impairment on the real estate property recorded in 2022 helped boost overall year-over-year results ending with an overall net profit growth of QAR 133 million or 197% versus the same period last year. That wraps up the segment, and I will now turn it over to Sami to discuss the outlook for the rest of the year.

Thank you, Akram. Starting with Maritime & Logistics. On the container shipping side, year-to-date Q3 reflected a large drop in container shipping rates, and we expect rates to continue being under pressure due to depressed global demand and expected new vessel capacity coming online. In logistics, the unit remains under pressure, and we expect to subdue Q4 in terms of warehousing and freight forwarding activities. In offshore, on the support vessels and services side, we expect to see continued growth, particularly longer term with all the expansion we're taking place in Qatar's oil and gas industry. For the harbor operations, we expect stable revenue throughout the year, given that most of the vessels are on a long-term contract. In Gas and Petrochem, overall, we expect limited volatility due to the long-term nature of contracts we have in most business units. Our VLGC joint venture is the exception where performance is difficult to predict due to volatile spot prices. But the current outlook is positive for the rest of the year. In Trading, we're going to continue to focus on profitable growth and margin improvements. And lastly, Capital where we will continue to focus on yield enhancement. And with that now, operator, we'll open the call for Q&A.

[Operator Instructions] Our first question is from [ Mustafa Amer ].

Two questions. First, on the Gas and Petrochem segment. This is where you sort of take in the Nakilat income as well into the P&L for this segment. Just wondering, you've attributed lower associate income over there. So where is this coming from? Because Nakilat year-on-year has done fairly well. Second, on the Maritime & Logistics, obviously, a big drop there. You're attributing that because container shipping segment. What's your outlook on that segment? You have mentioned Q4 being soft. Do you see a recovery in that segment anytime soon?

Okay. Thank you very much for your question. Now with respect to the Gas and Petchem as it relates to the share of results of associates, we did have a past audit adjustments or entry that we had to book this year. And so that was a past adjustment from last year that was booked this year. So that had -- it's a material adjustment but we had to book it this year. So that had an impact on our share of results of associates. That's number one, and we've mentioned that in our previous call as well. And as it relates to container shipping, it is a challenging market today. And obviously, the market is characterized by -- and it's a spot market. And so there's a lot of volatility in the market and it's very difficult to predict where it's headed. But at this point, we don't expect it to get any worse than it did the first 9 months of this year, but it's very difficult to predict outlook for the remainder of the year and where spot rates will end up going.

What was the quantum of the one-off in the Gas and Petrochem?

Sorry, repeat that question?

What is the quantum of it in [indiscernible]?

In associates? In associates is [indiscernible].

Sorry, it wasn't clear the line was.

QAR 0.6 million.

Our next question is from [indiscernible].

1 quick on your Maritime & Logistics. I mean, you did mentioned about container shipping and rates are coming down. On the flip side, we are also seeing some traction on shipyard business. So I wanted to understand what are the -- what is the relation between the shipyard going up when other businesses are going down? Apart from that, in terms of your offshore business, what we are seeing is it has seen 1 of the lowest margins during the quarter as compared to recently over the last few quarters or years, in spite of stable revenues. So what is the reason behind let's say, drastic drop in the margin? You did mention about operating expenses coming down. So just wanted to relate with that, why is this down?

The -- well, the shipyards business -- let me start with the shipyard. The Shipyard business is not correlated to container shipping volumes. That has nothing to do with it. What we have done in container shipping is we have made some major operational changes. And we've mentioned that on many calls that what we're focused on is operational optimization. So we've had some management changes in that business. We focused on optimizing the way we manage projects. So over time, you'll see major improvements in containers in the shipyard coming from all these investments that we're making and these operational improvements that we're making to the shipyard. So this is fundamentally the major changes that we're making in shipyard. It has nothing to do with container shipping business. What was the second question again?

Regarding your offshore business, which have seen, as I mentioned, lowest margin, I suppose you look at it over the last 2 years, a quarterly basis, it has quite a [ scenic seem ] drop. So I wanted to understand the reason behind it.

Well, I mean, if you look at -- I mean, if you look at the container shipping business, the -- sorry, the offshore business, I mean this year has been a phenomenal year. After many years of depressed returns, we've managed to turn this business around. And turnaround is coming from multiple areas. Number one, significant investments have been made in operational improvements. So we've managed to increase uptime and which obviously helps improve the bottom line. We've made investments in new capabilities and services and with higher margins, and that is starting to pay off. On top of that, if you look at the margin -- the market overall, not just look at our offshore business, if you compare to the market overall, what you're seeing is a general trend of rate increases overall. And the market is under supply. Demand has been going up. If you look at the region primarily. And the supply of vessels is dwindling. Vessels are getting older. So it's a very, very good time to be an asset owner today. And that is serving us well today. So if you look at the margin quarter-over-quarter, because we have managed to change our revenue mix over time, where we're adding projects and some of these projects are short term in nature, but higher margin. There are some immaterial, if you will, fluctuations from quarter-to-quarter. But overall, on a long-term basis, you will see significant upward trajectory where the margin will continue to improve.

Okay. So I mean you can safely say that over the next, say, couple of quarters, you will be seeing margins that are coming back to the EBIT levels, which we have seen in the previous quarters [indiscernible]?

And again, I can tell you that we see -- we're very excited about this business. We see a lot of opportunities. And what you see this year is that whatever -- I mean we know that container ship and rates were not going to last forever. I think globally, most container shipping companies have benefited or all of them, if you will, they made significant profits. And the reality is we know that's not going to last. And this year, our P&L got impacted by the drop in container shipping rates. But we have been very successful in replacing the majority of that lost profit and a big chunk of it is coming from offshore business. And we're also very excited about the opportunities we see in the region. We have a substantially large pipeline of work that's coming. And again, if you look at our competitors, all of them echo the same sentiment and the same excitement. So I think over the next couple of years, we should see much bigger improvements in results from offshore as well. And again, you see that this year, I think that's been a significant achievement compared to what you've seen in the past 2 to 3 years.

Lastly, and again, coming back on your offshore, I mean, along with the increase in revenues, which you have mentioned, we're also seeing you have trade receivables, which is going up. I mean we are seeing a quite significant pickup. I mean is there anything there to talk about it in terms of diesel sales? I mean are you finding some issues there on diesel?

I think trade receivables, I mean, we -- if you look at general, there are no issues in trade receivable. Collection history is fantastic. And if you look at even the way we provision for receivables and you're already seeing reversals of receivables recoveries because we're very, very conservative when it comes to receivables. So in terms of any issues of receivables, we don't see any. And again, we use a very, very conservative provision model. And so we like to err on the conservative side. But again, as I mentioned, our business is growing. And with that, receivables will continue to grow. And depending on the segments, there is -- there are -- we are subjects to creditors as per contract. But again, our receivables are very collectible.

[Operator Instructions] Our next question is from [ Nikhil Patani ].

Yes. I mean it's just tight and we've got much to talk about. But just 1 important question, which I'd like to have a follow-up on because we are quite interested in terms of [indiscernible] VLGC joint venture, which you mentioned in spot rate, which are doing well. So I wanted to have -- I mean a little bit picking your brain on what do you see it in the next -- the fourth quarter? How do you see that rate going up? I mean in terms of the general, what we see economic slowdown happening everywhere, but people [indiscernible] well doing much better. So can we understand the -- how to look at it for the next 1 or 2 quarters?

Listen, in terms of VLGC rates, they're historically volatile. But the rates right now are quite high. They are higher than the peak of the same period last year. And so given the supply and demand dynamics in the market, if you look at -- aside from tanker, if you look at -- sorry, aside from container shipping, if you look at the tanker business as well, it's doing quite well right now. So overall, there are a number of segments, shipping segments are doing quite well and it's tied to supply and demand fundamentals plus in some regions, geopolitical issues, if you will. From our perspective, we think that the rates will stay strong well into the end of Q4.

We don't have further questions. I will now turn the call back over to Bobby Sarkar. Thank you.

Okay. So if we don't have any further questions, we can end the call for today. I want to thank Akram and Sami for taking the time to go over the presentation and answer our questions, and we will pick this up next quarter. Thanks everyone.

Thank you very much, everyone. Appreciate it. See you next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.