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. Thank you. I'd now like to welcome Mr. Bobby Sarkar to begin the conference. Bobby, over to you.

Okay. Thank you, Bhavesh. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Milaha's Fourth Quarter and Year-end 2022 Results Conference Call. So on this call, from Milaha's management, we have Akram Iswaisi, who is the EVP in finance and investments; and Sami Shtayyeh, who's the VP in financial planning and analysis. So as usual, we'll conduct the call with management first reviewing the company's results, followed by a brief Q&A. I would like to now turn the call over to Akram. Akram, please go ahead.

Okay. Thank you very much. Appreciate it. Thank you, everyone, for joining Milaha's 2023 year-end earnings call and your interest in the company. 2023 was a great year for Milaha, especially when you consider the headwinds we faced early on. The largest and as expected and discussed on previous earnings calls was the container shipping windfall we saw in 2022, which quickly dissipated, leaving us with a large gap to fill in terms of profitability in 2023. We more than filled that gap, posting year-over-year increased profits. And our ability to do that define 2023, and we anticipate 2024 to look just as strong. I will now go over our consolidated financial results. and then our various individual business segments, before I turn it over to Sami to go over the 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 2.9 billion for the year ended December 31, 2023, compared with QAR 3.3 billion for the same period in 2022, for a decrease of 10%. Operating profit came in at QAR 436 million for the year ended December 31, 2023, compared with QAR 487 million for the same period in 2022, a decrease of 10%. Net profit for the year ended December 31, 2023, was QAR 1.30 billion compared with QAR 1.13 billion for the same period in 2022 for an increase of 2%. And lastly, our earnings per share was QAR 0.91 for the year ended December 31, 2023, compared with QAR 0.89 for the same period in 2022. Now I'm going to get into the various segments, starting with Milaha Maritime & Logistics. As mentioned in my opening remarks, the large decline in container shipping rates took its toll on 2023. That drop in container shipping rates not only impacted Milaha, but impacted the entire container shipping industry. This obviously had a severe impact on our Maritime & Logistics segment. Overall, revenue for Maritime & Logistics dropped by QAR 477 million versus the same period last year. And that was predominantly because of the reduced container shipping rates along with a slight decrease in volumes. Expenses came down by QAR 214 million, driven primarily by the drop in container shipping volumes. Overall, we ended the year with net profit down QAR 330 million versus the same period in 2022. Now moving on to Offshore. Offshore ended the year with operating revenue being up QAR 164 million or 14% versus the same period in 2022. The Offshore segment continues to benefit from the oil and gas expansion taking place in Qatar with additional subsea and engineering-related projects and services along with increased utilization of key assets driving our growth. Overall expenses increased by QAR 55 million with variable expenses tied to the increased revenue more than offsetting favorable one-offs related to the reversal of a VAT provision that was taken in '21 and lower professional fees. The net income result was a year-over-year growth of QAR 87 million or 112%. Gas & Petrochem recorded a 12% increase in revenue, driven by increases from our FSO unit that became operational in the middle of 2022, along with one-off increases in our LNG vessels. 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 reduced expenses related to the gas carrier divestment along with lower operational related costs incurred for the FSO. At the nonoperating level, income increased by QAR 62 million with QAR 79 million -- a positive QAR 79 million from reduced impairments, more than offsetting a negative QAR 12 million gain taken in 2022, on the sale of the gas carrier that didn't recur and QAR 8 million lower in income from our JVs and associates. Net profit for the segment ended up QAR 180 million -- QAR 108 million or 19% versus the same period in 2022. In our Trading segment, we were able to reduce bottom line losses by QAR 3 million versus the same period in 2022 by increasing sales of higher-margin goods and services, namely marine-related ship chandlering products. And lastly, Capital. Revenue slipped by 19% or QAR 102 million with QAR 140 million drop in Qatar Quarries, partially offset by higher overall investment income. Total expenses came down by QAR 156 million, driven by QAR 131 million of lower Qatar Quarries cost of goods sold, that's tied to the drop in revenue, along with a QAR 24 million reduction in bad debt provisions. The nonrecurrence of an QAR 86 million impairment on a real estate property recorded in 2022, helped boost year-over-year results, ending with an overall net profit growth of QAR 149 million or 165% versus the same period in 2022. And that wraps up the segment, and I will now turn it over to Sami to discuss the outlook.

Thank you, Akram. Starting with Maritime & Logistics. On the container shipping side, as already discussed, 2023 was negatively impacted by the large drop in container shipping rates, and for the most part, we expect rates to continue being under pressure due to depressed global demand and expected new vessel capacity coming online. In logistics, the environment is quite challenging and expected to remain so. Our focus is on boosting sales efforts and improving operating efficiencies. . In Offshore, on the support vessels and services side, we expect to see continued growth, particularly longer term with all the expansion work 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 long-term contracts. In Gas & 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. In Trading, we will continue to focus on profitable growth and margin improvement. And in Capital, we will continue to focus on yield enhancement. With that, operator, we'll now open up for questions.

[Operator Instructions] Our first question comes from the line of [ Mark Combes ] from TFI.

I just wanted to ask a question about the sort of the freight forwarding and that sort of the container business. Obviously, last year it was in a loss, but this year, apparently, rates have improved because of disruptions in the Red Sea. Do you think that -- what do you think is kind of a stabilized or sort of a normalized level for that subsidiary? Like what are you hoping for this year from it?

In all honesty, I think the Red Sea situation, we're seeing that not just in our business, but with other container shipping carriers that rates have gone up, okay? But the expectation is that increase will be temporary. So because the situation is in flux or fluid, it's very difficult to predict what would be the positive impact on our numbers for the rest of the year. So we can't really disclose to you really what the normalized numbers will look like for the rest of the year, but we expect a decent pickup as a result of this situation because, again, it's still fluid and the question is how long will it last. The longer it lasts, obviously, the more positive an impact it has on container shipping rates. And rates have increased overall. Not just in container shipping, in the market overall, there is an increase in rates as a result of the Red Sea situation.

Okay. And I just wanted to ask, obviously, you have a very large investment book like Milaha Capital. Is there any consideration to sort of lower that over time and increase the dividend paid to shareholders?

I think -- it's a good question. I think the way we're looking at this right now is that if you take, for example, today our Offshore business, our Offshore business has done exceptionally well in 2023. And we are optimistic that this business will continue to do well in the next few years. I mean, the Offshore market is very strong. Demand far exceeds supply even from a vessel perspective. And there's a huge pipeline of opportunities. So our plan is to continue to invest in our core operating activities, of which Offshore is going to be a substantial one. And so if you look at our CapEx program. I mean, in the past couple of years, we've not invested enough in CapEx. If you look at the cash flow, you'll see that. But already this year, we've been winning tenders, winning contracts, and the next couple of years is going to be a significant CapEx program to build up a bigger fleet and to also continue to rejuvenate our fleet. So what we're looking at is how do we use our balance sheet to fund that growth activities, whether it's the investment portfolio or use in depth to continue to fund the growth. This is how we're looking at it. And so there are discussions to further optimize that investor program.

Yes, obviously. I just wondered if that might help narrow the discount to book that your stock trades at if you improve the payout ratio of your earnings that you pay out in dividend. That was just an observation.

I think it's a good -- I mean, listen, we continue to have discussions with the Board on this, and it's definitely a good question. But what we're looking at is how do we use our balance sheet, whether it's the investment portfolio or using that to try to fund some of this CapEx program. Because at the end of the day, if you look at our business, we need to continue to invest. Our business is CapEx heavy. We are a shipping, an offshore company, a logistics company. If you look at where the growth is going to come for us, a big part of what we're focusing on right now is Offshore business. You guys are in the region, you're in the market. There's significant potential not even for the next couple of years, we see it for a much longer period. And so our focus is on how do we fund that growth. And so we're looking like, again, how do we optimize our balance sheet to be able to fund that growth.

Our next question comes from the line of [ Jan Abadi ] from Al Rayan Investments.

My question is regarding the amortization and the impairments for 2024. How do you see it for the full year? Do you have any plans to increase or decrease your impairments?

Thank you for the question. As we've mentioned on previous calls, the large impairment charges in our perspective are behind us. And as you look at future impairments, if you look at this year, book closed at QAR 20 million on our P&L, which is really negligible and immaterial. And so as we have old equipment, we will -- we'll be conservative, honestly. We're not going to be aggressive. Our approach is to be much more conservative on how we look at impairments and the future economic life of our assets. So in terms of future impairments, we don't expect anything material. I mean as you've seen in '23, and it's been QAR 20 million. So that tells you a lot about what to expect in the future. And again, we've done a lot in the past few years. We were conservative. And so our view was always to be conservative on how we look at, again, the economic life of our vessels and we take action immediately.

Our next question comes from the line of Joshua Martin from Ashmore Group.

I was just wondering with regards to the Maritime section, how much spare capacity do you currently have? And really, what are you planning to add in that space?

Thank you for the question. When you say maritime, you're talking about container shipping primarily, right?

Yes.

Okay. In terms of our capacity, it's a flux because what we do is we have our owned vessels and we're also chartering vessels depending on market dynamics. This container shipping business, we will grow it strategically. So we're looking at various new opportunities, new network expansion programs. But we're also looking -- the way we're looking at our business right now is how do we build -- how do we push our platform out. So looking at container shipping and logistics as an integrated platform to be able to optimize their returns. So that's basically how we're looking at our business. So again, we own 5 vessels today. And again, we are looking at potentially buying some more vessels, but again, the way we're trying to grow that business is looking at container shipping as part of a platform. So integrating the other services with it, which is logistics and various other supply chain solutions. And we've been successful recently with a couple of pilots, and that's sort of what we're looking to do is continue to push that integrated platform approach as we push out some of the maritime services in Qatar and outside of Qatar.

Our next question comes from the line of Nikhil Phutane.

Maybe I've not been able to start the meeting early. Well, I just wanted to know whether these questions have been asked, well and fine, otherwise you can skip it. Well regarding again your impairment vessels, which you have again shown in your Offshore, the management has indicated very much in the past that we could not be necessarily showing this again and again because that has been done and dusted. But again, we are seeing the same thing going forward in fourth quarter. So I wanted to have a view on that. Secondly, similar to that, we have these trade related provisions, Maritime & Logistics. So what is this? Can you just give some color on this?

So the first question, you're referring to impairments on Offshore, correct? That's what you referred to, right?

Okay.

But if you look at the P&L, that impairment number is immaterial in the grand scheme of things. And if you compare offshore companies and shipping companies, there are always going to be impairment charges taken on various equipment, various assets. But the question that was asked is what does it look like for '24. And my response earlier was we'll always look at our assets, our vessels and evaluate economic value of those vessels. We're always going to follow the proper accounting standards. And we're usually conservative. We're not aggressive. So we've taken a lot of charges in the past and that were material. But if you look at '23, I think the number of QAR 20 million is really immaterial in the grand scheme of things. So we don't expect big charges going forward, okay? As it relates to the second question, I think you mentioned, on Maritime & Logistics. I mean, listen, we have -- if you look at Maritime & Logistics, '23, there was really -- if you're talking about provision -- what are you talking about provisions for M&L, we have none right there. I mean, if you look at provisions from payment of trade receivables, it's 0. So I'm not sure which number are you referring to for the second part of the question?

Regarding the provisions that you have provided, I mean, under your Maritime & Logistics, which you just mentioned, trade related.

It's not related to Maritime & Logistics. It's related to Offshore. So those provisions relate to Offshore. If you look at Maritime & Logistics, provisions for impairment of trade receivables is 0, impairment of property and vessels is 0. So there's none there. It's mainly tied to Offshore. And specifically, as I mentioned, we had old equipment, and we went through the exercise of evaluating impairment. And those assets are no longer employable, so we were conservative in taking the impairments in Q4.

Okay. Yes, I mean, coming back to your Maritime & Logistics, I mean what we are seeing is a lot of tourism-related activities around Qatar going forward, even right now as we look at in the first quarter. I mean, can we see some kind of a lift off in your warehousing and freight-forwarding activities going forward?

I mean in terms of that logistics business is a volume gain. So as you've alluded to, if we see more activities here in Qatar, that bodes well for us. You've seen our announcement in the media about our expansion into Saudi Arabia. So we've started new products and services in Saudi Arabia. So that business will continue to evolve and grow. And that's what we're hoping for. And again, we've got a strategy to grow that business. And that growth requires volume. So part of it will have to come domestically as things start moving, but we're also looking at expansion outside of Qatar. And again, you've seen that first step in Saudi Arabia. So we're pushing hard in Saudi Arabia. And from there, we're going to continue to push the logistics business.

Okay. Lastly, on your operating expenses. I mean, we are seeing quite a change, significantly increasing trend, especially in your wages, say, for example, in Maritime & Logistics division. I mean, against your normal rate, it has quite increased substantially. So are we going to be seeing -- I mean, is this a onetime thing which has happened? Is this something which we could be seeing in 2024?

I'm sorry, you're referring to Maritime & Logistics. So what you're referring to, what do you see, an increase in operating supplies and expenses?

Yes, yes, yes.

Actually, operating supplies and expenses have come down, they've decreased by QAR 208 million on Maritime.

No, I'm talking about overall, including other operating expenses and other things, which have been classified, including your wages. So there has been...

At the end of the day, we tightly monitor the operating supplies and expenses. We were impacted, again, by macro dynamics. There's been an impact as a result of inflation. We've had an impact on various expenses. We've had crew cost issues that have gone up as well in the past. So we continue to look at ways to optimize cost. But generally speaking, our cost has been well controlled, and that's what we're seeing in the P&L. Now we continue to find ways to do more with less. We look at how do we -- how to use -- I mean, we've got major digital initiatives to try to leverage technology to be able to build scalability into our business, to be able to do more with less. But if you look at our operating expenses, they seem stable. In fact, they've come down. And you got to look at that in relation to revenue as well because, again, some of our -- you got to look at that in relation to revenue. If you look at what we've been able to do today, we've been able to significantly increase the top line on Offshore without majorly increasing the operating expenses. So that is also a testament to what we've been trying to do to squeeze more value out of the top line, whether it's optimizing pricing, doing more with less. And so you see that in our numbers. I think it's quite clear.

Fine, I will not argue on this. But lastly, on your Trading division, I wanted to understand when we can see a turnaround? 2024 could be seeing that?

In terms of trading, I think there was a positive improvement compared to last year. And so we mentioned again, if we're going to make an investment, we've developed some new products and services, and it takes anywhere from 2 to 3 years to begin to reap the fruits of your investments. So shipyard, we've bid major changes to shipyard management. As an example, across the business, we've brought some new talent, so we're optimizing the business. If you look at Trading, for example, we also made some changes in terms of management there. The ship chandlering platform is going to be -- it's a platform that takes time to develop. So over the next 2 to 3 years, you begin to see the fruits of some of those investments being made. But again, it's not going to be an overnight success because it takes time to build those services and roll out those products. And again, I want to highlight again, if you look at what we've done with Offshore, where we've lost a significant amount of revenue from container shipping, and we've managed to replace most of that profitability, most of that top line from the Offshore business. That's a testament to our ability to be able to react to the market. And so we're building a lot of products and services right now to continue to grow the business, but it takes a little bit of time to be able to reap the fruits of those investments. So it doesn't happen within 12 months.

Our next question comes from the line of [ Jan Abadi ] from Al Rayan Investments.

Yes. You've mentioned CapEx for the Offshore business for 2024. I was just wondering if you can provide us with some guidance regarding that, please? And just some clarifications on the number and how are you thinking of going about this CapEx?

Honestly, we've signed nondisclosure agreements. So I can't specifically give you a number. But I can tell you it's going to be substantially higher than what you've seen in our P&L. We've bid on a lot of contracts. And we've won some contracts as well. And so I think you will see more disclosures coming up over the next quarter. But right now, I can't give you an exact number, but it's going to be substantially higher than what you've seen in the past. And if you look at -- I mean, from a CapEx perspective, in '23, I think we did a little less than QAR 300 million, whether it's maintenance CapEx or new CapEx. In 2022, I think it was close to QAR 400 million. . The number we're expecting to see is much, much higher than that for 2 reasons. One, we're winning a lot of tenders. Secondly, on the Offshore side, we are looking to rejuvenate our fleet. And so if you look at Offshore vessels in the market today, generally speaking, if you look at even our competitors, the vessels are aging. And there hasn't been significant CapEx investments in new vessels and new fleet. So we are looking at rejuvenating our fleet and also fulfilling requirements for some of the tenders that we're winning.

There are no further questions at this time. I'll now hand the call back to Mr. Bobby Sarkar.

Okay. Thank you, Bhavesh. If there are no further questions, we can end the call for today. I want 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, guys.

Thank you very much, everyone. Appreciate it.

Thank you. This concludes today's conference call. You may now disconnect.