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

Hello, everyone, and welcome to Milaha conference Call. Please note that this call is being recorded. I'd now like to hand over to our moderator for today. Shahan, you may now begin.

Thank you very much. Hello, everyone. I want to welcome you to Milaha's Third Quarter 2024 and 9 Months Financial Results Conference Call. So on this call from management, we have Akram Iswaisi, Executive Vice President, Finance and Investments; and Sami Shtayyeh, Vice President, Financial Planning and Analysis. So as usual, we will conduct this call with first management reviewing the company's results followed by a Q&A session. I will turn the call over now to Sami. Please go ahead.

Thank you, Shahan. Thank you, everyone, for joining Milaha's year-to-date Q3 2024 Earnings Call and your interest in the company. To begin, I'm pleased to report that Milaha had an exceptionally strong third quarter. Although we were slightly behind last year's performance at the half year mark, we have more than recovered in Q3, achieving a 5% year-over-year increase in our net profit. For today's call, I will first go over our consolidated financial results, then discuss our various segments and outlook. And as always, we'll conclude the call with a Q&A session. Here are the key highlights of our financial results. Milaha's operating revenues came in at QAR 2.13 billion for the 9 months ended September 30, 2024, compared with QAR 2.23 billion for the same period in 2023 for a decrease of 4%. Operating profit came in at QAR 445 million for the 9 months ended September 30, 2024, compared with QAR 404 million for the same period in 2023 for an increase of 10%. Net profit for the 9 months ended September 30, 2024, was QAR 917 million compared with QAR 870 million for the same period in 2023 for an increase of 5%. And lastly, our earnings per share was QAR 0.81 for the 9 months ended September 30, 2024, compared with QAR 0.77 for the same period in 2023. Now on to our business segments, starting with Maritime & Logistics. Operating revenue for Maritime & Logistics increased slightly by QAR 2 million going from QAR 618 million in the first 9 months of 2023 to QAR 620 million in the same period in 2024. In short, our container shipping and shipyard units offset declines in freight logistics. In container shipping, freight rates out of our recently opened China routes more than offset weakness in rates out of India, and that helped to grow revenues by QAR 22 million year-over-year. Our shipyard similarly posted a QAR 22 million increase in revenue, mainly due to added project income and volumes. And in freight logistics, reduced freight forwarding volumes, in particular, project cargo and lower warehouse utilization versus the same period in '23 drove a QAR 39 million reduction in revenue. Operating expenses came down by QAR 33 million, mainly due to a reduction in logistics volumes, which lowered our cost of sales, along with the addition of a QAR 12 million favorable swing in our bad debt provisions due to the successful recovery of outstanding debt. Net operating income decreased by QAR 33 million, and that brings us to an overall net profit increase of QAR 1 million versus the same period in 2023. In Offshore, operating revenue fell by QAR 51 million for the first 9 months of 2024 versus the same period in '23, going from QAR 1.112 billion to QAR 1.062 billion, with increased chartering rates being offset by both planned and unplanned vessel maintenance, which impacted our revenue-generating capacity. On the operating expense side, we saw a QAR 30 million year-over-year decrease with reduced operating supplies and expenses tied to lower chartering in expenses, third-party contractors and various miscellaneous expenses, more than offsetting higher salaries and wages and other miscellaneous operating expenses. Overall, net income dropped by QAR 22 million from QAR 169 million in the first 9 months of '23 to QAR 148 million for the same period in 2024. At the operating profit level, Gas and Petrochem had a slight dip in the first 9 months of 2024 versus '23, going down from QAR 95 million in '23 to QAR 92 million in 2024. But at the nonoperating level, income increased by QAR 33 million with a QAR 50 million increase from results from associates, mainly Nakilat, more than offsetting a drop of QAR 9 million from results from joint arrangements, mainly out of our VLGC joint venture. Net profit for the segment ended up QAR 31 million or 6% versus the same period in 2023. In our Trading segment, reduced heavy equipment and bunker sales and margins negatively impacted our results with the bottom line slipping from near breakeven in the first 9 months of 2023 to minus QAR 13 million for the same period in 2024. And lastly, capital, despite a 2% overall drop in revenue in the first 9 months of '24 versus '23, led by reduced Qatar Quarry sales, overall net profit increased by QAR 51 million, driven by higher investment income. And that essentially wraps up the segments. I'll now go over our outlook. Starting with Maritime & Logistics. On the container shipping side, we expect rates to continue being under pressure due to depressed global demand and expected new vessel capacity coming online. But we're optimistic that the new China services, which began in May, will continue to provide uplift. In freight logistics, the environment remains challenging. 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 our harbor operations, we expect stable revenue throughout the year, given that most of the vessels are on long-term contracts, similarly for industrial logistics. In Gas and Petrochem, overall, we expect limited volatility due to the long-term nature of contracts we have in most of the business units. Our VLGC JV 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 lastly, capital where we will continue to focus on providing stable results and yield enhancement. And with that, operator, we'll now open the call for questions and answers.

[Operator Instructions] Your first question comes from Rob Skepper from Ashmore.

My first question is just on the OSV business. So the outlook statement there is still very positive. But I guess we're kind of yet to see much materializing the results or on the news front. Like is there anything you can share on this front?

Yes, I can jump in. This is Akram. This business is CapEx-heavy business. So there is -- you've heard the announcements in the market on -- you've heard the announcements in the market about us winning substantially large contracts. And we've indicated many times that the business is -- has a lot of upside. There's a lot of potential given the North Field expansion, our ability to capitalize on that. And that continues, but there is a time lag for us to be able to invest in the CapEx and continue to build up the operation. So we're still optimistic on the business, and you will see those results materialize over time as we continue to buy new vessels, invest in new builds and continue to build up our operational capabilities. I mean you've seen the -- you've heard and you've seen the announcements in the market about new contracts we are winning. But again, they need time to be executed. We need to buy the CapEx. So they need time to materialize. So there is a lead time to be able to see the results. And these are long-term contracts.

Yes. Okay. And what's the amount of investment required to support the contracts announced so far?

Well, I mean, for -- again, we're talking potentially CapEx in the billions that will be required to support all the North Field expansion and requirements. So the CapEx requirement is to be able to support a lot of North Field expansion is essentially in the billions. So we haven't disclosed that to the market, but the number is substantially large. It's a requirement overall.

Yes. Sorry -- and -- yes, the announcement so far is for the QAR 792 million charter. Like is that a [indiscernible]?

Yes. That's for the first contract. I mean as we win contracts, we will announce them in the market, and again, we are bound by confidentiality provisions with clients and as they allow us, we'll announce those in the market. But you will see this is one of many contracts that are coming. Again, I think everybody in the market knows there's a lot of upside in the Qatari market on the back of the North Field expansion. And so we are looking to capitalize and as well as support the country in that expansion phase

Yes. Okay. And in terms of announcements of further contracts, like over what kind of time frame -- like are they kind of being concluded now? So you'll kind of have most of these contracts in place in the next few quarters?

We could not disclose that. Again, when they happen, we will announce them to the market.

Okay. Great. Just jumping around a little bit. Just on the capital business. So just on the current asset allocation in the investment book, are you allowed to share that?

I'm sorry, repeat the question?

Within the capital division, just asking about the investment book, what's the current asset allocation?

Unfortunately, we don't disclose that.

Okay. Okay. And is there any leverage on the investment book?

It's very little. Very, very little. I mean as -- if you look at our balance sheet as a company, we've reduced our debt substantially. So we are very well poised and prepared to deploy our capital -- our balance sheet to grow in that high interest rate environment. We've been able to save quite a bit. And so as the market -- the rates come down, I think we're very well positioned to use that to fund growth. But if you look at our debt, it's very little, negligible.

Okay. Great. Then last one for me. Just on the question around like dividend policy and dividend frequency, is that something that you guys would be looking at in terms of moving to an interim rather than annual, et cetera, et cetera?

And I think that seems to be the market trend at the moment. Once our Board, obviously, all -- I believe, in my opinion, all the Boards in Qatar are discussing this now, which seems to be the general trend in the market. Our Board has not approved that. Otherwise, you'd hear about it in the market. So I think let's just wait and see and when the Board approves it, we will announce in the market. But it seems to be the general trend in the market right now.

Your next question comes from Mark Rambus from TFI.

Just a quick question about the outlook for whether your company would be subject to OECD tax, which if it's implemented in 2025? Have you spoken to any consultants and sort of sought opinion on whether you might have to pay? And if so, how much and what you could offset? Maybe you could just talk about that.

Well, 2 things are for sure, death and taxes. So I think that taxes are coming and essentially global minimum tax, everybody now has to pay it regardless. So -- and we're prepared for that. We've been prepared for the past couple of years. We've done our homework. We've done our research. We have a good understanding of our exposure. And so taxes are coming.

Yes. But let's say, for example, there were some loopholes for international shipping. There's certain -- I don't know what your other subsidiaries paying, like to sort of lower that effective tax rate from 15, which is fairly harsh in a way. Is it -- I mean, do you -- have you got some steps you can take to lower it?

Well, we have. I mean if you look at, number one, if you look at -- there are -- for example, in shipping, there's something called the tonnage tax regime, which is countries have implemented that in various places around the world. It's not a new regime. Those exist worldwide, which effectively help reduce tax liability for shipping companies given the fact that shipping companies are -- it's a thin margin business. So to support shipping companies in some countries, we've seen tonnage tax regimes being implemented. We don't know if it's been implemented here at Qatar or not. So these are there. So again, my point to you is, we've considered how do we reduce our tax exposure. We've looked at how do we restructure our businesses to be able to reduce tax liability even as we invest whether through the investment portfolio or through the operational portfolio, how do we reduce our tax exposure. So we do have a tax team that's very good at tax structuring and this is one of the things that we've embarked on the past couple of years. And in fact, it's a journey we've been going on for a while where we went back and looked at our entire portfolio even before Global Minimum Tax to try to restructure our businesses to reduce tax liability. So we are well prepared for this. And there is tax exposure, but I think we've been able to build a very good plan to try to reduce our exposure. And then again, as -- if you know -- I think you probably thought over that -- in Global Minimum Tax, there are a lot of things that are still evolving. But the fact remains that the overall -- there is an exposure, but it's how you manage exposure and whether there are exception exemptions, they continue to evolve. But we're on top of it and we're evolving with it.

Okay. I guess we'll wait and see.

Your next question comes from Nikhil Phutane from CBFS.

Well, my question is pertaining your offshore business, how -- you did mention you are doing well in terms of [indiscernible] projects are going to be coming up and maybe continuing going on currently also? But it looks like on a quarter-to-quarter basis, you see, I mean, the margins have been quite low. It has been reducing. So just wanted to understand why is that so? Why the margins are coming off?

Well, I mean, margins are coming up. In essence, if you look at this business right now, what we've been able to do is really sweat the assets. So we've been able to optimize our balance sheet, sweat our assets, and this is sort of what you're seeing being reflected in our P&L. However, this business, because it's a CapEx-heavy business, it has to undergo periods where we need to take vessels off from contracts and maintain them. So we have been impacted by that in the last quarter. And so margins should continue to expand. And also what we've done as we've been able to invest in capabilities because we are -- again, as a business, we continue to expand our portfolio of offerings. Again, I've mentioned that many times before, Milaha continues to evolve rather than being an asset owner. We are taking a portfolio approach to serving our customers. Historically, we used to just essentially leased assets, if you will, or rent our assets. Now we're coming to market, and we've been developing products. If you look at engineering capabilities, EPC capabilities, we've been developing those to be able to come in and take on more profitable projects, higher-margin projects and come in and be able to offer the customers more than just asset leasing. And this is sort of what we've been doing. And we mentioned that before, we have been, in fact, investing in capabilities that hire more people and acquire even assets that will allow us to provide those kind of services. Again, this is a business where you have to ramp up and there's a lag in order for you to be able to ramp up. So in terms of one buying assets, if you can't buy secondhand in the market, you have to build them. And there is a lead time for the building. So those capabilities have been developed. So -- but if you look at our numbers for offshore where we were in the past and where we are today, it's substantially different. So the business continues to grow. And if you look at even effectively the top line for offshore, we've -- we used to charter in a lot of vessels and deploy them, and that number of chartered vessels has diminished just because you can't buy vessels in the market. So our focus is on how to optimize returns on the existing vessels, but we're also looking at building new vessels or buying secondhand vessels to continue to grow the top line, which, in our opinion, there's a huge potential, and I don't say contract backlog, but there is potentially a lot of upside that we see and we have a good line of sight of what's going to happen in the next 5 years.

Okay. Well, okay, coming to your logistics, we were looking very optimistic when...

And by the way, just to piggyback on that, our net profit margin offshore, last year was 15%, and this year it's 24%. So even despite the fact that we had to take vessels off for maintenance, margins are still relatively stable. Without that, margins would have been much higher. So you'll see over time, that margin continues, but reality is vessels will have to be taken off for maintenance periodically, which does impact profit margins. Sorry, I interrupted you, go ahead.

Okay. I think you did have a lot of provisions also last time. But nonetheless, I mean, going on to logistics actually, which actually -- I mean, in the last quarter, you did mention we are looking very optimistic new vessels coming across, we could be seeing better going forward in terms of logistics, container shipping and other things. But it looks like -- I mean you did well. But overall, in terms of -- I mean, receivables, for example, impairment of trade receivables that took place. And apart from that, your -- I mean, in terms of overall coming to profit for this quarter actually came to largely from higher profit from your fleet and technical services, which I believe is within the division. So I wanted to understand how you account for this allocation to fleet and technical services? I mean, is this -- there is some fixed fees, how this evolves? I mean, just wanted to have a head start up on this.

Are you talking about Maritime & Logistics?

Yes.

Effectively -- just -- it's just a cost center effectively. So it's not an operating business unit. It's just a cost center that serves or shared services that serves the rest of the business. If you look at this business today, I've mentioned logistics, what I mentioned in the past, to be clear, that we are working to optimize logistics. We are looking at the operation, how do we cut cost, how do we grow the top line. And we said we've set targets for ourselves around first and second quarter of next year to begin turning that business around. But again, we are in a market that is tied to the macro dynamics that we're in. And so this is a business that we are working to turn around. And so it does take time. It's not going to happen over night. I mentioned that last quarter, so it's not going to turn around in a span of one quarter, but we are picking up new contracts, and it's a volume business. So it needs time and it needs scale to be able to turn things around. If you look at container shipping, it's doing well except for the accounting adjustments, which, again, these are IFRS standards that we have to abide by. But I'm optimistic that next quarter, we will see that turnaround. And you've seen that, I think, from an IFRS perspective, when it comes to provisions, we're much more conservative and we follow the standards to the letter. And that does have an impact on our P&L in certain quarters, but it tends to reverse itself in the following quarters because some customers take too long pay, but eventually they end up paying. Fleet and technical, like I said, is a shared services that serves various businesses. So it's a simple mathematical equation.

Okay. I mean within the logistics we ship the actually have shown quite volatile in terms of revenue pattern. I mean, you did mention that you could be seeing undergoing major changes?

You're right. It's a small business. In the grand scheme of things, it's not right now, it's say, you look at that business, number one, we are upgrading the shipyard. So this is a major upgrade to the shipyard that hasn't been done in decades. So again, we expect a lot of business. We do have a lot of business, but you need to be able to upgrade the shipyard and provide capabilities in order to serve your clients. So this is something that we've been doing and working on. The shipyard is undergoing upgrades. We've hired new capabilities to be -- we have new leadership in the shipyard to manage the shipyard. The men, in our opinion, is there. So what we needed to do is upgrade the shipyard, enhance our capabilities, and you will begin to see the results over the next couple of quarters, the major improvements or improvements in shipyards. And so if you look at this year, we've had some one-off items in shipyard. But if you back those out and you normalize numbers, the shipyard is profitable and the profitability should continue.

Okay. And -- okay. And lastly, on your fourth quarter, I mean it's quite early, but in terms of a normal trend, which we see fourth quarter normally some kind of one-off items that take place -- can say via impairment of vessels or trade receivables. So are you seeing something like that happening again in fourth quarter?

I mean, again, we follow IFRS and as per standard -- we follow the standard, so I cannot really provide a guidance on that because, again, we will fund accounting standards, we're subject on audit and discussions with the auditors. But again, nothing we are aware of at this point. And again, as I've alluded to before, the material accounting adjustments we've taken in the past will not recur again. So if anything happens, it will be immaterial in the grand scheme of things. But the major ones we've talked them -- we've done, we've taken major impairments in the past. And those are behind us. And again, if it happens, we don't believe it will be material. But again, we follow IFRS standards and is that simple.

As of right now, we don't have any pending questions. I'd now like to hand back over to Shahan for further remarks.

Okay. Great. Thank you, gentleman. Thanks for giving us an update on 9 months results, and we will pick this up again next quarter. Thank you.

Thank you, everyone. We appreciate it. Thank you. .

Thank you, everyone.

Thank you for attending today's call. You may now disconnect. Have a wonderful day.