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

Hello, everyone, and welcome to the Qatar Navigation Milaha Conference Call. Please note that this call is being recorded. I'd now like to hand over to our moderator for today, Bobby Sarkar. You may now begin.

Thanks, Ellie. 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 2024 Results Conference Call. So on this call from Milaha Management, we have Akram Iswaisi who is the EVP in Finance and Investments; and Sami Shtayyeh, who is the VP in Financial Planning and Analysis. So we will conduct this conference with the management first reviewing the company's results and going over the presentation and then we'll follow up with the Q&A session. I would now like to turn the call over to Akram. Akram, please go ahead.

Thank you very much. Thank you, everyone, for joining Milaha's 2024 year-end earnings call and your interest in the company. 2024 marked another strong financial year for Milaha, one which we are all proud of. All our core marine-related segments posted year-over-year growth. Offshore has had a fantastic year where it continues to capitalize on not only the favorable oil and gas industry growth here in the region related to Qatar's expansion primarily, but also we've begun reaping the benefits of past year investments in capabilities, processes and systems and know-how. On the Maritime & Logistics side, we have narrowed the large operating profit gap from 2023, largely due to our strategic initiative of optimizing our containership and network and continuing to work on optimizing our logistics operation and obviously, recovery -- focusing on recovery of outstanding dues. And in the Gas & Petchem sector -- segment, our results from associates and JVs continued to provide steady, reliable income and growth. All in all, a fantastic year. I will now go over our consolidated financial results. And then our various individual business segments before turning it over to Sami to go over the outlook. As usual, we will end the call with questions and answers. The key highlights of our financial results. Milaha's operating revenues came in at QAR 2.8 billion for the year ended December 31, 2024, compared with QAR 2.9 billion for the same period in 2024 for a decrease of 3%. Operating profit came in at QAR 536 million for the year ended December 31, 2024, compared with QAR 436 million for the same period in 2024 for an increase of 23%. Net profit for the year ended December -- for the year ended at QAR 1.12 billion compared with QAR 1 billion for the same period in 2024 for an increase of 9%. And lastly, our earnings per share was QAR 0.99 for the year ended December 31, 2024, compared with QAR 0.91 for the same period in 2023. All right. Getting into our segments, Maritime & Logistics. Operating revenues for this segment increased by QAR 49 million going from QAR 779 million in 2023 to QAR 828 million in 2024. Our container shipping unit growth in that segment or the profit center more than offset declines in our freight logistics business. In the container shipping business, freight rates of newly opened China routes provided uplift and helped revenues grow by QAR 76 million compared to last year. In freight logistics, reduced freight forwarding volumes, in particular, project cargo and lower warehouse utilization versus 2023 contributed to a reduction of QAR 20 million in revenue. Operating expenses came down by QAR 50 million, with QAR 12 million increase in depreciation and amortization. From our container shipping unit related to additional CapEx, which was more than offset by the following: a favorable swing bad debt provisions due to successful recovery of outstanding debt, the nonrecurrence of one-off items recorded in 2023, a lower corporate overhead allocation due to a change in reporting structure and more fleet and technical expenses being allocated to our offshore unit due to increased maintenance and repairs and crewing expenses. Nonoperating income decreased by QAR 33 million, and that brings us to an overall bottom line increase of -- or improvement of QAR 45 million versus 2023. Moving on to Offshore. Offshore ended the year with operating revenue down QAR 53 million or 3% versus 2023. Increased chartering rates were offset by planned and unplanned vessel maintenance which impacted our revenue generating capacity. Overall expenses decreased by QAR 58 million or with QAR 135 million in reduced operating supplies and expenses tied to lower chartering expenses, third-party contractors and various miscellaneous expenses more than offsetting higher salaries and wages, fleet expenses and other operating expenses. The net income result was year-over-year growth of QAR 44 million or 13%. Moving on to Gas & Petchem. This unit recorded -- the segment recorded a small QAR 2 million increase in revenue, equivalent to 1% growth versus last year but with the QAR 30 million increase -- QAR 34 million increase in expenses, QAR 30 million of that increase is related to an increase in depreciation and amortization with the bulk of that type to change in the useful life of our 2 wholly owned LNG vessels. Let me elaborate on this specific point. As a background, these 2 vessels originally have a useful life of 40 years obviously ongoing, as you're well aware, ongoing technological investments in LNG vessels have led to a significant shift towards more efficient and eco-friendly designs. From an accounting perspective, a benchmarking exercise was conducted looking at the existing contract commercial outlook and recognizing that it is highly unlikely that existing contract would be extended beyond the former contract period and the vessel will likely be operating in the market after the end of the contract. This prompted a reassessment and ultimately a change in the estimated useful life of the vessels from 40 years to 30 years. The change in useful life triggered an acceleration in the annual depreciation charge and also led to an impairment due to the shortened asset life span, which is reflected in the nonoperating section of the P&L. At the non-operating level, income increased by QAR 83 million, broken out as follows: QAR 50 million increased impairments related to the change in useful life of the 2 LNG vessels I just discussed, QAR 65 million increase in results from associates, mainly from our share of Nakilat and an QAR 82 million increase in results from joint arrangements, mainly from our VLGC JV. Net profit for the segment ended up QAR 52 million or 8% higher than last year. In our Trading segment, essentially and across the board, a reduction in sales drove a 20% drop in revenue versus '23 that, along with an QAR 8 million provision for obsolete parts adjustment drove the bottom line to a QAR 29 million loss for '24. And lastly, capital revenue slipped by negative 2% or QAR 8 million with a QAR 50 million drop from lower Qatar Quarry sales more than offsetting QAR 42 million in higher overall investment income. Total expenses came down by QAR 63 million, driven by the reduced Qatar Quarries cost of goods sold. At the nonoperating level, income decreased by QAR 60 million with QAR 63 million of that related to the impairment on one of our real estate assets. All in all, capital reported and specifically the real estate asset in the logistics assets. All in all, Capital recorded a net profit decrease of QAR 3 million compared to 2024. And that wraps up the segments, and I will now turn it over to Sami to discuss the outlook.

Thank you, Akram. Thank you callers. Starting with Maritime & Logistics. On the container shipping side, rates are expected to come under pressure given new vessel capacity, political and economic trade and tariff issues and the potential for the gradual easing of the Red Sea crisis. In logistics, turnaround efforts are expected to improve results, but the environment remains very competitive and challenging. 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 and industrial logistics operations, we expect stable revenue given the long-term nature of most contracts. In Gas & Petchem, overall, we expect limited volatility due to the long-term nature of contracts we have in most business units. Our VLGC JV is the exception, where charter rates are currently stable and near to midterm, however, the longer-term outlook is uncertain. In Trading, we will be focused on reorganizing the segment and continuing our focus on profitable growth and margin improvement. And lastly, Capital where we will continue to focus on yield enhancement. With that, operator, we'll now open the call up for questions.

[Operator Instructions] Your first question comes from Nikhil Phutane from CBFS.

Just wanted to understand division wise in terms of what has happened. You mentioned about the slightly higher depreciation during the fourth quarter for Maritime & Logistics division. So I wanted to understand, has there been any purchases or on this -- also along with that, your JV income has been quite volatile during the year. So I mean, how can you model that going forward? And regarding...

I'm sorry, repeat, hold on, let's start with one question at a time. You're talking about the increase in depreciation?

Yes. A slight increase, which has taken place in the fourth quarter. I wanted to -- I mean, as for the run rate of the first 2 to 3 quarters so I wanted to understand the reason behind it, as there has been some revisions which have been added up.

On the LNG vessels, right? As I mentioned, we had an increase in -- we changed the useful life of the 2 LNG vessels that we own 100% historically when we bought them, the economic useful life was 40 years and we changed that to 30 years. And as I mentioned earlier, for obvious reasons, which we believe that due to the technological advancements that are happening in the LNG space -- in the LNG shipping space, those vessels more likely than not will not be renewed on the current contract and will likely trade in the spot market. So the economic life will be changed, and we changed it for 40 years to 30 years. So we adjusted it 30 years before we -- because we feel that it's much more reasonable and reflects of the remaining economic useful life of those LNG vessels. Hence, the reason for the decrease in the depreciation.

Okay. I mean, fine. I mean, apart from this, you also mentioned on the logistics front, can you just give us color what exactly is that impairment related to? And what do you see going forward?

I mean listen, the impairment for the logistics. Again, we do an accounting exercise every year looking at the future cash flow potential -- earning potential of the warehouse. And so based on that, we took an impairment with the utilization continues to remain low. And we do have to be frank with you, it's still a challenging environment for logistics. And as part of the facility, we built out the infrastructure component of this large -- it's a large facility, a little over 400,000 square meters and so we've taken impairments on some of the other infrastructure investments that we made in that facility. Plus we adjusted our outlook for the warehouse and hence, the reason for the impairment.

Okay. I mean all this in relation with your earlier conference calls that you have where you did mention that we could not be seeing much impairment, especially on the basis front. So I mean 2025...

No, that's not what I said. Let's be clear, that's not what I said. That's not what I said. I said we're not going to be significant material impairments. So I cannot give -- I cannot tell you on the call or tell you for certainty that I can -- there will be or will be impairments. We have -- the business world around the changes is not static and therefore, we have to react to it and we have models and accounting standards we have to follow. So I never said there will never be impairments. I said that we are likely not to see material impairments like we've seen them in the past.

On positive side, in terms of your Offshore Marine division, I mean, the fourth quarter has seen good progress, especially from your services and chartering. So can we consider this as a base for 2025, you still see difficulty going forward in first half, especially?

Sorry, Nikhil, this is Sami. Can you repeat the question? It appears Akram logged off. Yes, go ahead.

Okay. This has got to do with your Offshore Marine division. I mean, I think the fourth quarter revenues have been very done well on the services and chartering. So I wanted to know whether we can consider this as a base going forward or I mean, this is again a yearly trend, which we can see largely in the fourth quarter?

I mean, look, quite frankly, what we said in the past is we're bullish on Offshore. We expect the trajectory to be upward trending. You will have some blips along the way when you have a fleet of 40-plus vessels plus another 18 or 19 harbor vessels. So you're talking in total close to 60 vessels. You're going to have instances where some vessels come offline. They're going in for repairs, maintenance, whether it's planned or unplanned. So I don't want to say Q4 is a good barometer nor do I want to say Q3 is a good barometer, but what I can tell you is that we're very bullish. We expect the trend to be upward for the next few years.

All right. Sami, I'm back, I got kicked off somehow. Did you manage to address the question?

Yes.

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

It's Bobby again. I just wanted to follow up with quick question on Offshore. I think previously, you talked about a capital spending plan about QAR 2 billion over the next several years. Can you maybe give a little more fine-tuning in terms of how or when we can expect this capital to be spent, please?

That's a good question, Bobby, because I can tell you, our plan for 2025 is a CapEx of close to QAR 1.7 billion, just to be spent in 2025, of which QAR 1.3 billion to QAR 1.4 billion will be vessel-related and that's our CapEx plan. So we'll model ourselves for 2025. The assumption is we will be spending that much CapEx. Obviously, our ability to -- I mean, these are CapEx investments that are largely tied to the growth in oil and gas space in Qatar. And our focus is, obviously, today in today's market, it's very challenging to find assets. So the plan is to spend that in 2025. But it all depends on the availability of Offshore assets mainly in the market and new builds. So this is sort of our target for 2025, just to put things in perspective. '26 could be also a much higher number, the amount of growth in the oil and gas sector in Qatar is phenomenal, it's beyond anyone's expectations, if you will, and it's beyond anything we've seen in a long, long time. So that just gives you sort of puts into perspective the amount of investments that we're making in the sector.

Okay. And just as a follow-up. So 2026 could be even better and/or higher, so your target of this QAR 2 billion could also be increased, I guess, in the future?

Potentially it could be.

Yes. And this QAR 1.4 billion to be spent in offshore this year, do we have a rough sense of what type of vessels and how many vessels we are looking to add?

The QAR 1.4 billion, it's mostly Offshore, but obviously, it's almost close to 90% offshore, and it's a mix of different vessels. It's -- I mean, the demand in Qatar for vessels, ranges from PSVs, AHTS as you name it, there's a huge demand for vessels. And so it's difficult for me to right now give you sort of the breakdown of the vessels, and we don't want to share that right now, but I can tell you that the amount of CapEx is substantial.

Okay. And just another final question. On the LNG vessels that you lowered the useful life from 40 to 30 years, when is the -- can you discuss when you have these firm contracts coming off and when will these vessels go into the spot market?

We are 5 and 7 years. Ellie, do we have any other questions?

Right now, we don't have any other raised hands.

Okay. All right. In that case, I would like to thank Akram and Sami for going over the presentation and discussing Milaha's performance for 2024, and we will pick this up again next quarter. Thank you very much.

Thank you very much, everyone. We appreciate it.

Thank you.

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