Renaissance Services SAOG (RNSS) Earnings Call Transcript & Summary

A very good afternoon, everybody, and welcome to the Renaissance investors and analyst meeting for Q1 2021. Once again, thank you very much for your interest in Renaissance and for attending today. And for those of you familiar, it's the usual format. This session is for you. So immediately, with -- Vishal, the CFO and Deputy CEO, is here; with me, Stephen Thomas, the CEO, to answer your questions. So over to whoever would like to ask the first question. Thank you.

Please go ahead with your question, [ Sameer ].

I have a couple of questions. First, on your Duqm occupancy, where does it stand? And I think your current capacity is close to 22,500 beds, right? So yes, that's my first question. And second question is where does this cost escalation now stand at, which used to be at OMR 1 million per month last year? So yes, these are the 2 questions. I have a couple of other questions. Maybe I will come back to the queue later.

So thank you, [ Sameer ]. I'll take the first question on the occupancy. As you saw in our chairman's statement, we described how, at the end of the first quarter 2020, we were 16,000, and this fell during the COVID period to 10,500. And at the time of publishing the chairman's statement just a short while ago, we were at 13,800. Occupancy as of today is 14,230. So it continues that steady climb. It has been described in the chairman's statement that we are expecting this climb to continue during this part of the year. It's going to be very much dependent on the new people who are due to mobilize to do the ME&I finishing for the refinery project, awaiting for travel restrictions and COVID and quarantine restrictions to lift so that we can get that exact timing on some of those new arrivals. But in the meantime, we continue to see a steady rise. The 14,230 is the specific answer to your question. Thank you.

And [ Sameer ], just to add on what Steve mentioned, that the capacity of our facilities in Duqm is flexible, the way we have built the facilities. So if there are 4 people in a room, there are 6 people in a room, 1 guy in a room or 2 people in a room, so the capacity would keep changing based on the demand. So currently, what we are seeing is that more demand is there for single in a room, where we really get a premium than 2 in a room and of course, now less demand for 8 in a room because of various like requirements by our clients. So immediately, we have changed to 6 in a room. So the capacity in terms of the number of beds, we just need to fill now 4,000 more to make it 100% because based on 6 in a room, the capacity would be 18,000, not 22,000. 22,000 was based in 8 in a room. So we are almost 70% occupied in Duqm despite all the pandemic. And one reason is how well we have handled the COVID situation in Duqm inside our accommodation. We have medical facilities to do PCR tests. We are going to support our clients for vaccination program. They are in coordination with MOH. So all these things really helped us in our Duqm occupancy. And as Steve currently mentioned, that we are expecting that occupancy should gradually ramp up over the remaining part of the year. Coming back on your next question on the cost element. Let me put in this manner that if we look at last 4 quarters, so Q1 2021, then if you go back to the previous 3 quarters, that is Q4 2020, Q3 2020 and Q2 2020, Q4 2021 (sic) [ 2020 ] performance at operating profit level, at net profit level is the best. So we can clearly see that despite COVID impact, we are able to perform better. So for us, this OMR 1 million number still stays the same because that is the COVID peak impact. But what we have done, we -- like we are just changing how to increase the top line by providing some of those add-on services, and a key is to keep increasing occupancy. For example, in Duqm, we had many Navy ships claim -- calling shore, and there, we had some extra revenue as well. So it is safer to assume that pandemic impact of OMR 1 million will be there because we have seen in Q1 number of cases in Oman went up. We are not able to bring people in from outside Oman because of these restrictions, flight restrictions, which are required to increase the occupancy for our Duqm as well as for our PDO PAC. So it is fair to assume that still we are in the peak of pandemic, considering what is happening to number of cases in Oman. Of course, things are improving and will improve post vaccination drive in Q2. So this OMR 1 million will come down significantly in Q2 and Q3. But because of all other operational efficiency measures that we have taken over the last 9 months, we are able to counter this OMR 1 million impact. And that's the reason Q4 operating profit and net profit is the best over -- in all the last 4 quarters, [ Sameer ].

I have one follow-up question on that. So I understand that your cost addition can stay for some more time. That's what I understood. So where does the average daily rate stands at for Duqm? Are you seeing it flat? Or any -- are you expecting any -- or are you seeing any further negotiation from your client to bring it down? Or is it still stable? Any chance that it can go up?

So [ Sameer ], good point. No, it is stable. In fact, our clients are appreciating us and how we are able to maintain the same rate despite giving more offering in terms of the COVID, like food parcel and everything. So we are committed to continue with the same rate at least for this year. Of course, there are many clients coming for extra offerings. They need add-on services where we charge extra like charges for those offerings. But our standard rates are the same. We have not seen any dip in those rates.

I think I'd like to add to what Vishal is saying. He's absolutely right. And the -- and it mixes the 2 points. So some of the costs that we've taken onboard for COVID will include the level of PPE that we're having to use, the amount of sanitizing that we have to do, longer opening hours to allow social distancing, fewer people in diners and so on. All of these cost money and needing more service staff behind the counter because people cannot self-serve using the same items of cutlery and so on. And so all of that cost has meant that our businesses can keep going and our customers have been able to keep their operations going. So it's worthwhile. Now you ask the question, "Well, what about passing some of those costs on to clients?" And as Vishal said, no, we have kept our rates. You're asking specifically about Duqm. We've kept them at the same rate. Because -- and there have been other things. There was a major impact from Cyclone Hikaa. There was a major impact on disruption of water supply, and it became very expensive to trap water in. But in all those cases, we've absorbed that cost and kept the rates flat because the key to Duqm is that our clients, when they're building a big project like the refinery or the port or the dry dock and so on, is that they can be sure that those rates will remain stable unless there is something that is permanent and extraordinary that's changed in either force majeure or in the laws and regulations and so on so that they'd have that cost anyway even if they've done -- taken an alternative route. So us keeping our rates stable and us remaining profitable in business is part of the long-term offering that people will not forget, and what we're seeing is they are not forgetting. They see us as part of the solution to Hikaa, that we are part of food security across whole of Duqm. They see us as the water security. We managed that breach, although that's now been permanently resolved in the area. And now they see us as part of the solution in COVID. If you follow the graphs, we suppressed the virus inside our fence while, sadly, we see it as it has been throughout the country, going up. And now at least we're starting to see that coming down as well. But these are actually good things about our business and keeping that rate stable. It's an important strategic point. Thank you.

[Operator Instructions] [ Vishan ], you can go ahead with your question, please.

I wanted to just get some clarity on the PDO project. When is the outcome expected? [ You've shared ] there's a license expected. And if you could just give us an update on that.

So [ Vishan ], I presume you're talking about the major PDO tender that is out at the moment. The -- we are not allowed to talk about a live tender in terms of our commitments to nondisclosure in the tender. So let me refer you to what was public knowledge before, where they were looking at achieving an outcome either by late this month or possibly next month. And the only thing I can say is there's nothing to suggest that they might -- that they should not achieve that objective. But that has nothing to do with what's happening inside the tender and going on in that respect, but that is what was expected by the market. And I think that, that hasn't changed.

My next question is with regards to the operating expenses that we saw in the quarter. We witnessed operating expenses at OMR 1.2 million compared with OMR 1.9 million last year in Q1 and OMR 1.7 million in Q4. Could you just explain why the sudden -- why the big drop?

Sure, [ Vishan ]. So basically, it depends on the particular contract mobilization at a particular time and some of the COVID-related expenses in one particular quarter. And that's what we had explained to [ Sameer ], that we were able to bring some of the significant operational efficiency in some of our contracts. There, you see lower operational -- operating expenses. So one side is on the savings, operational efficiency. Second side, some of those extraordinary expenses were there when we were like entering into COVID time last year. So that's where you see a drop in operating expenses. So we are expecting that operational efficiency and this kind of the operating margin should continue even going forward. And also, one more point. If -- you see that Duqm occupancy has significantly gone up in this quarter compared to the previous 2 or 3 quarters. So as the occupancy goes up, the corresponding like revenue goes up, but operating expenses won't go in the same proportion. So that is one of the reasons where you are seeing improvement in the margin, operating costs came down. And like we are expecting the same kind of the margin to continue going forward.

Can I also draw attention to a separate point beyond the operating efficiency side? We -- there's a continuous improvement journey for our company all the time. Is that -- very specifically, after the oil price crashed a year ago, a number of clients have been seeking up to 30% discount in rates, et cetera. Now we don't operate in a 30% discount scenario in terms of margins to offer. But what we have done is worked very closely with clients who were looking to save expense themselves to reengineer some of the contracts where they still get the high standard of service but take some costs out of the contract that is then able to bring the price down for the client but also enable us to remain profitable. So there's a number of initiatives that we've taken that will also have had its own impact on that figure.

Next question is on the UAE operations. You mentioned that you're looking at focusing on the UAE operations and expanding into Qatar. If you could just give us an update on the same.

Sure. The -- we have a relative -- an important but relatively small operation in UAE, and the -- and we don't have anything specific in Qatar. And so strategically, it makes sense that if we are able -- so we now have a clear foothold in UAE. And the team there have worked very hard. We were suffering before with -- obviously, yes, there's a COVID impact loss at the moment, but the actual business has got itself into a position in a non-COVID environment that it would be breakeven and better. And so that gives us a platform to start working and attacking other larger opportunities there. And similarly in Qatar, we're prequalified for a number of major opportunities, and we've taken part in some tenders. And we're looking at that being with the right partners, et cetera. So it is about trying to diversify our geography. It's tough because there's already some good players in each of those markets. So we have to establish what is our USP that will attract customers to take us. But it's now talking about those markets as platforms of opportunity for us.

And last question is on the Waste Management segment. What's your outlook for that? And how do things stand over there?

Well, we've won 2 tenders -- 3 in reality, 2 came together. We do the waste collection and street cleaning in SEZAD, that is Special Economic Zone in Duqm; and Al Wusta. We've also won through be'ah the PDO, but there's been -- not from our side, there has been a delay in that starting up. So we'd hoped it would start up by halfway through this year, that's next month. It will be a little later than that because there are issues on local community contracting and so on, which, of course, we are be open to helping the local community contractors as much as possible. But that will be a nice element of growth. At the moment, of the cyclical tenders that came around for waste collection, the largest, of course, were in the Muscat area. We were just getting into it at that point. We weren't successful. We are putting together our coalition, our partnership, with [ Sajir Environmental Services ]. And so we came late to the winning of it. But what -- but it's only 8.3% of that total market -- the total value of all the bids. So we won the SEZAD project, it's the first one. OMR 12 million is the PDO one coming up. This altogether represents 8.3%. So the growth potential as the first of those come around again -- the total market was OMR 234 million, was the value of all the tenders. And what averages about OMR 45 million a year as a market in terms of what is done by private sector is going to be a OMR 200 million and OMR 400 million market in just a few years' time. And there are other opportunities. There's waste to energy. There's waste treatment. And we are making sure that we're aligned with the right people. And what we're very happy with is not just in the waste management. Also, in the utilities contracts, we've got a gain, small but profitable. The entries we've made into these new -- so this is -- we've talked about diversifying geography. Now we're talking about diversifying our services. A, they're profitable; and B, our clients are telling us we are top of the KPI list in terms of contract performance and looking forward to us competing when it comes around to the bigger tenders again. So it's a growing market for us. We've established capability in it. And we look forward to being a serious contender when those new -- existing contracts come around again. And when new privatization of other forms of opportunities in the waste sector and, indeed, in the utilities sector come to the market, we stand ready to compete for that. Thank you.

[Operator Instructions] [ Sameer ], please go ahead with your question.

Yes. A couple of follow-up questions from [ Vishan's]. Actually, how -- so with regards to your PDO Manazil, how will this impact your existing PAC business if that PDO Manazil goes live?

So in principle, there are 2 -- again, I don't want to talk about the tender itself and where that stands because I'm not allowed to do so. You would understand that, [ Sameer ]. Principle is that the existing PAC can be won once. If a new operator or even an existing PAC operator were to win with an entirely greenfield proposal and if that proposal was deemed to be something that can replace the PACs, then the PACs would be subject to their existing contracts through to 2044 and subject to the compensation clauses in that at market value. The second is what they call the brownfield bids, where the PACs are included in the bid of the existing PAC operator. So if that bid was successful, then -- and the other PACs were not needed, then those other PACs would be subject to the compensation process. And the final point is if the client were to decide that the PACs remain exactly where they are and the winners will be required to build the delta. So that will become apparent only after contract award, where one -- you can win one, either the north or the south. So there'll be 2 winners, and it will be one or the other. And then it becomes clear after that. So it's -- the PACs, of course, continue to be required through to the building of Manazil. If they weren't required after that, they would be subject to compensation. The likelihood is a mix of those things and not to throw away good assets that are already in operation, but we have to wait for the outcome of that, [ Sameer ]. Either way, we're covered.

Also, on your Qatar and UAE projects, how big the CapEx would be? What kind of CapEx you are looking for?

The -- if you look at most of our -- sorry, let me start again. Our CapEx-intensive projects tend to be in our accommodation solutions, where we decide to build, own and operate a PAC. Generally speaking, in a pure services contract, there's very little CapEx. It will be sort of equipment for either a kitchen or it might be some plant and equipment for a hard FM project, et cetera. Because, generally speaking, those services are provided in the clients' offshore oil rig or in a hospital or in a port or whatever it is that we're serving. So there's not a big -- in what we have bid, there is not a major CapEx requirement.

Understood. So you are mainly looking for the facility management contracts in Qatar?

At the moment, yes. Obviously, if quite an opportunity for one of our accommodation solutions was there, we would look at that. At the moment, we are focusing that on the Manazil tender that we've just spoken about. But generally speaking -- I mean there are some -- if you do a major event, then you need to invest for the short period of that event and the infrastructure. That is very quickly recouped because the event is obviously short term and so on. So no major CapEx issues at all or anything for us to be concerned about not being able to deliver.

I have 2 more questions. Can I go ahead? Or should I come back in the queue?

Please go ahead.

Okay. So what's the status of the projects being announced in Duqm, IOC delays or cancellations? And have you made any kind of negotiations with these project companies?

So the next major project, of course, which was put on hold is the pet chem project. So at the moment, OQ8 are building the refinery. And through no fault of anybody's, obviously, there's delay there because of COVID. And so that is going to carry on for longer than was originally anticipated. And the -- originally, that was the dovetail in with the pet chem project that was to follow. And then that was put on hold. Now again, I'm just -- we're talking as a service provider, although we are clearly a key part of the Duqm community because what our investment has done is to become an enabler for those projects. So I'm not talking as a technical matter expert. My understanding in terms of the pet chem project is the fall in oil price has changed the dynamics and the economics of the value-add that the refinery gives to the crude and the pet chem projects gives to the refinery. And so there is -- it's being reworked before they suspended the FEED work that was going on by Wood group and reworking if they can change one of the -- the refinery brings in 230,000 barrels a day, and the output can be a mix of 6 different products. And they can turn any of those up to be 100% production or equal 1/6 of each of those products. They want to change one of those products to be -- I think it's from the naphtha to NGL, but it doesn't matter whether I'm right or wrong on the detail of that. That will change the dynamic of the potential value-add for the pet chem project. And that's what they're doing, and then they will re-announce what they plan to do with the pet chem project. Our understanding, and again, it is others to say this, not me, is that there's full discussions on at the moment with the Kuwaiti partners, et cetera. And there is certainly a keen desire to look at it because it is the downstream that keeps adding value. And so looking for the most efficient and optimum outcomes from the products that you add value to can then create the foreign investment that's needed to come in and create the projects downstream in Duqm. So that's on the pet chem side. Now other projects, we've seen projects announced, and we've seen projects either halted or paused. So for example, the Oman cement project was announced, and then they've decided not to go ahead with that and to reinvest more here near the capital. But there are many other projects. We've seen the big announcements around green hydrogen. Now the big part of that will be coming down the line in 2026. But before that, there are those 3 other initial JVs and initiatives by others that look to be coming in the gap. So we keep constantly updating on what's the next project, what's happening. There's also -- beyond the projects, there's also what's happening with the military. And we continue our very close association. We still have one of the friendly foreign forces staying with us at this very moment. They have another big exercise coming up at the end of the year. And then they have a permanent requirement because they're investing in Duqm as a logistics and training base. So all of these things look promising for our future. What will be good will be when we get clarity around that pet chem project and its timing because that will be "the next big thing" like refinery for us. But the other smaller projects are also very important. And where we're good for the smaller projects is it's very expensive to put a short-term camp for just a few hundred people or a couple of thousand people versus paying just for the night that you actually need. So that's where we get very competitive. One point to make about the projects and the international investment is that people like OQ, who obviously is the Omani shareholder at OQ8, the Duqm refinery, recognize our facility as key to getting the foreign investments because the international financiers, the lenders absolutely require a minimum ILO standard and worker welfare before they will invest. And we deliver that standard at a very competitive price. And so in that sense, we're very much -- it's not just us keeping an eye on projects, it's projects keeping an eye on us and asking us will we have capacity for them, et cetera. Thank you.

We will be happy to take any other questions. So if there are no any questions, we just would like to use this opportunity to update that in terms of -- if you see our balance sheet, in terms of our support from all our financiers, including banks and shareholders, either at Duqm level or either at Renaissance level, all we are seeing in challenging times like last year of COVID and in the current times, all have -- all stood by us. We completed our financing of Duqm expansion, and Duqm occupancy is gradually going up. We have seen that our Q1 performance as on a stand-alone quarter basis -- quarterly basis has been better than all previous 3 quarters. And we are expecting the same trend to continue, unless some major issues happen; again, third wave of pandemic. So if there are no any questions, Steve, whether we should say any final comments. Steve?

Yes. I'll pass one final comment on the PAC occupancy. Because -- as we clearly explained in the chairman's statement, we see a big difference from Q1 of last year at 90%, which is now sort of general going rate for some time now of PACs being full, and that has fallen to 79%. And it's come up slightly. We're about 82% at the moment, but that can move around. That is not a significant move. But talking with our clients, they also see that when the travel restrictions -- when we get through this current wave, they do see that dial moving upwards as well in the following context. One is existing contracts that stay in the PAC have been thinned out and now struggling to get people moving back and forth, et cetera, with travel and so on. And they need to come back to full strength. There's also a number of projects that were held during the year when the oil price has fallen so sharply and the COVID impact on top of it. And so what they call the ODC contracts, the off-plot delivery contracts, which end up awarded to multiple players across all the regions, that is going to have a much higher requirement on a sustainable basis going forward. And so we're watching that with great interest because it does look as if that can bring us back. We cannot say what time because they're going through the tender process at the moment, they'll have to make their awards. And then we'll have to see how flexible is the sort of COVID restrictions to enable rapid mobilization. But in sort of a less restricted set of circumstances, we can look forward to increases in occupancy during the course of this year. Now hopefully, we're able to tell you next time if it's earlier this year or later in the year. But there's some better news coming down the track in PAC occupancy as well. So that's the only other thing I'd like to update on, Vishal. And so if there are no other questions, we'll just ask one more time. And we'll take that as a no. Again, thank you all very much for attending and for the questions. And I know with the good questions from [ Sameer ] and [ Vishan ], it covers questions that others wanted to ask as well. So hopefully, it gives you everything that you need to know. We look forward to talking to you again at the end of Q2. Thank you all very much indeed.

Thank you all. Bye from Steve and Vishal.