Renaissance Services SAOG (RNSS) Earnings Call Transcript & Summary

A very good afternoon, everyone. Welcome to our quarterly meeting with our investors and analyst community. I like to welcome you all here. It's the usual format. Of course, you'll see our half yearly results. I believe that they are keeping with the guidance we've been giving you as we go through this 2 years of the hiatus of the between projects in Duqm, but where the rest of the business is picking up to compensate for that period. Without further ado, we'll then open it up to your questions to give you the maximum time during this hour. Thank you very much. Indeed, if anyone has the first question, please go ahead.

Hi, Sameer. Can you hear us?

Great set of number in Q2. So just a couple of questions on, especially on your RSVD. So you last time guided for almost 6,000-plus level of occupancy by end of this year and almost 50% -- I mean close to 10,000 levels by 2025. So do you still stick with your guidance?

So yes, Sameer. Although guidance we give will be based on, known commitments, we've got those commitments will depend on actual project starting dates for our customers. So what's happened since we last spoke. So I think we were averaging around 4,500 during the last quarter. And we said that we expected that to come up to 6,000 by the end of the year. Now where we're at today, and it's happened just starting in the second half of the year, we're at 5,500. So it's gone up 1,000 when we were last speaking. This is primarily from existing clients, this is what we call the permanent base. Remember, we described that we will have up swings of temporary boost in accommodation when there are project teams working but each project that's finishes, leave behind a residual permanent workforce. And that residual work force with all that 5,500, over the 4,000 often are part of the common workforce. Now in terms of the crossing 6,000 and as we go towards the end of the year, there's some temporary things. We've got another military exercise that will happen between our Omani and other friendly forces. We've got -- so that will be temporary boost to the accommodation. But the projects that we see coming first of these green hydrogen projects. There are 3 of them expected in Duqm. And as -- so one of them has started the ground preparation. So part of our current occupancy includes the contractor who is doing the ground preparation for that project. Now we understand that the green hydrogen projects -- sorry of the green steel projects misspeaking unintentionally, the green steel projects, there are 3 of them. They require gas guarantee, gas offtake as the cleaner energy to use while they transition to renewable energy as more and more renewable energy sources come into Duqm. So what we hear is there's dome discussion going on between those 3 projects and the government over the gas allocations. Once that is sorted out, then we'll see their actual start date. Now as it stands in our information, we're expecting we've got one of those projects where there's always the first team on the ground for ground preparation, and there are other contractors lined up for that project. They've all talked with us once they get the green light to go ahead. A second project may also start within this calendar year. And the third one is due to start during 2025. So those green steel projects are expected to bring us up beyond 6,000 by the end of this year, and further improved numbers in 2025. We're also expecting -- and we know that government then [ procure ] looking at the expansion of the refinery, they're looking at the next downstream project, petchem project. So that, we're not expecting any numbers in this year, but we are expecting some sort of announcement signal during the year.

Got you. One follow-up question. So what kind of occupancy is required for RSVD to breakeven at net profit level.

Sameer, I think this question was asked of me last time as well. And I've given the answer that at added -- the EBITDA breakeven has been gone down to the 3,500 level. When you talk of profitability, that number would be around 4,700 at a book level. Depending on the mix. So it's not just an absolute number, they're we're at 4,700, it depends on the room mix whether it's 1 PR, 2 PR, 3, 4, 6 or 8. So that is how it works. So we will foresee a very positive momentum for the [ Group ] given that the awards have started happening. And one of the steel projects, as Steve mentioned has started that ground leveling and road infrastructure, which is already mobilized. We expect 2 or 3 more roads to happen during the year. and then the other 2 steel projects to mobilize towards either Q4 or Q1 of '25.

That's very clear. And one last question from my side. You mentioned about 2 new projects on smart meter and one other project as well. I don't remember exactly on waste water treatment. How big is the size of these projects? And how -- what kind of margins are you expecting on this?

Yes, we're not going to get into competitive information on margins, although as a general comment, if you look at our -- we're very highly competitive business in soft services, pure services contracts. Those are long tight margins. And then as we move into to this utilities and waste management, when you move into our accommodation services, when you get the economies of scale that the occupancies are high, those movements are different, higher levels of margins. So positive margin business to be in the utility sector, but I don't want to get into specifics. We need -- what happened with the -- see I can't recall Sameer, which stage you're -- when we were talking about is a major tender out, et cetera, now that tender got postponed. But what happened was we were awarded the smart meter rollout for the area in which we operate, the capital area, the 3 zones of the capital. And so that's all happening during this year and is contributing to the run into next year as well. Now there are a couple of other tenders out. So on the water meter front, a similar one for the 3 zones in the capital area. And on the water, we operate zone 1, and there are 2 other operators in zones 2 or 3, but all 3 zones are out. And we -- but we fully respect competition, but we expect to be as an incumbent, very defensive of our zone 1, and we're targeting to win one of the other 2 zones as a desired outcome, we expect to hear an outcome of that shortly. So in that area, there's instead of that one massive bid, it's coming out more incrementally. But it is coming out and it's, there's plenty to do and plenty opportunity coming by the utility service.

Joyce can you hear us?

Steve, could you please give us some color on the PAC business because what I understand is you have mentioned there is enhanced mobilization for the increased capacity. And could you please give us some color on what's the occupancy level right now? And how are we progressing on -- into the third quarter and probably where are we likely to end at the end of this year?

So in our PAC business, I've always -- we've described to you how there are sort of 30,000 beds out in the PDO oil and gas field. 15,000 of those are PAC beds, and we previously had 8,000 of those. So today, we're at 10,100 of those having expanded. And so -- and obviously, the 15,000, it's now at about 17,500 beds in the PAC community. So the benefits of that, of course, we're building a modular solution, to meet the time line that they needed the expansion done. And that said to be there for a temporary period. And so the recovering the investments of that over 3 years. And the benefit and the profitability of that, it would be like with all higher occupancies. You start moving into economies of scale so obviously that flow to the bottom line. And another reason why you're seeing that in spite of the downturn this 2-year hiatus of Duqm and note we're going through the second year, we're coming to the end of that, is being compensated by these other factors, that growth in our PAC business and better performance in other contract services, other businesses. So that's where PAC's at. I can also -- and I know you haven't asked about this, also the new Manazil tender is coming out. Remember, huge effort we made in competing for the original version. That's coming out in a different version where first and foremost, the existing path including our operations and [indiscernible] are part of the solution. They are going to be part of the solution at the minimum until 2044. And then beyond that if the construction, the PDO is extended beyond to 2044. So within that tender, there is a down side of -- so some of these temporary beds will convert into shutdown camp. And the PAC's themselves, they will either be a new PAC where there are existing PACs or existing PACs will expand. That, of course, is a tremendous advantage to us and other operators of which we are -- we have been 65% of that business where we should be able to leverage expansion, ought to be more competitive and building a whole brand-new infrastructure. And the next gain that is going to be another 7,500 beds of expanded PACs. And the second piece of that is going to be another 10,000 beds that will come as centralized contractor CAPs, modular, in all the locations, the 6 locations where there are no beds at the moment. So the scale of this opportunity coming towards us is another 17,500 beds, of which, if you follow our success rate, we have always won the maximum we can because these things quite like it, we understand clients want to have competitive tension. We'll have different operation and we'll have different operations in other areas. So if we were to win our share of that, there's a chance of almost doubling this business that we have again, perhaps it's over -- the request for it of interest has come out that will be followed by the tender document that is followed by the competition and then the award and then it's got to be built. But in terms of the business we are in and where we are successful at that, is this tremendous opportunity coming down the track of further PAC expansion.

Can you give us some color on the occupancy levels that currently we are in and how are we progressing on?

Yes, of the expanded capacity, we're just around 90%. We would expect it to be above 90% just now. So we're just under that, but it's going well. And we're actually full in several locations. We've got 2 locations that are below our expectation having expanded and below our client expectations. Not a complaint. This is a reality of how things have worked out and delays of contract awards, et cetera, in their own side of the business. So that is also coming. So we're expecting to get -- I can't put an exact date on it, but we expect it during this year to cross that 90% again of the new expanded capacity and see the benefits of that flowing later in the year.

Got it. Got it. And another question that I have is to, Raashid. Raashid, we are seeing some expansion in the EBITDA margin during this quarter, specifically from 21% to 23%. What are the reasons that led to this improvement in EBITDA margins? If you can elaborate on that, that would be very helpful.

So thanks Joyce. I think I've mentioned it last time as well in the call that the theme that we're following is very simple. We are looking at individual contract profitability, improved deficiencies across our processes that can be replicated as we move forward. Then both these combined into what we look at from an ops excellence angle to make each and everything efficient while giving the same or better customer experience and continue to manage our overheads as efficiently and closely as we can. All this combined has led to better margins on the EBITDA level and the operating profit level. If you see when you compare it to the last quarter -- when I say last quarter of -- if you compare to the quarters of H1 '23, we've come out much better. All the efforts have and the initiatives that we are driving to make us more lean, more mean in terms of how we execute, in the field are slowly and steadily showing results in what you -- in the question that you've asked on EBITDA as well as expanding it to operating profit as well. So that is it. I wish I could give you contract specifics but we don't discuss individual metrics. I think you've seen and as Steve explained Duqm, so which gives you color that the other part of our business, which is the heart of contract service business is firing on all cylinders.

Yes. So how much further room do we see for improvement in EBITDA? If you can just share some insights, that would be very helpful.

Look, it's a journey. We've embarked on this journey. We have seen the results from quarter-on-quarter-on-quarter. Once -- as Steve said, Duqm reached 6,000, you would see some really, really good numbers flowing through because I think we've done what we had to do in Duqm. Now I would call it a wait and watch. Now it's just as we fill up, you'll see a much, much healthier bottom line coming through. That's all I can say. We will continue to improve. We're looking at each and every contract with the client to make sure it's efficient, it's how we wanted to run. And we're also talking to our clients where we see any opportunity which can be passed on to our clients to make it a win-win for both us and our clients. And there are many initiatives that we're doing around water conservation, around managing air conditioning, and we can talk about it. There are many initiatives from technology and utilization point of view and measuring what we are doing and improving in the sense where we improve our bottom line and remain sustainable, which is the core of what we want to achieve as we go along.

Yes. I mean, absolutely support what the way Raashid's framed that. It brings us back to what we've spoken about in this forum before our Renaissance 2.0 strategy. And so yes, that excellent work that has been done by Raashid and our colleagues on operational excellence and other issues. But if you come back to that sort of issue when we talk about our ambition, you want to lead the future in those four words, smart, sustainable services solution. So we've got our services. A lot of what we do is we respond to clients tenders and they ask for service, we offer it and then we have the exchange of providing that service and getting paid for it. And it's having that solutions piece, what Raashid was saying there, we want to take a lot of these smart things, a lot of the automation that we've brought in, a lot of the technology we're bringing into the business, whether it's on energy consumption, reducing water usage, food waste, a whole range of initiatives, how we turn that into services that we can also provide for our clients, not just in those places where we operate ourselves. So by getting greener in what we're doing and smarter with the technologies that we're using, bringing the solutions to our client, that's where you're seeing this performance holding up in spite of that enormous downturn and [indiscernible] period in Duqm. And it's a range of these things that are contributing to it. And I'm just linking not just the story of what we've done and doing, but it's very much at the heart of our strategy.

That's very clear, gentlemen. Can you touch upon your international operations? You've been trying over the past several years, we've been trying in Qatar and Saudi. Is there any updates that is worth sharing at the moment?

So no, nothing new or dramatic. It's been very slow churn of opportunities coming up in Qatar post world cup. That's not over the last 2 years, it's [indiscernible]. Of course, we are the newcomer on the book. Saudi, we now established the office there. We're looking at opportunities. We've talked to you about the PPP opportunities that we've already bid that would be transformational in if we are successful with any of those because it gives you a very large trojan horse to enter a market with. But no major breaks through there but a much increased activity on our part, but we don't have a success story to tell you other than each time we're learning and looking at opportunities that we can get down there. For example, there are two new PPP opportunities in Saudi. One in the oil and gas space and one in the education space. And these are in our sweet spot where people are looking to start accommodation and so on and so it's -- the opportunities are coming, but we don't have a story to tell yet. But one small comment -- sorry, sorry after you Joyce, please.

Thank you. And any other service level contracts or any other tenders are upcoming in the future, in the near future?

That's what I was going to ask [indiscernible] . The -- one of the things we've noted, I don't know, all of you and very much an integral part of this great market of ours, if you've noticed in the last couple of years, even though I say it is a post-COVID issue, not just in our sector, how many opportunities come, tender opportunities, et cetera? And what used to be a pattern of you know what they are deciding on, you know they've got to mobilize by then, you know that's going to happen and to my mind there was a much more certain time line on things. Now there's a pattern of a lot of change coming, even sort of mid-tender or late tenders of revised back date offers and revised starting days. It's become something of -- and it's fine. We all -- the market has changed. And I think that we've still got a number of tenders in play in which you might always hear the rumor, et cetera, I can't get into that in which we are serious contenders, all of which, if a couple of them were awarded quickly now in this year, some would start in this year and start to contribute. So when Raashid answered the point about where we think EBIT is going to go, et cetera, this is another factor. We always build the bridges as to what if these things happen, it will be. We're reliant on those things and fully respectful of when the clients are ready to make that commitment and say, right, let's go and then, of course, we have to be the winner. But we've got some important tenders out there that would not just have an impact towards the end of this year but would have a great impact over the next few years.

Alexander? Alexander wanted to speak, but let's go see.

A couple of questions from my end. Just want to clarify on the latest -- the rules which came in this time of Omanization rules and certain visa restrictions, do you see any impact in your end? Or how do you are pleased because this has been a kind of specific related to the lower end of the job. Your blue-collared jobs are included in this. Do you see any impact? That's my first question. And on the second question, I was seeing your balance sheet. If you compare to the Q1 and Q2, I could see the financial assets, basically, you have a book of investment book closer to -- it used to be around OMR 15 million, and that has come down now primarily -- I could see the current assets, especially the financial assets in the current side. has come down. Is it related to dividend payment or any sale you did in Q1?

I'll take both on. In terms of the labor law that came out in June last year, the Royal Decree, we went ahead and booked all accruals as per workers required by the Royal Decree in December of last year. And since January onwards, we've been going ahead with the new compliances that are required both for expats as well as our Omani colleagues. So that is done. In terms of your question on visa, et cetera, we as a company have been in the forefront when it comes to our organization targets, our organization percentages across the spectrum from the head office down to the sites. At certain sties, it's closer to 70% Omani colleagues running projects. Does that answer your question or you want me to elaborate any further?

If I could add something to it Raashid, but then go -- and then we'll go to balance sheet, Raashid will answer in just a second. So that point that my colleague's just made is the basis of where we come on this. So first of all, if new rules come out, anyone in this job category has to be Omani or in this type of department has to be Omani, we are a company that is compliant. So to us that -- so we accept if something new comes out. Now we're also a company that is recognized by the authorities, including the Ministry of Labor as part of the solution. Raashid just referred to where we have got contracts to 70% and 80% of organizations. We've got some contracts and smaller contracts that might have a small amount of organizing because of the tight spot and the location and availability of local workforce, et cetera. Now one of the things that we're very, very keen on in our company, the fast really, we have policy that the favor Omani candidates and we go out for Omani candidates specifically to some [indiscernible] it's only Omani colleagues we're looking for. We're also as this country goes, values and contribution of expats and what they've done to build the economy, et cetera, and many of our blue-collar jobs are in those categories where there are more of jobs than available local colleagues to join or even the attractiveness of those jobs. So a lot of our automation is about making jobs more attractive et cetera to more Omani colleagues in some. But if we see an exception, so there are some things like where a -- construction companies have large numbers of expats as well as they are Omani. So toward the blue collar end we will have [indiscernible]. We therefore need to language-wise expats to look after them and so on. So we go the authorities and say, look, this is what we've got. This, we need an exception for, for this reason, because it is part of the solution and part of building this economy, not a part of just, we're trying to keep expats in these jobs [indiscernible]. So we really value our expats. We want them to feel safe and secure in their jobs the same as our Omani colleagues are. And as we grow with more Omanis coming in and our expats is sort of spreading out but we're keeping job security for them, and these new rules we always comply with the new rules where there are exceptions required and justifiable, we take that to the authorities, and we've always found them willing to listen because we're not bringing this curious case for it. so we don't it see it as something that will harm our business is the essence of your question. Raashid back to you on the balance sheet question.

For the balance sheet, so your question around investments and cash in bank balance?

Correct, investments, especially from Q1 to Q2, yes.

Yes. So the investments also include the money that we invest on a short-term basis and money market funds, yes. If you look at it in totality, in June 2023, our balance was around OMR 20.5 billion. which if you add up both as of 2024, it's OMR 15.7 billion So the movement is approximately OMR 4.8 billion to OMR 5 billion of a decrease. It is attributable to actually three key aspects, and I'll talk about them. One, you touched upon, which is the dividend, which was -- we give a one-off higher dividend after 10 years of 30 baisa per share. The second thing is that we -- Steve talked about the increase in beds from 8,500 to 10,100, We did that out of internal accruals. We did not borrow for it. And that investment was in the range of OMR 7.5 million to OMR 8 million. And the third factor that is contributing to it is we've made two installments of project wins during the year. And we've prepaid one of our local loan in the first quarter amounting to OMR 1.3 million. So that is OMR 5.3 million plus. The OMR 7 million for the temporary expansion, modulator expansion that we had at the PACs and the dividend. So essentially, if you do your maths, our cash reserve should have grown, but we funded everything through internal accruals, a good story to share when we close the year. Our day sales outstanding was around 175 days. As of 30th of June, it stands at 147. So massive drive on collection, which is our day to day, how we breathe and do business because otherwise we won't survive. So that is the movement in your cash and investments combined.

Yes. It's pretty clear, Raashid, I think. Now it makes sense. I think that's what I was thinking. And do you have any view on this -- the current portion, which you have. We have around another OMR 15 million, if you want or you will have a similar strategy? Or what is your view on this? Because you have your debt and you have your investments. How do you want to look at other perspective and the interest rates are coming down. I'm sure you have your investments in pretty safer or the bond investment, and you need to see through just on your perspective of how you're going to do any strategy on that?

We look at various opportunities in terms of is there an opportunity to invest. We are always on the lookout for both in terms of growth organically and inorganically. At the moment, we are very proud to say we are self-sufficient. We're generating cash. I would refer to us as a cash-rich company. We have all our cash invested in safe and secure -- I would call it -- not vehicles but whether it's the MMFs or bond deposits very safely, earning us money till such time it is required. We'd like to keep that -- the cash product because on a daily -- I wouldn't call it daily but on a regular basis, we come up with many opportunities whereby we may consider that we need to move faster and invest. So we keep that cash [ already ] sitting with us. Just in case we have any opportunity, we can deploy it, and that's about it. There's no outlook as such, but the investments are secure. They're very stable and safe.

My only concern is, because the yields are going to come down. Eventually, you'll have lower yields at some point of time, whether it makes sense to pay your debt or keep your cash. That is what my view. Yes.

So, third option is to pay down debt. But at this point of time, yes, yields may come down. The repo rate remains at 6%. So I think we'll wait and watch is what I'd say. I don't want to predict or take a shot at the future.

Yes. As you know the -- in reality, debt is cheaper than equity. And we've always try to balance this equation. I mean it's something that Raashid and his treasury team are always looking at what is the optimum. And so we want to sustain our balance sheet relationships as well. So it's not that we wanted to bring down all the debt and not have those ongoing relationships, et cetera. So some of it is keeping our powder dry for the right opportunity when it comes. The other is being in a position to be able to pay. Remember, we said we want to pay regular and consistent dividend. We're glad we weren't consistent from last year, we went up but we have what we wanted to keep doing with cat as well as we've got -- been through a bit of a trying period, the kind of opportunity, I'm not saying that the major M&A, but we've got some interesting irons in the fire that we're looking at early stages, do you want to have your cash available for the equity for that as well.

I think Bishen had raised his hand. Yes. I think we've answered the first question. Could you provide the occupancy in RSVD currently. Deepak, can you hear us?

Yes, I can hear you. Please go on.

Okay. So the RSVD current occupancy is just about 24% to 26%. As Steve mentioned earlier, it's at the 5,500, 5,600 levels. It's a 1,000 above where we closed H1. It's looking promising. As Steve mentioned, contract awards are happening, although it's at the moment, one of the green steel projects, we expect everything, although slightly delayed to happen whether it's Q4 or Q1 '25. So that's the reason visibility we have. We have the known demand and we have the unknown demand. The good thing is that over the 5,600 that we have currently, also 80% is permanent. And that is really happening. at this point of time, that's all I can tell you. We have an extremely bullish and positive outlook towards what's happening at the Group, Steve attended, and he can give you more color on the Duqm forum that happened and 10 years and the focus there is on Duqm.

Yes. I mean, we've discussed this in this forum before. But I think everyone can be -- can see what the government invested in, in Duqm already, and that is not going to be a squandered investment or the infrastructure, the roads, the dry dock, the port, the refinery amongst other. All of those things are designed, the port and the refinery are both designed to have additional upstream and downstream activity around them. So that's going to come naturally from that. So there really is a push in Duqm and international purview that Duqm can be almost uniquely because it's got space and it's got all the attributes to be very, very strong on renewables. It's got wind [indiscernible] plant. It's got plenty of free acreage and so on. So to really become a green industrial project promotion zone, hence the three green steel projects looking at and so on. And so although we can all be frustrated about when do the other [indiscernible] actually going to get signed on the dotted line and move forward, there's really positive momentum there and a very positive long-term view. I mean BP have independently been looking at sites for wind renewables around the world and Duqm came out #1 on their list. So there's projects we don't talk about yet because we don't have any actual firm color on them, where the oil and gas companies are looking at Duqm for some renewables they do their transitions and carry on with the hydrocarbons of course but looking to add more renewables in their portfolio.

Deepak, you had a question on tax.

Yes, that's right. I guess it seems to be higher...

I think this is the third time I'm explaining this, so it's a little bit complex. It's not as simple, last year we didn't have any tax provisions. The only entity where we were accruing for tax was our joint venture, Renaissance SAOG. Renaissance made a divestment in 2019, against which it booked a loss of OMR 52.5 million, and that loss was in our books and we were using that loss as a tax shield for '19, '20, '21, '22, '23 and '24. Because that loss was becoming time bound for the tax authorities, as of 31 December 2023, it disallowed the entire loss. Since they disallowed the loss, we booked a tax provision in our books, for which we had already accrued -- we had already accrued for that in anticipation that this may happen. So it was [ PI ] neutral. I clearly spoke along on a conservative basis, although we feel that -- and we strongly believe that the entire loss that was claimed should -- is allowable for tax purposes. But on a prudent basis, in the current year, we've booked a tax provision against the profits that we've made, and we will have that decision taken by the tax authorities towards the second week of October. And I don't know how we go ahead. So that's the story trying to make it as short as possible, just an understanding. If you have any further questions on the tax, I'm happy to take.

Thank you, Deepak.

Bishen had raised his hand, then suddenly disappeared.

I think we may have covered it all because you've covered, we know that obviously, there's always a big interest in Duqm. I think one of the things that we've been very happy to be able to say is that we have seen that move of a 1,000 more people coming in from the end of the first half. And so that's a positive for all of us to take home. And then we have to take the balance of what Raashid and I have been describing and when projects start. Something around that, but there's definitely momentum for more to come and that we will achieve going through that 6,000 before the end of this year. So that's positive. And the other big positive is how the rest of the business is performing to compensate for this hiatus in the Duqm numbers, including the -- starting to see the benefit of that expansion of our PACs and so on. So and as usual, your questions are on the button, and we know you take great interest in that. So we very much appreciate that, your interest going on. So Deepak you're asking about you missed the point on higher finance costs. We can take that one. And maybe it's the last question.

Deepak?

Yes, please go on.

Yes. So if you see the report that has moved from June of last year to this year from 5.5. It's gone to nearly 6. So I had to take resets have been at a slightly higher in terms of basis points versus what we were running last year. So that has led to a small increase in our interest cost. And that is it. There's nothing else to it. It's just the reset and the refinancing that we did towards the end of 2023 for the Group. Those are the two things that contribute to it.

Okay. So I think on that note, as always, from Raashid and myself, thank you for attending this and for your interest in us, and we look forward to continued progress of this company quarter-on-quarter, and we'll see you next time to report on Q3. Thank you all very much indeed.

Thank you all.