Good day, and welcome to the Qatar Navigation Q2 2021 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bobby Sarkar. Please go ahead, sir.
Thank you, Deanna. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Navigation or Milaha's second quarter 2021 financial results conference call. On this call, we have Akram Iswaisi, who is the EVP Finance & Investments, and Sami Shtayyeh, who is the VP of Financial Planning and Analysis. We will conduct this conference call first with management reviewing the company's results, followed by a brief Q&A. I would like to turn the call over now to Akram. Akram, please go ahead.
Thank you very much. Thank you everyone for joining Milaha's first half earnings call and your interest in the company. I will start with our consolidated financial results and then dive into the individual segments. After that, I will turn it over to Sami to go over our outlook, and then we will end the call with questions and answers. The key highlights of our financial results, Milaha's operating revenue came in at QAR 1.37 billion for the first half of 2021, compared with QAR 1.23 billion for the same period in 2020 for an increase of 12%. Operating profit came in at QAR 144 million for the first half of 2021, compared with QAR 254 million for the same period in 2020 for a decrease of 43%. Net profit for the first half of 2021 was QAR 438 million, compared with QAR 300 million for the same period in 2020 for an increase of 46%.
Lastly, our earnings per share was 0.39 QAR for the first half of 2021, compared with 0. 26 QAR for the same period in 2020. Now moving on to our segments. Starting with Milaha Maritime & Logistics. Operating revenue increased by QAR 59 million or 13%, and operating profits increased by QAR 39 million. Our container shipping and logistics unit drove most of the increase. Container shipping got a boost from increased shipping rates and various cost optimization measures we have been focused on since the latter part of the year. Logistics performance has also improved as volume and jobs have picked up. On the cost side, aside from variable expenses that are highly correlated to revenue, we had QAR 11 million of one-time claim related provision that were recorded.
At the non-operating level, we had a drop of QAR 15 million as a result of not recording QAR 5 million gain on sale of vessels which occurred last year. It's a non-recurring item. Along with QAR 13 million in lower profits from our QTerminals joint arrangement. Overall, our net profit ended up 52% higher than the same period last year. Moving on to Offshore. Operating revenue increased by QAR 77 million or 19%. However, the strong top-line performance was more than offset by a higher increase in operating expenses, which caused margins to erode. The increased revenue came from the addition of new vessels compared to the same period in 2020, higher third-party chartered vessels, and more diving and engineering services income, which has been a focus area for the company. Expenses were out of alignment with revenue and can be summarized in four main categories.
Due to COVID restrictions last year, many dry dockings got pushed into 2021. Yet we carried essentially the same level of expenses. COVID-19 expenses continued to weigh down on results. Crew salaries have shot up as we have to overlap crews during sign-offs. One crew was in quarantine while the other is getting ready to sign off. This has also increased our hotel and accommodation expenses. We recorded a QAR 16.4 million tax provision, which will not recur. That's a one-time provision. Our lift boat was newly employed off the coast of West Africa last year. It has been off-hired since Q1. We are in the final stage of evaluating options on the vessel. When compared to last year, obviously we did not have revenue this year. We did have revenue last year.
We're essentially carrying the same level of expenses until we take a decision on what's going to happen with that vessel. QAR 149 million in lower impairments recorded versus 2020, which boosted overall performance on the segment. Moving on to Gas & Petrochem. That segment's performance was dragged down by tanker rates, which have been much lower than 2020. Revenue dropped QAR 33 million or 20%, and this fell through to the bottom line. On this topic, it's worth mentioning that in the second quarter of this year, we sold two tankers and we only have one remaining, but it's operating in the spot market. The sole remaining tanker will be converted to an FSO later in the year and ultimately hired on a long-term contract. This will remove the volatility that we've witnessed in the tanker market over the years.
We're expecting that this converted vessel will be in a long-term contract, so we'll have less volatility. On the non-operating level, income increased by QAR 13 million, with QAR 20 million additional coming from our share of Nakilat, QAR 3 million less from our VLGC joint venture, and QAR 4 million less coming from a loss on the sale of the tankers we just spoke about. Moving on to Trading. In this segment, we had a very strong first half with revenue up to QAR 69 million or 78%, versus the same period last year. Bunker and heavy equipment sales drove most of the increase and helped improve the bottom line by QAR 2 million versus the same period in 2020. Lastly, moving on to Capital.
Investment income decreased by QAR 26 million, with QAR 48 million in lower dividend income, partially offset by higher QAR 12 million in bond and other income, and QAR 10 million in reduced losses recorded last year on our held-for-trading portfolio. Real estate revenue decreased by QAR 22 million, driven by lower rent income. At the non-operating level, neither the QAR 163 million impairment nor the QAR 73 million in gains on sale of properties we recorded last year recurred, which contributed heavily to the year-over-year improvement. That wraps up the segments. I will now turn it over to Sami to discuss our outlook.
Thank you, Akram. Starting with Maritime & Logistics, we expect overall volumes to remain steady at Hamad Port, which is the main driver of our QTerminals share of profit. On the container shipping side, strong shipping rates that we witnessed thus far this year will eventually come down once supply chains normalize. When that is exactly is dependent on several things yet to be seen. In Logistics, we expect a pickup in volumes in business, barring any unforeseen COVID-related closures. In Offshore, we feel cautiously confident that operations will perform well into the rest of the year. In Gas & Petrochem, now that much of the volatility has been removed by virtue of selling two of our tankers, the majority of our business becomes fairly predictable due to the long-term nature of contracts.
In trading, sales are sporadic, based on our pipeline, we believe we can carry forward with the growth from the first half. Lastly, on the capital, on both the investment and real estate fronts, we don't foresee any major changes up until the new tenancy contract on our villa compound starts up in Q3, which will obviously have a positive impact. That essentially sums up the outlook. With that, we'll now turn it open for questions. Thank you. Operator?
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. It appears there are no questions at this time. Once again, press star one to ask a question.
Hi, Deanna, it's Bobby Sarkar. While we are waiting for questions, maybe I can just start with a question of my own. Akram Iswaisi or Sami Shtayyeh, if you could just explain, in the marine, you had very strong revenue performance year-over-year because of increase in services revenue. Could you just explain the nature of this increase? It says diving-related projects, how permanent this is, and could we expect a similar kind of trend going forward in the second half? Excluding the, staying in offshore, excluding the one-off VAT, et cetera, expenses, do you feel that operating supplies and expenses will also remain at that heightened level, given the lift boat is still idle? Can we expect something better in terms of expense in the second half? Thank you.
Okay. Thank you for the question, Bobby. As we've indicated, operating revenues have increased. Even with that increase, we've had a large number of vessels in dry docking, and that has impacted revenue. Obviously, largely that's related to the fact that we deferred dry docking from last year to this year. The expectation is once vessels come out of dry docking, we anticipate revenues to normalize. In terms of operating expenses, as I mentioned in the segment explanation, vessels are in dry docking, but we still have to incur certain operating expenses. Obviously, there is a correlation between expenses and revenue. As you see revenue, the increased operating supplies and expenses become easier to explain. At the same time, as we've mentioned, the lift boat that was in Nigeria was generating revenue last year.
It's no longer generating revenue, but we still have to incur certain operating expenses. If we decide to sell that lift boat, those expenses will go down. If we deploy the vessel elsewhere, obviously, you will see a corresponding revenue pickup. Those are the items that are essentially aside from, let's say, a net profit, if you look at operating profit, we were impacted by these two main events. At the same time, we are still impacted by COVID-related expenses, because crew changes, primarily coming from crew and crew changes. We have to maintain certain standards and follow certain procedures. That has had an impact on our operating profit. Now, as COVID subsides or as things normalize, we will see certain operating expenses go down. It's tough to predict right now when that's going to happen.
That's sort of the view on the rest of the year. Hopefully, that answers the question.
Yeah, that's fine. I just had a quick follow-up. In terms of the dry docking, do you have a sense of what percentage of the fleet was dry docked, and what's the progression going forward? Are we going to see a similar level in terms of dry docking in the second half, or is most of it done? What additional color, if anything, you can provide on that would be helpful. Thank you.
Well, here's the reality. 2020 was an exceptional year, right? When we were hit last year with, let's say, COVID, if you will, and a lot of restrictions on operations, and that impacted our ability to operate. We've, to a large extent, learned how to deal with these issues. We are managing our dry docking schedule much more effectively than we did last year, because last year was, I think, a learning year, if you will, for everybody. We don't anticipate having major issues going forward. However, dry docking days have been extended, you might be able to schedule a dry dock or maintenance, but it takes longer than usual, again, because of restrictions, policies, procedures, wherever you take the vessels to get dry docked or maintained.
I don't want to give you a percentage of the vessels, because different vessels generate different. If you look at, for example, diving vessels generate a lot more revenue than a small PSV. We have different sizes of vessels, different capacities. Each one of them generates different revenues. Some of them are higher earners than others. It's tough to say, well, it's 30% of the fleet, because that may not have a big impact on revenue. We've had vessels that generate substantial revenues that have impacted the topic.
Okay. Thanks, Akram. Great. Deanna, do we have any questions?
Yes, we do have a question from Bijoy Joy with Qatar Insurance Company. Please go ahead. Your line is open.
Hello. Thank you, gentlemen, for the call. My question is on the offshore side. If you can please give us some color on the number of vessels which are not generating revenue, and what is the impairment status on these vessels?
Well, we don't have a lot of vessels that are not generating revenue. If you're talking about idle or are you talking about dry docked?
Yeah, idle.
Idle, we only have a handful. Aside from the lift boat, which is essentially idle, we have a few vessels that we are planning to dispose of or sell. The majority of our vessels operate either in the spot market or on, let's say, medium or long-term contracts. Our utilization is quite high. Vessels sometimes we have certain types of vessels, because if you look at the offshore vessels, there are certain types of vessels that are customized or have certain specifications. Depending on our ability to deploy those vessels, some of them are worked on, three months contract, six months contract. The majority of our vessels are on medium to long-term contracts. In terms of idle, we don't have a whole lot. I'd say at least less than 10%. Okay.
I don't remember the exact number, but I'd say probably less than 10%, the number is probably, I would say, between spot and idle. Again, we flip-flop between spot and idle. Where we find opportunities to deploy our vessels and generate revenue, we do so. Some of the vessels, just to put this in context as well, we keep some vessels as backup vessels for some of our contracts. We cannot have 100% utilization with no backup vessels, because in the event of a breakdown in any of the vessels, we need always a backup vessel to be able to come in and continue the contract. There's always a cushion there in terms of vessels, and those vessels are typically deployed. Again, we keep them in the spot market, just so we have some flexibility there.
These vessels, which are idle, are they fully impaired, or they have impact on the net realizable value?
We go through an impairment exercise, and you've seen that we've gone through an extensive impairment exercise on a lot of the offshore vessels. We annually, and even if not annually, we periodically look at the impairments, and take impairments when necessary and when needed as per IFRS standards.
Okay. My second question is on the warehousing. You guys took some impairment on that side. Is it completed? Is it fully done? What is the current status of that segment?
You're asking if impairments are done, or is the warehousing facility done? What's the impairments, right?
The first question is, impairment is done.
Okay
Status in terms of-
We're not taking any more impairments. On the warehousing, it was a one-time adjustment. That's it. In terms of the warehouse, occupancy is extremely high. As we've mentioned in previous earnings calls, during COVID, we have picked up a lot of new clients. I think the name of the game now is resilience, and the market sees Milaha as a resilient supplier, a resilient service provider. That has transformed into new clients and additional business for us. You've seen that on the container side, and you've seen that in Logistics as well. As I've alluded to earlier, in the segment results, Logistics has done well this year compared to the same period last year.
Just one follow-up on the offshore side. I see in the presentation that there's a one-off, QAR 16.4 million on the VAT provision. If I remove that from the operating expenses, I see that the operating expenses have increased more than what the revenue has come for the first half. Is there something other than these provisions? Is there something which is one-off and which will not repeat in future?
Let's focus on operating profit. If you look at operating profit, last year, obviously, if you look at operating profit, there's a decrease from the same period last year, right? As we've alluded to, number one, we have vessels that are in dry docking, and so we have some lost revenue there. Two, we have the lift boat, which still incurs operating expenses, but no revenue. We also chartered in new vessels. If I recall the number exactly, I think it was six new vessels or seven new vessels that were chartered in compared to the same period last year.
Again, we are chartering new vessels because we are bidding on a lot of work, as we alluded to earlier. We have been largely an asset owner, we've been expanding into services. When we approach clients, we offer now bundled services or platforms, services plus assets. Chartering vessels gives us flexibility as we win contracts. We can convert those chartered vessels into Milaha-owned vessels, and that's the approach. We have a mix of Milaha-owned vessels and Milaha-chartered vessels. That gives us more flexibility rather than having to buy CapEx in the beginning. We win the tender, which we use in chartered-in vessels, eventually we convert those into Milaha-owned vessels, depending on the business case and the economics. That would explain also the increase in operating supplies and expenses.
We have a lot of chartered-in new vessels, and we have one new Milaha-owned vessels as well, compared to the same period last year.
Okay. Got it. one last one.
I've also mentioned COVID, right? One more thing. I've mentioned also COVID expenses. We've been hit. COVID expenses have been significant in this segment as well, coming primarily in terms of crew wages, hotel expenses. We've been hit with that as well, but that's a necessary evil, unfortunately. That's not going to go away until COVID subsides.
Mm-hmm. Okay.
Yeah.
On the pricing side for Offshore, how do you see the pricing and how do you see the margins? Is it fair to assume the same kind of margins, like three years before, what margins you used to enjoy? Is it the same kind of margins that could be expected in future, for the segment?
Well, it's tough to predict what the future will look like. It's tied to, obviously, the global oil and gas market and also the supply of vessels, right? As I mentioned earlier, a big focus of Milaha Offshore is expanding into services to complement our asset base, and that's where we begin to see margins. Again, right now, we do have asset ownership where we charter vessels to clients, but we're also providing services, and our focus is to continue to focus on adding a portfolio of services to complement our asset base, and that's where we hope to continue to grow our margin.
Which was not there in the previous years, right?
Historically, we've been building it up. Historically, we've been primarily an asset owner. Owning asset and chartering assets still made money in the past, fantastic returns. I don't have to tell you, look at the OSV market globally, and you will see the kind of margins they're generating. The market has changed, and now we're focused on complementing. Again, it's about generating revenue, but it's also about being able to serve our clients. Coming in with a bundled approach allows us to, let's say, better entangle a customer, better serve our customers. It's a different approach that we're taking right now, but it's being built up, and we have been doing some work that we've never done before, building knowhow internally, even looking at joint ventures with various partners to build capabilities, and that has worked well for us.
Okay. Thanks. That's it from my side. Thank you.
No problem.
There are no further questions at this time. Once again, as a reminder, to ask a question, press star one. We do have another question now from Mustafa Amir with Al Rayan Investment. Please go ahead. Your line is open.
Hi. Thank you for the call. Just wanted some color on the real estate, the villa compound that's going to be rented out. What are the numbers you're looking at, and how substantial is it going to be going ahead? Just some color on the villa compound contract.
Obviously, we've rented out the compound. It's a five-year contract. Unfortunately, because of confidentiality, we can't disclose rates or any information at the moment because we signed a non-disclosure agreement. Again, we've deployed it at reasonable market rates, let's put it that way. Starting from August of this year, the compound is fully contracted to one client, which for us, that's a success because the ramp-up to be able to rent 178 villas will take a long time. From day one, the compound is already rented to one client. That will have a good impact on top line and as well as bottom line. At this moment, I can't disclose any information.
No problem. I understand. How many villas you said were in total?
178 villas. Yeah. You can back into the numbers if you look at market rates from 178 villas.
All of them have been contracted. Sorry.
One contract for one client.
Yeah, one contract, one client taking up all of them, yeah?
That's correct.
Okay. Thank you.
You're welcome.
It appears there are no further questions at this time. Just again, as a reminder, to ask a question, press star one. It appears there are no further questions for today's call, I would like to turn the conference back to our speakers for any additional or closing remarks.
Okay. Thanks, Deanna. This is Bobby Sarkar again. If there are no further questions, we can end, wind up the call for today. I wanted to thank Akram and Sami for taking the time to answer our questions, and we'll pick this up next quarter. Thank you very much, guys.
Thank you, everyone.
This concludes today's call. Thank you for your participation. You may now disconnect.