Earnings Call: Q2 2021

Jul 25, 2021

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, Diana. Hello, everyone. This is Bobby Sarkar, Head of Research at QMB Financial Services. I wanted to welcome everyone to Qatar Navigations or Malaha's Q2 2021 financial results conference call. So on this call, we have Akram Iswesi, who is the EVP, Finance and Investments and Sami Shethaya, who is the VP of Financial Planning and Analysis. So we will conduct this conference call first with management reviewing the company's results followed by a brief Q and 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 Melaha'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. Medaha's operating revenue came in at $1,370,000,000 for the first half of twenty twenty one compared with $1,230,000,000 for the same period in 2020 for an increase of 12%. Operating profit came in at $144,000,000 for the first half of twenty twenty one compared with $254,000,000 for the same period in 2020 for a decrease of 43%. Net profit for the first half of twenty twenty one was $438,000,000 compared with BRL300,000,000 for the same period in 2020 for an increase of 46%. And lastly, our earnings per share was BRL0.39 for the first half of twenty twenty one compared with BRL0.26 for the same period in 2020. Now moving on to our segments, starting with Malaha Maritime and Logistics. Operating revenue increased by $59,000,000 or 13% and operating profit increased by $39,000,000 dollars 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 $11,000,000 of onetime claim related provision that were recorded. At the non operating level, we had a drop of $15,000,000 as a result of not recording $5,000,000 gain on sale of vessels, which occurred last year. It's a nonrecurring item, along with $13,000,000 in lower profits from our key terminals joint arrangement. Overall, our net profit ended up 52% higher than the same period last year. Moving on to Offshore. Operating revenue increased by $77,000,000 or 19%. However, the strong top line performance was more than offset by a higher increase in operating expenses, which caused margins to erode. Increased revenue came from the addition of new vessels compared to the same period in 2020, higher third party charter new 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 4 main categories. Due to COVID restrictions last year, many dry dock ins got pushed into 2021. This effectively meant we had less revenue generating assets than we normally would, but yet we carried essentially the same level of expenses. COVID-nineteen expenses continue to weigh down on results. Crew salaries have shut up as we have to overlap crews during sign offs. 1 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 $16,400,000 tax provision, which will not recur as a one time provision. Our lift boat was newly employed off the coast of West Africa last year, but has been off hire since Q1. We are in the final stage of evaluating options of the vessel, but when compared to last year, obviously, we did not have revenue this year, but we did have revenue last year. But we're essentially carrying the same level of expenses until we take a decision on what's going to happen with that vessel. Then $149,000,000 in lower impairments recorded versus 2020, which boosted overall performance on the segment. Now moving on to Gas and Petchem. That segment's performance was dragged down by tanker rates, which have been much lower than 2020. Revenue dropped $33,000,000 or 20 percent, and this fell through to the bottom line. On this topic, it's worth mentioning. Then the Q2 of this year, we sold 2 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 higher on the long term contract. This will remove the volatility that we've witnessed in the Tarkan market over the years. So we're expecting that this conversion converted vessel will be in a long term contract, so we'll have less volatility. On the non operating level, income increased by 13,000,000 dollars with $20,000,000 additional coming from our share of Bacalat, dollars 3,000,000 less from our VLGC joint venture and $4,000,000 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 $69,000,000 or 78% versus the same period last year. Bunker and heavy equipment sales drove most of increase and helped improve the bottom line by $2,000,000 versus the same period in 2020. Lastly, moving on to capital. Investment income decreased by $26,000,000 with $48,000,000 in lower dividend income, partially offset by 12 higher $12,000,000 in bond and other income and $10,000,000 in reduced losses reported last year on our held for trading portfolio. Rested revenue decreased by $22,000,000 dollars driven by lower rent income. And at the non operating level, neither the 163,000,000 dollars impairment nor the $73,000,000 in gains on sale of properties we recorded last year recurred, which contributed heavily to the year over year improvement. And that wraps up the segments. I will now turn it over to Sami to discuss our outlook. Thank you, Akram. Starting with maritime and logistics, we expect overall volumes to remain steady at Hammett Port, which is the main driver of our Q terminal 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, one 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. And in gas and petrochem, now that much of the volatility has been removed by virtue of selling 2 of our tankers, the majority of our business becomes fairly predictable due to the long term nature of contracts. In trading, sales are sporadic, but based on our pipeline, we believe we can carry forward with the growth from the first half. And 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. And with that, we'll now turn it open for questions. Thank you. Operator? Thank Hi, Deanna, it's Bobby. While we are waiting for questions, maybe I can just start with a question of my own. Akram or Sami, 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 and how permanent this is and could we expect a similar kind of trend going forward in the second half? And then excluding the staying in offshore, excluding the one off that etcetera expenses, do you feel that operating supplies and expenses will also remain at that heightened level given the lift book the unit lift book is still idle or we can expect something better in terms of expenses in the second half? Thank you. Okay. Thank you for the question, Bobby. As we've indicated, operating revenues have increased. But even with that increase, we've had a large number of vessels in dry docking and that has impacted revenue. And so and obviously, largely that's related to the fact that we deferred drydocking from last year to this year. And so the expectation is once vessels come out of drydocking, we anticipate revenues to normalize. In terms of operating expenses, as I mentioned in the segment explanation, vessels are in drydocking, but we still have to incur certain operating expenses. So obviously, there is a correlation between expenses and revenue. So as you see revenue, the increased operating supplies and expenses become easier to explain. At the same time, as we've mentioned, the lift post 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 up, will go down, apologies. And if we deploy the vessel elsewhere, obviously, you will see a corresponding revenue pickup. And so those are the items that are essentially, I mean, aside from, let's say, net profit, if you look at operating profit, we were impacted by these 2 main events. At the same time, we are still impacted by COVID related expenses because they're crew changes primarily coming from crew and crew changes. We have to maintain certain standards and follow certain procedures. And so that has had an impact on our operating profit. Now as COVID subsides or things normalize, we will see certain operating expenses go down. But it's tough to predict right now when that's going to happen. And so that's sort of the view on the rest of the year. Hopefully, that answers the question. Yes, 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 drydocked? And like what's the progression going forward? Are we going to see a similar level in terms of drydocking in the second half? Or is most of it's done? Or what additional color, if anything, you can provide on that? That would be helpful. Thank you. Well, I mean, here's the reality. I mean, 2020 was an exceptional year, right? So 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. So we've to a large extent learned how to deal with these issues. And so and we are managing our drydock schedule much more effectively than we did last year because last year was, I think, a learning year, if you will, for everybody. So we don't anticipate having major issues going forward. However, drydocking days have been extended. And so you might be able to schedule some drydock 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. And so and it's and I don't want to give you a percentage of the vessels because different vessels generate different each. So if you look at, for example, diving vessels generate a lot more revenue than a small PSP. So we have different sizes of vessels, different capacities, each one of them generates different types different revenues. So some of them are higher earners than others. So it's tough to say, well, it's 30% of the fleet because that may not have a big impact on revenue, but we've had vessels that generate substantial revenues that have impacted the top line. Okay. Thanks, Vikram. Great. Diyra, do we have any questions? Yes. We do have a question from Bijujoy 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 vessels number of vessels which are not generating revenue and what is the impairment status on these vessels? Well, I mean, we don't have a lot of vessels that are not generating revenue. I mean, if you're talking about idle or are you talking about drydock? Yes, idle. Idle, we only have a handful. I mean, aside from the lift boat, which is essentially idle, we have a few vessels that we are planning to dispose off or sell. But the majority of our vessels operate either in the spot market or on, let's say, medium and long term contracts. So our utilization is quite high. So because vessels sometimes may work for so we have certain types of vessels because if you look at the offshore vessels, there are certain types of vessels that are customized or are have certain specifications. So depending on our ability to deploy those vessels, some of them are work on 3 months contract, 6 months contract, but the majority of our vessels are medium to long term contracts. In terms of idle, we don't have a whole lot. I'd say less than 10%. Okay. So just 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 because, again, we flip and flop between spot and idle. And where we find opportunities, we deploy our vessels and generate revenue, we do so. And some of the vessels, just to put this in context as well, we keep some vessels as backup vessels for some of our contracts. So we cannot have 100 percent 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. So 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. So these vessels which are idle, are they fully embedded or they have impact to the net related to value? I mean, we go through an impairment exercise and you've seen that we have been we have been we've gone through an extensive impairment exercise on a lot of the offshore vessels. So we would like we annually and even not annually, we periodically look at the impairments and take impairments when necessary and when needed as per IFRS standards. Okay. And my second question is on the warehousing. So you guys took some impairment on that side. Is it completed? Is it fully done? And what is the current status of that segment? When you ask you're asking if impairments are done or is the warehousing facility done? What is the impairments, right? The first question is The first question is impairment is done and what is the status in terms of We're not taking any more impairments. On the warehousing, it was a onetime adjustment. That's it. And in terms of the warehouse, it's occupancy is extremely high, as we've mentioned in previous earnings calls. We have 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 Malaha as a resilient supplier, a resilient service provider and that has transformed into new clients and additional business for us. And you've seen that on the container side and you've seen that in logistics as well. As I alluded to earlier in the segment results, logistics has done well this year compared to same period last year. Okay. Just one follow-up on the offshore side. I see in the presentation that there is a one off 16,400,000 euros on the VAT provision. But 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. So is there something other than these provisions, is there something which is one off and which will not repeat in the future? Well, I mean, let's focus on operating profit. If you look at operating profit, last year, I mean, obviously, we've if you look at operating profit, there is a decrease from the same period last year, right? And as we've alluded to, number 1, 1, we have vessels that are drydocking and so we have some lost revenue there. 2, we have the lift boat, which still incurs operating expenses, but no revenue. And we also chartered in new vessels. So if I recall the number exactly, I think it was 6 new vessels or 7 new vessels that were chartered in compared to the same period last year. So 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, and so we've been expanding into services. So when we approach clients, we offer now bundled services or platforms, services plus assets. And so chartering vessels gives us flexibility. As we win contracts, we can convert those chartered vessels into Malaha owned vessels, and that's the approach. So we have a mix of Malaha owned vessels and Malaha chartered in vessels. And so that gives us more flexibility rather than having to buy CapEx in the beginning. We wouldn't make tender, which we use in chartered in vessels and then eventually convert those into Valajao vessels depending on the business case and the economics. But that would explain also increase in operating supplies and expenses. We have a lot of chartered in new vessels and we have 1 new Malaha owned vessels as well compared to the same period last year. Okay. Got it. And one last one. And I've also mentioned COVID, right? And one more thing. I've mentioned also COVID expenses that we've been hit. COVID expenses have been significant in this segment as well. And so coming primarily in terms of crew wages, hotel expenses, so 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. Okay. And On the pricing side for offshore, on the how do you see the pricing and how do you see the margins? Would you be is it fair to assume the same kind of margins in the previous like 3 years before what margins you used to enjoy? Is it the same kind of margins that could be expected in the future for the segment? Well, I mean, 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? And so as I mentioned earlier, a big focus of offshore is expanding into services to complement our asset base, and that's where we begin to see margins. So again, right now, we do have asset ownership where we charter contract, 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? So Historically, I mean, we've been building it up. We've been building it up, but historically, we've been primarily an asset corner because owning asset and chartering assets still made money in the past. Fantastic returns, I mean, I don't have to tell you, look at the OSV market globally and you will see the kind of margins we're generating. So the market has changed and now we're focused on complementing. And again, it's not also about also 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. And so 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 know how internally, even looking at joint ventures with various partners to build capabilities and that has worked well for us. Okay. Thanks. That's it for me. Thank you. No problem. And we do have another question now from Mustafa Amir with Orion Investments. 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? So just some color on the Willa Compound contract? Well, I mean, obviously, we've rented out the compound. It's a 5 year contract. Unfortunately, we can't because of confidentiality, we can't disclose rates or any information at the moment because we signed a non disclosure agreement. But again, we've deployed it at reasonable market rates, let's put it that way. So starting from August of this year, the compound is fully contracted to one client, which and for us that's a success because the ramp up to be able to rent 178 villas will take a long time. But from day 1, the compound is already rented to one client. So that will have a good impact on top line and as well as bottom line. But at this moment, I can't disclose any information. No problem. I understand. How many dealers you said were in total? 170 dealers. Yes. I mean you can back into the numbers. If you look at market rates, the 178 villas, expected margin All of them are being contracted. So it's one sorry, so it's 1 1 contract. Yes, one contract, one client taken up all of them, yes? That's correct. Okay. Thank you. You're welcome. And it appears there are no further questions at this time. It appears there are no further questions for today's call. So I would like to turn the conference back to our speakers for any additional or closing remarks. Okay. Thanks, Diana. 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.