Earnings Call: Q1 2021

Apr 25, 2021

Good day, and welcome to the Carter Navigation First Quarter 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. Thank you, Diane. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Navigations or Milaha's Q1 2021 financial results conference call. So on this conference call, we have Akram Iswesi, who is the EVP in Finance and Investments at Malaha and Sami Shethaya, who is the VP of Financial Planning and Analysis. So as usual, we will conduct the call with management first to reviewing the company's results followed by a brief Q and A session. I would like to turn the call over now to Akram. Akram, please go ahead. Okay. Thank you very much. Welcome everyone to Malaha's first quarterly earnings call and your interest in the company and first of all as well Ramadan Kareem. I'll start with our consolidated financial results and then dive into the segment results. After that, I'll turn it over to Sami to go over the outlook for the rest of the year, and then we'll end the call with questions and answers. The key highlights of our financial results are as follows: Malaha's operating revenues came in at $675,000,000,000 for the Q1 of 2021 compared with $692,000,000 for the same period in 2020 for a decrease of 2%. Operating profit came in at $131,000,000 for the Q1 of 2021 compared with $200,000,000 for the same period in 2020 for a decrease of 34%. Net profit for the Q1 of 2021 was EUR 297,000,000 compared with EUR 283 $1,000,000 for the same period in 2020 for an increase of 5%. And lastly, our earnings per share was BRL 0.26 for the Q1 of 2021 compared with BRL0.25 for the same period in 2020. Now moving on to the segments. The La Jamere Time and Logistics top line revenue decreased by 4% or $10,000,000 but operating profit increased by $18,000,000 and this was primarily driven by our container shipping unit. We right sized capacity to better align with volumes, which allowed us to: number 1, shed costs we otherwise would have borne 2, get rid of unprofitable revenue. Additionally, at the segment level, we recorded a $6,000,000 drop in the provision for bad debt as compared to the same period last year. At the non operating level, we had a drop of $5,000,000 as a result of not recording a gain on sale of vessels, which we did last year, along with lower profit from our JV company. These factors drove the 40% increase in net profit we recorded this year. Now moving on to offshore. Operating revenue dipped by 6% or 12,000,000 and operating expenses increased by $9,000,000 both of which drove the drop of $22,000,000 in operating profit compared to the same period in 2020. Higher revenue from the addition of new vessels compared to the same period last year and higher third party chartered in vessels were more than offset the negative impact of vessel dry dock ins, maintenance issues and COVID-nineteen off hires. Now COVID-nineteen is not fully behind us yet, and although we've done a very good job at mitigating the impact on our operations, it still affected Q1 offshore results. Now $99,000,000 in lower impairments recorded last year versus 2020 versus 2021 boosted our overall performance for the segment. So last year, we had close to €99,000,000 recorded impairments. This year, we did that. That has helped improve the financial results going from a loss of €77,000,000 to a profit of €3,000,000 in Q1 of 2021. Moving on to gas and Tech Chem. Operating revenue and operating profit both dropped and we were the result of plummeting tanker rates. As a point of reference and to give you an idea of the magnitude of the drop, in Q1 of 2020 tanker rates averaged $20,000 to $30,000 per day and that's kind of a range. And in Q1 of 2021, it fell to about $10,000 per day. On the non operating level, income increased by $50,000,000 to $10,000,000 additional coming from our share of bacalettes and $5,000,000 additional from our VLGC joint venture, which is DOLF LPG, which benefited basically from higher VLGC rates compared to the same period last year. Net profit for the segment ended down $7,000,000 from $150,000,000 in 2020 to $143,000,000 in 2021. Now moving on to our Training segment, a 29% increase 29% increase in revenue coming from virtually all units under that pillar improved the bottom line by 1,000,000 euros versus the same period in 2020. Margins are thin in this segment, so revenue and volume growth are key to improving results. And lastly, moving on to Malaha Capital. Investment income decreased by €27,000,000 with around $40,000,000 drop in lower dividend income, partially offset by $5,000,000 in higher bond income and $9,000,000 in reduced losses recorded last year in our held for trading portfolio. Real estate revenue decreased by $7,000,000 driven by lower rent income. And at the NAND operating level, we recorded negative or lower negative $31,000,000 in lower gains on the sale of property that was sold in 2020. And that wraps up the segments, and I will now turn it over to Sami to discuss our outlook. Thank you, Assam. Starting with Maritime and Logistics, we expect overall volumes to remain steady at Hammett's 4th, which is the main driver of our terminal's share profit. On the container shipping side, we were quite optimistic about the rest of the year and then India imposed a lockdown last week as they try to manage through their COVID-nineteen situation. To the extent that does not turn into a prolonged matter, we expect the unit to continue to outperform to 20 20. And logistics utilizations are expected to continue increasing in the warehouse and client sites that had been shut down due to COVID-nineteen are gradually reopening allowing us to work on-site again. Both of these are good news. In offshore, although Q1 results came in weaker than expected, we feel cautiously confident that operations will perform better in the rest of the year. We do have many drydocks scheduled this year and COVID-nineteen related expenses and downtimes could alter that view, but as we stand today, we feel good about offshore outlook. In gas in touch with them, the majority of our business is fairly predictable due to the long term nature of contracts. Two parts of our business that are less predictable are the tankers and our VLGC joint venture, which are both exposed to volatile spot prices. How spot prices fluctuate throughout the year is difficult to predict and so there is some uncertainty on these two units. In trading, we saw a decent pickup in revenue in Q1 and are cautiously optimistic on the rest of the year given sales efforts and what we're seeing currently in the pipeline. And lastly, on to capital, on both the investment and real estate fronts, we don't foresee any major changes up until the new tenancy contract on our new Villa compound starts up in Q3, which will have a positive impact. With that, we'll now open up for questions and answers. Operator? Thank We will take our first question from Dave Arora with Daman Investments. Please go ahead. Hi, gentlemen. Thank you for the call. When we look at your profitability, most of your profit is coming from 3 I would say 3 places. 1 is obviously the Hammock Port and then is QGTS and third is the Q and M the capital business. But if you exclude these 3 then the other businesses, which is maritime and logistics and the Offshore and Gas and Petrochemical, they're not none of these are contributing much to the profits. And that also reflects sort of in the valuation of the company. So we just want to understand what is the strategy in each and every business? And what if you can just go business by business and tell us what do we see, what sort of operating profit can we expect from, let's say, offshore marine business, gas and petrochemical business, given these are acid heavy business, gas and petrochemical, offshore marine, but they don't have that much profitability. So what sort of a profit do you expect from these businesses 5 years down the line or 3 years down the line if there is not that much visibility? And also on the other business, which is maritime and logistic? Thank you. Okay. Thank you for the question. I think it's obvious and it's been obvious before that most of our profitability is coming from enacalat capital and let's say, maybe non operating businesses. And we've alluded to this before that number 1, if you take Mala Hamada and Logistics, we have been making investments in our logistics business and that's been paying off. And if you notice right now, this business and I think I was asked that question as well last quarter, when will this business become profitable? And if you look at 2021, Q1, this business has already is already profitable. We were showing a loss last year and that loss has turned around. So a lot of investment has been made in this business from optimizing your asset base, from bringing in new talent to be able to execute on the company's strategy. Within MML, we focus primarily on the featuring. I mean, we are from a container shipping perspective, we're a featuring company. And so we've worked on optimizing our network, reducing costs and really focusing on profitable growth, and that's the key. From a logistics perspective, we've made a lot of investments in optimizing our logistics facilities. We increased occupancy significantly, so utilization is extremely high. We've focused now on adding value added services, creating logistics solutions and rolling those out to the market. But again, it takes some time to actually bear the fruits of our investment. But you're beginning to see that right now where we're beginning to turn a profit on MML. And we're optimistic that over the next couple of years, Malaha Maritime and Logistics profitability will continue to grow. Now if you look at the offshore business, this is not unique to the Beraha Offshore, okay? This is not unique to Halul. Globally, the offshore market has been struggling for the past 2 to 5 years, it's not even more. Now but reality, if you compare Halul to other companies, we have been much more lucky, if you will. Our business has survived, and we are profitable. Barring impairments. The business is doing quite well. And today, this business right now, there's a big I mean asset ownership by itself doesn't generate profit. So we've been focused primarily as well on adding services that can generate margin. So in addition to asset ownership, which is critical, you need to start investing in services. And we've been investing a lot in services. But it's going to take time to show those results in our P and L. Now we're also optimistic over the last couple of years of hoping to see improvements in oil prices, which will translate in a, let's say, in a more improved market conditions for the offshore for OSB market. So I think those factors right now are going to help us over the next couple of years. Sorry, on the offshore business, do you see this business as strategic given you were saying that oil prices can improve, they can improve for a year, but they can again fluctuate downwards given the move towards EVs and all. Do you see this business as strategic as your portfolio? Or is it better to maybe you can also think about and sometime to offload this business? If the profitability in the next 1 to 2 years doesn't recover? Strategic. It's strategic to us. It's strategic to our country. So it will stay. But how much patience you will keep for how many years can you if by any chance this doesn't turn around and this continue to be sort of a loss making business or more or less net net not making much money to you and justify the return on assets? I don't think that's the question I'm going to answer right now. Okay. As I mentioned to you right now, it's a strategic asset to the company. We believe in this business and it's also critical for the country and this business will remain. So at this point, I'm not going to answer any more questions on that topic. Okay. All right. Thank you very much. I appreciate it. And the third one, gas and petrochemical division, right, the 3rd division. Well, the Gas and Petchem division, we are focused we've changed the strategic direction of that business unit. And we're primarily focused on niche markets like FPSOs and FSOs. So this is the area that we're focused on these days. We're not investing in traditional maritime shipping assets like tankers, like MRs, LRs. We've seen a lot of volatility in the sector and that market is still way oversupplied. So we are focused on investing in assets that are backed by long term contracts. So this is where we're investing right now, especially in that segment. And that segment, from profitability perspective, it's relatively stable. But from a growth perspective, this is the area that we're looking at that we're investing in right now. And I think a lot of the contracts in this business are on the spot market, right? For VLGCs that you have, they're on the spot market? They are well, they were on a contract and then now they're tied to the spot market, yes. So the situation changes every couple of years. Is there any guidance you can give us So I was saying any guidance you can give us in 3 years, what sort of a profit operating profit you can see from this business? I can't give you a guidance in 3 years from now, to be honest with you. Okay. All right. Thank you. But if you look at that business, again, the only volatile aspect, I mean, within that business, the VLGC is a volatile market. That's an old track. If you look at the which I mean, we've been selling our tanker business. So our volatility or exposure to the spot market has been slowly reduced. And like I mentioned, we're changing the mix to continue to invest in assets that are backed by long term contracts, FPSOs, So you begin to see less volatility to spot market rates going forward. That's all I can say at this point. So what is the visibility on putting these VLGCs in the charter market? Can we see that happening? And what are you waiting for, the rates to stabilize or the rates to go higher from here? I'm not waiting for anything that depends on the market. So it's a view. It's the market that again, the market for VLGC is very volatile. And it really depends on the market dynamics and the view of the clients. So when clients expect rates to go up, they tend to want to lock in rates. So again, it depends on market dynamics, and we're always looking at there are opportunities to take advantage of rising spot rates, we will do so. If there isn't, then we will lock it in and fix the rates as much as we possibly can. So but I can't give you visibility on that right now because, again, this sector is volatile and it changes month by month actually. Okay, same as in the tanker business. You can't predict what the tanker business will do. As I mentioned, tanker market was doing exceptionally well last year. And this year, the rates tanked significantly. So it's very again, this business in general, tankers and VLGCs, it's a very, let's say, tactical business and you have to manage it on a day by day basis or month by month. And it appears there are no further questions at this time. All right. We do have another question now from Biju Joy with Qatar Insurance. Please go ahead. Hello. Hi. Thanks gentlemen for the call. This is Bijuaj here from QIC. My first question is on your operating supplies and expenses. Can you If you don't mind, can you speak up a little bit? Can't hear you. Sure. So my first question is on your operating supplies and expenses. Can you give some color as to what is happening with Qatar queries and why is the Excels is going up? Listen, on cut out carriers, the revenue has gone up as well and so has operating supplies and expenses. So in that kind of business, it's more like a trading business. So it's natural that revenue is going to go up, operating supplies and expenses, cost of goods sold has to go up as well. It's that simple. Okay. So I see that happening on your trading side, just trading side as well. So I understand it's a thin margin business and the cost of expenses will also go up. So are you guys aggressive on that side? Is there an opportunity that is going on in the market? How does it look for the year? Listen, I think if you look at what we've done with that business unit is we have restructured that business unit. We sold the travel agency, but we shut it down as we not sold it. And we have been focusing primarily on serving the Qatar Marine market as a supplier, as a service provider. Now we've had all the building blocks. We've been we sell lubricants. We do fleet and technical services, ship repair. And so a big part of what we have tried to do is focus on serving the Qatar Marine market. And so that includes as well ship channeling. So building supply chain for vessel owners in Qatar has been an area that we're focused on and we've been invested in that to be honest with you. So if you're asking me about the outlook for the company, this is one of the areas that's going to be growing over the next couple of years because we see a market for this in Qatar. And we've been doing it in chunks, if you will, but we have built a been working on building a structured supply chain to be able to serve the cauterabiv market. So you're going to start seeing more activities in that area. So this is sort of the buildup to that, to be honest with you. Okay, understood. My second question is on the capital side. When do you think the rental from the villa projects will start kicking in in the numbers? August, August of this year. August to September. Mark, any delays? August to September. Okay. And what kind of a tenure equity, 5 years? Is it fair to assume that? 5 years, yes. 5 years. So other than that, anything on the warehousing side, which you think will start picking up? What is your expectation on that side? Listen, on the warehousing side, to be honest with you, the first thing we've done is we wanted to fill the warehouse, okay, to generate cash flow. So we've done a good job of that. Now we're working on optimizing the warehouse that we have to squeeze more value out of it. So now it's about sweating the assets. And we've done that across the board. So if we build more warehouses, we're going to build them to make money. But you already know that the capacity in the market is there's already enough capacity in the market. So while we are constantly looking at what warehouses to build a few months and talking about additional capacity, we still have a large plot of land that's been developed. So it's got the infrastructure. It's well secured and we have the capacity to continue to build, but we're only going to invest in profitable growth going forward. We're not going to follow the build it and they will come approach, but we're going to focus on profitable growth. So right now, what we're focused on is sweating the assets as much as we can. And then we could eventually look at as our client base continue to expand to grow, as our client needs continue to grow, then we'll look at building the additional facilities and additional warehouses. But right now, the main focus has been on sweating the assets. And we've done a good job of that. So sweating the assets, filling that, maximizing basically the usage of that facility, adding more value added services. So it's not just about rent and warehouse space. It's about the movements of inventory in and out. It's about the value add services that clients need. So this is how we're looking at that business today. Got it. Understood. And how do you see the offshore market? Do you see any pickup expected or anything moving on that side? Honestly, I mean, I think you're reading the same information that you're reading and we're looking at the same research that you're looking at. There's a lot of optimism next year and the year after about a global recovery about potentially. I mean oil prices have gone up this year as well, but the continued increase in oil prices over the next few years, which bodes well for the offshore market. And we're already starting to see some potential, let's say, CapEx programs being sanctioned compared to the past couple of years where there's obviously a moratorium or a freeze. So there is some movement and it looks quite exciting. And like I said, as I mentioned earlier, we are also expanding into services and new things. And if you notice from our announcement in the market, we've announced about relationship with Schlumberger and our foray into wealth stimulation. And so we're doing a lot more things to enhance our value offerings, our service offerings to our client base and investment capabilities. So I think we're quite optimistic over the next couple of years. Offshore will look better than it did the past couple of years. Would it go back to the old days? Not quite sure. But I think we're headed in the right direction. And definitely, there's optimism about an improvement in our market. Okay. Can you give some color? There's a 20% or maybe 80%, 17%, 18% increase in fleet and technical expenses. Is it something that is happening? I can't hear you. Can you hear me? Yes. Yes. There's some increase in expenses on the fleet and technical expenses for offshore. Can you give us some color as to where is it coming from? Yes, I can take that one. Yes, go ahead. That's fine. Yes. Hi, Vijoy. So the increase is primarily because we added some new vessels last year. So naturally, when you have new vessels, you're going to have crude costs associated with the vessels, you're going to have spares and maintenance expenses, all of that. So that all falls under the Speed and Technical, and that's why you see an increase there. The vessels were primarily in the Offshore segment. Okay. Got it. Understood. Thank you. Thank you so much, guys. Okay. And we have one more question from Adeel Rashid with Daman Investments. Please go ahead. Hi. You guys mentioned that the lockdown in India is an area of concern for you within container shipping. Could you elaborate on sort of the exposure India has to the maritime and logistics revenue? Yes, I can take that. So what India is a huge trading partner of Qatar. That's a common known fact. We opened up direct routes from India several years ago. So when they instituted the lockdown last year when COVID first started, it definitely took a hit on our container shipping volumes and numbers. They've instituted a similar lock down just late last week because of the herds, the huge surge in cases there. So that's what we mean by that. Now how long that's going to last? There's no indication. I think initially they said a couple of weeks, but it's hard to tell. It's all going to come down to how well they manage or how well or not the COVID situation eases up there. So like I said, I mean, it's a concern. India is a huge trading partner. We have the ships coming from there on a regular basis. So to the extent the lockdown falls into weeks and potentially months, then that would definitely have an impact on our container shipping volumes and profitability. But so if you look back at 2019, what was would you be able to sort of mention what was the exposure before COVID? So you could give us some perspective of and then maybe year on year 2020, how is it looking? When you say exposure, I mean, how much of our business in India? How big is yes, how big is India as a contributor to your revenue within the segment? I don't know off the top of my head. I want to say something incorrectly. The best I can tell you to do is get a hold of me offline and I'll have to do some research to get that information for you. I honestly, I don't know what off the top of my head. Sure. All right. Thanks. Can I add just a point to that? If you operations will not shut down, what will happen is simply a slowdown. So there may be congestion, there may be a delay and that will have an operational cost impact, which is what we had last year as well and we've managed through that. So we're not expecting a complete shutdown because the same business will still continue, but perhaps at a slower pace. There will be some congestion, social distancing will be an issue, processes will be a little bit more prolonged and lengthy. But regardless, business will still continue. And so we don't expect the impact to be material, but it could potentially be an impact that we had it last year and we dealt through it and we recovered from it as well. And that's the way we're looking at it. I don't we don't expect it to be that severe. But regardless, there probably will be congestions if it happens. If it becomes strict, there'll be congestion, there'll be prolonged processes, there'll be delays for paperwork, social distancing and that will have an impact. All right. Okay. Thank you. And there are no further questions at this time. So I would like to turn the call back to our host for any additional or closing remarks. Hi, guys. This is Bobby Sarkar again. So if there are no further questions, I guess we can start the call now. Thank you, Akram. Thank you, Sami, for taking the time to answer all our questions. And we will pick this up next quarter. Thank you so much. Ladies and gentlemen, thank you for your participation. You may now disconnect.