Gulf International Services Q.P.S.C. (GISS) Earnings Call Transcript
October 31, 2023
Earnings Call Speaker Segments
Hello, and welcome to the Gulf International Services conference call. I would like to provide all participants that this call is being recorded. Thank you. I'd now like to welcome Johan [indiscernible] to begin the conference. Johan, over to you.
Thanks, Kevin. Hello, everyone. I want to welcome you to GIS' Third Quarter 2023 Financial Results Conference Call. So on this call from QP privatized companies affair speakers are Sami Mathlouthi, Assistant Manager, Financial Operations; and Rashid Hamad Al-Mohannadi, Head of Investor Relations and Communications. So as usual, we will conduct this call with first management reviewing the company's results followed by a Q&A session. I will turn the call over now to Rashid. Please go ahead.
Thank you, Riyad. Good afternoon, and thank you all for joining us. Before we go into the business and performance update of GIS, I would like to mention that this call is purely for the investors of GIS and no media representatives should be attending this call. Moreover, please note this call is subject to GIS disclaimers as stated on Slide #2 of the IR deck. Now we can move into the call. On Sunday, October 29, GIS published it's financial results for 30th of September 2023. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today on this call, along with me, I have Sami Mathlouthi, Assistant Manager, Financial Operations in privatized company affairs; and Mr. Saud Abdul Khan, Senior Financial Management Analyst. We have structured our call as follows, at first, I'll provide you with a quick insight of GIS ownership structure, competitive advantages and overall governance structure by covering Slide 6 till 8 and Slide 29 and 50. Secondly, Sami will take you into GIS key financial and operational performance matrices. Later, Saud will provide you with segmental performance and review. And finally, we'll open the floor for the investor Q&A session. To start with, as detailed on Slide #6 of the IR deck, ownership structure of GIS compromises of Qatar Energy with 10% stake being the parent shareholder, whereas GRSI with 22.2% stake is the largest shareholder. As detailed on Slide #5, Qatar Energy provides most of the head office functions through a service level agreement. The operation of the GIS subsidiaries are independently managed by their respective Board of Directors, along with senior management team. The BOD structure is detailed on Slide #7 of the IR deck. In terms of the competitive advantages, as detailed on Slide #8, all of the GIS group companies are strategically placed having a significant market share in their respective business sector within Qatar. For example, drilling business is the only Qatar entity onshore drilling services provider and have more than 50% market share in the offshore drilling service in Qatar. Similarly, the aviation business of GIS is the sole provider of helicopter services in Qatar oil and gas sector and being one of the largest operator in the MENA region. In terms of the insurance business, it's one of the leading medical insurance providers in Qatar. For the catering, the merger established a predominant local champion in catering, all of this supported by experienced senior leadership having expertise in relevant business segment. In terms of the governance structure of GIS, you may refer to Slide 29 and 30 of the IR deck, which covers various aspects of GIS corporate governance in detail. I will now hand over to Sami.
Thank you, Rashid. We were pleased to announce that the group revenues for the 9-month period ended 30th of September 2023 amounted to QR 2.6 billion with an increase of 18% compared to last year. The group reported an EBITDA of QR 803 million and the recorded [indiscernible] of QR 415 million for the 9 months ended 30th of September 2020. Growth in the group revenues, coupled with an increase in finance income and repaid inflationary accounting in one of the overseas operations led to an overall increase in net earnings. On the other hand, the group direct cost increased by 7%, mainly linked to increased commercial activity. Due to persistently higher interest rates, 9 months 2023 group financial cost significantly increased by 34% to reach QR 163 million. However, further to the concluding refinancing deal, the third quarter of this year was a decline in finance costs compared to the previous quarters. On financial performance updates on Slide #12. It has outlined under the group's revenue for the first 9 months of 2023, so a notable increase of 18% in comparison to the same period in 2022. This growth can be attributed to increased revenue in the aviation, drilling and insurance segments, which all contributed to an overall rise in the group's revenue. It is worth noting that catering revenue of QR 312 million is presented separately as it falls under discontinued operation and according with IFRS 5 requirements. Net profit for the first 9 months of 2023 showed a significant increase of 55% compared to the same period in 2022. This notable growth was primarily driven by increased profitability in the Aviation segment. The rise in net profit can be attributed to revenue growth and a positive impact on hyperinflationary accounting in one of our overseas operations. However, it's important to note that this positive momentum was partially offset by higher direct and finance costs. Sequentially, the group top line experienced a 5% growth compared to the previous quarter. This increase was primarily attributed to higher revenue in the Aviation and Insurance segments. However, the Drilling segment saw a decline in revenue due to reduced utilization caused by the planned maintenance of two offshore rigs during Q3 2023. On the other hand, net profit for the current quarter dropped by 30%, mainly due to decreased profitability in the Aviation sector. The decrease was influenced by negative inflationary impact of QR 3 million in contrast to the positive QR 40 million impact experienced in the previous quarter. Furthermore, the Drilling segment reported losses coming from reduced revenue during this period. Regarding balance sheet metrics, the group experienced a 60% uptick in total assets in the current reporting period compared to the previous year, reaching QR 10.3 billion by 30th of September 2023. Cash and total investments showed growth as well, standing at QR 1.2 billion, a 7% increase from the figures reported on 31st of December 2022. However, total debt at the group level remained relatively flat against 31st of December amounting to QR 38 billion as of 30th of September 2023. GIS restructuring is a significant achievement that will help the company to amplement its strategic repositioning and achieve its long-term growth goals. By gradually reducing its debt levels and lowering its borrowing cost, GIS will improve its financial flexibility and profitability. This will enable the company to invest more in its core business, pursue new growth opportunities and strengthen its competitive position. Now I will hand over to Saud to cover the segmental results.
Thank you, Sami. Moving into the segmental review of starting with a segment. As this is on Slide 17, the [indiscernible] segment reported revenue of QR 978 million for the 9 months ended 30 September 2023, up by 3% compared to last year. The revenue growth was mainly driven by higher assetilization from the onshore segment due to the deployment of TDI, which was off contract during the previous year. This was partially offset by lower revenue from the left board and bulk segment due to the report going off contract in the last quarter. The segment reported a net loss of $23 million for the 9 months ended 30 September 2023 compared to a net loss of $40 million during the same period of last year. This loss reduction was primarily due to growth in segmented revenue and the pool financial performance from the joint venture of Federal. However, increased finance costs resulting from higher interest rates before the loan restructures, partially offset this gain. On a quarter-on-quarter basis, the segment reported a net loss of $2 million compared to a net profit of $1 million in the previous quarter. The loss reported was mainly due to lower revenue on the back of plant maintenance of 2 offshore rigs during Q3 2023. Lower profitability was partially offset by reduced finance costs during the current quarter. Moving to the Aviation segment. As detailed on Slide 20, during the 9 months ended 30 September 2023, the segment reported a 16% increase in revenue compared to the corresponding period in the previous year, amounting to QR 799 million. This upside in revenue was primarily attributed to heightened flying activity witnessed within both domestic and international operations, coupled with a robust revenue expansion across the maintenance repair and overhaul business as well as the growth in revenue in international locations, notably in Turkey and Angola. Also, the segment reported a sequential increase in revenue by 10%, driven by higher domestic revenue due to price increase adjustments recorded in current quarter, in addition to higher revenue from RSA aviation supported by higher flying hours and the new contract mobilizing in Lebanon and UAE. Furthermore, the segment net earnings demonstrated a significant growth of 26% in comparison to the corresponding period of presenting here, reaching QR 340 million. This enhancement and bottom line for visibility can be primarily attracted to the segmental revenue increase, coupled with higher finance income and positive inflation impact in relation to IS-29 adjustment. On the other hand, net earnings witness a reduction on a sequential basis on the back of negative inflationary impact of $3 million during the current quarter versus a positive inflationary impact of EUR 40 million in the previous quarter. As demonstrated on Slide 21, applying our wine growing trends on a year-on-year basis at the back of better flying activity, both domestically and internationally. Sequentially, flying hours maintained similar levels compared to previous quarter. Now we can move to the insurance segment. As detailed on Slide #23, during the 9 months ended 30 September 2023, the insurance segment reported a notable 38% increase in revenue compared to the corresponding period in the previous year, amounting to QR 885 million. This upside in revenue was primarily attributed to acquiring new contracts in the medical line of business and expanding premium in the general line of business. Furthermore, the segment net earnings demonstrated a significant growth of 80% in comparison to the corresponding period of the preceding year, reaching QR 83 million. This enhancement and bottom-line profitability can be primarily attributed to the augmented revenue stream complemented by the robust recovery of the segment investment portfolio, notably an increase of $16 million was observed in investment income for the 9 months ended 30 September 2023 as compared to the same period in 2022. This increase can be prudently attributed to the recovery of unrealized losses and gains recorded in the revaluation of trading investment security and higher finance income derived from fixed deposits. On a quarter-on-quarter basis, the segment revenue for Q3 2023 increased by 12%. Over segmented profitability for Q3 2023 declined by 31%, mainly due to higher net gains reported and lower investment income than previous quarter, as you may see on Slide 24. Including the segmental revenue with the catering segment. As demonstrated on Slide 26, the catering segment reported a revenue of QR 312 million, reflecting a reduction of 21% compared to the corresponding period of the previous year. The revenue reduction was mainly due to the completion of FIFA World Cup related contract, the nonrenewal of certain contracts with the catering segment and lower occupancy levels experienced by the accommodation segment. The segment reported a net profit of QR 2 million for the 9 months ended 30 September 2023 compared to a net profit of QR 4 million for the 9-month 2022. This improvement in profitability was mainly due to higher finance income. On a quarter-on-quarter basis, segment revenue witnessed a marginal reduction of 1% compared to the previous quarter. On the other hand, the segment reported a net profit of $0.1 million for the current quarter. I'll now hand over to Rashid.
Thank you, Saud. Thank you, Sami. I think that concludes our presentation, and we are ready to open the floor for the Q&A.
[Operator Instructions] And your first question comes from Nikhil [indiscernible] of CBFS.
Thank you for the presentation and wonderful set of results on almost all the division front. Well, my question is related, first, of course, to your cash cow, your Aviation segment. You did mention last time that there will be an increase in the number of aircraft say, around 5, that's what my understanding is, which will positively impact to the segment financials. So I wanted to know any update on that. Also, I mean, again, related to aviation, your average revenue per aircraft is normally what we have seen over the last 2 years, fourth quarter normally sees a slight reduction after a gradual increase in the first 3 quarters. So could we be seeing the same trend in the fourth quarter of 2023?
Thank you so much for your questions. So I think I will start with the first question regarding the new aircraft. As we have announced last year, so we got for the quarter is planning to acquire five new helicopters with an option to acquire another five. So in total, the plan is to acquire 10 new helicopters. And this will be normally in batches. So the first batch will start by end of 2024. And then we are expecting the first five aircrafts to be completed by end of 2025. We'll have all the five aircraft dispatched two helicopters and they will be deployed. These new aircrafts for sure, they will be first deployed to replace some of the existing aircraft in Qatar due to some requirements from our customers. And then based on the demand from our customers in Qatar, we might need to deploy additional aircraft from the old ones in Qatar. Otherwise, we are playing for many tenders, and those aircraft will be deployed as ever in the international segment, where the activity is growing as well. That's for the first question. For the second question, I think the revenue per aircraft is not a good indicator about the activity of the aircraft because in the aircraft, as we're always explaining, the revenue is divided into two variables. So one variable revenue and another fixed component. That fixed component is depending from the area, depending from the type of aircraft, depending from the length of the contract. So it's a fixed part. Then as long as the aircraft is flying. So then the variable component will come here. And we don't have always -- it's not a mathematical equation where, when you divide the revenue by the number of aircraft, you will find fixed variable that you can use. What we can say that the business is providing good performance. It's providing good returns. Activity is improving, flying hours have been improving compared to last year, and this will have a good impact on the profits of aviation. We hope that this will continue. So based on the existing contracts, so this -- some part is relating to some short contracts, especially the ones in Lebanon and UAE. But everything else, it's constant, and I think it will maintain the level of activities. Again, based on the number of flying hours that will happen during the fourth quarter. Well, at this stage, we don't have any control. So it's all depending on the requirement from the customers and what our customer will require in terms of their own commercial activities.
Okay. The answer is quite detailed you had mentioned. I will just take another one question which -- and then later on pass it across to the other question as it could come up. This is regarding your drilling sir. I mean, you mentioned about GDI-4. So it's going to be starting. So as it started in October that is this current month. And also, one of your offshore rigs was scheduled for contract renewal, which you had mentioned last time. So has that been renewed in the fourth quarter?
For your first question, GDI-4 has already started beginning of October. So that's good news. I think we have announced in Q3 that it's going to start beginning of Q4. So that happened. The GDi-4 is now contracted and operational, and we are expecting to get revenue from that contract. Your second question about what exactly? Can you repeat your second question?
It has got to do with your offshore rigs, sir. I mean one of your offshore rig was going to be due for contract renewal. So I wanted to understand whether that has been renewed.
Yes. We have one of the offshore rigs has been due for renewal. That has been done. That's one of the offshore rigs, which was under maintenance. So the maintenance, it was started end of last quarter for 92 days. That has been completed and the rig is already completed maintenance and will start working in the next day. So tomorrow is the start of that rig with the new contract.
Okay. Wonderful. And again, regarding your maintenance, so the 2 offshore rigs, which you had mentioned. So that has been completed in the third quarter itself. That is it has not overlapped in the fourth quarter, right? Is that right?
No, no, it's as planned. So that we have 92 days for one of the rigs. That's back to operation to model. Second one is 62 days. That started during the quarter itself during Q3 itself, and it's back 2 weeks ago.
Oh, wonderful. So okay, fine. So both have been started. Okay. I'll pass on to other questions, and let's see whether I can come back.
[Operator Instructions] And your next question comes from [indiscernible] of Fiera Capital.
A couple of questions. First, on the influence on the mandatory health insurance, is there anything else you've had in terms of the likelihood of implementation sometimes.
Sorry, Vijay, you sound this kind of muffled. Can you repeat the question and try to ask a question again.
Let me try this. So effectively, on the mandatory health insurance, do you have an estimate of the expected timelines for the same? And the second question is on the Drilling segment, but I could come back to it.
So the mandatory health insurance for your first question, that has been already implemented. So that's part of the new regulation that took place beginning of last year, and it has been announced. And as we said in the beginning, [ Alkoot ]. So I will say, strategy was to work towards business-to-business. So now it's moving slightly towards business to customer. Thus it has started already to offer these policies on online and the company is in testing phase to see the claims that are coming from this type of agreements. It's a little bit new to Qatar. It has not been tested. And based on the data, as you know, so most of the insurance companies, they work based on the past data. And based on that, normally, they will set up the premium. So here, it's the way around. So we have a fixed premium. And based on that fixed premium, you need to calculate the ups and figure, which is the claims. So at the moment, we are on the testing phase. The company is generating at the moment, I will say, from 3% to 5% of its revenue from this specific segment. We are just penetrating this small segment slightly with a little bit of, I would say, trying to be more careful. Once we have more data, once we can analyze maybe 1 or 2 years data. So based on that, we will decide whether we want to have like a total penetration of the segment or whether we will have just slight concentration on that segment, which based on the return that we will get. But from the data that we have so far from the actual number that we have so far, it's not a segment that will provide the huge returns to the business. So I think most of the returns that you will see on Alkoot, it's not coming from that specific segment, but I think it's more generated from the general insurance side of business, which is more profitable in terms of -- for Alkoot. The other segment might provide additional returns once maybe hopefully in the future, if it has lower claims. And if you penetrate that specific segment, it will generate additional revenue that you can use on your other side of business, which is the investment. But at the moment, I think the equity investments in itself in the managing, they are not very promising so far. As you can see as well that most of the returns will be through a fixed deposit, they are bringing additional layer of returns compared to investing in equities. So I think it's still under assessment. We started the [Audio Gap] segment. But till now, we are not on the full operation mode for that specific segment.
The other question is on the Drilling segment. I mean the rates which were negotiated, et cetera, we're in a very different environment, the market today is at a very different level. Obviously, the rate -- the interest rates have moved meanwhile as well, which has obviously impacted your profitability. So when do you think a realignment happens in terms of restructuring of either the financing cost or the drill rates that you are able to charge to your customers?
Thank you for the question. I think it's very interesting. We are working on both axes. In terms of restructure of the loan, restructure has been already completed. So for the largest loan, which is USD 925 million. That had been completed. Setup agreement has been signed. The second tranche of the loans, it's around USD 218 million that's completed in terms of negotiation. We are just in the documentation phase, legal documentation phase, which will be completed -- we are expecting that to last maximum four weeks. After that, we will disclose the completion of the restructure. That's one side. So this will have a good impact. You will see that impact as well in the financial statements of GIS. Maybe it's not obvious in terms of calculation. But if you calculate quarter-to-quarter, you will see that there is a big decline in terms of interest cost. For example, Q1 interest was QR 67 million. Q2, it's around QR 64 million. And then in Q3, you will see only around QR 30 million to QR 32 million of interest costs. So that's on the interest side. Additional savings in terms of interest cost will be seen in Q4 once we finalize the second tranche of the loan. And that's on the structure of the loans. So on the other part, how we can improve the revenues. So we are in continuous discussion with our customers. For any renewal of new rates, so you will see that the rates will be improved compared to the average rates that we are disclosing before, which is around USD 70 million to USD 74 -- USD 70,000 to USD 74,000 per day. So rates will be increased. It will be impacted on the revenue side. That you will see, I think, in the next quarters. For this quarter, I think year-to-date, you will see 3% increase compared to last year. But if you will add another QR 40 million losses that we made due to the offshore rigs going into maintenance, you will see that there is a good improvement in terms of revenue, which is relating to some improvement in some of the rigs that has been renewed.
Your next question comes from the line of [indiscernible] of AG Capital.
I was just looking for an update. Earlier in the year, we had seen Seadrill announce that they were negotiating to sell their share in their rigs and cutter. And I wondered if you had any update on that, that you could share from your side because they're your JV partner, if I'm correct, in those rates?
Yes. I think it has been disclosed publicly as well from Seadrill that they are negotiating the spot. So far, there is no changes in the ownership in Gulf Drill, which is the joint venture that we have with Seadrill. So what -- in the joint venture in the trial, what will happen. So the rigs have been contracted. The rig has been extended to an additional period until 2025 on some of the rigs until 2026. This will not impact even if there is any potential change in the shareholding or in the ownership of the joint venture. So this will not have any impact on the returns in terms of GDI on the joint venture in itself. But so far, there is no update. The latest update that's the publication of the disclosure that is done by Seadrill, but so far, no change in the ownership at the Gulf Drill.
[Operator Instructions] And your next question comes from [ Michael ] Putin of CBFS.
[indiscernible] okay, will this go into your catering segment, which I believe have not been covered to that extent. Now we understand that you -- another -- the new one, Abela catering is where exactly you were going to be taking over and the financials are going to be merging from first quarter of 2023. Now our understanding is, as of now, still it has not been shown. I mean it is -- is that correct? And when likely it could happen, I mean that's what you can just throw some light on it?
Yes. So I think for Amwaj transaction, we have disclosed already that the transaction is completed in terms of transaction. So it's -- Amwaj will remain as it is as a company, and it will be more like a holding, which will have the ownership of 100% of Shaqab and 100% of Atyab, but the shareholding at Amwaj level will change from being a 100% subsidiary of GIS. Today, it will be only 30% subsidiary of GIS and remaining 70 will be owned by 2 other shareholders, which is Abela and Tamween. So based on the new shareholding, so it has been decided to dissolve the Board of Amwaj. The Board which is appointed by GIS in Amwaj has been dissolved. New board has been appointed by all the new shareholders, the new parties. That new board has met. The last meeting was, I think, on 16th of October. And based on that, so we need to change all the legal process after closing the deal, where we need to change the ownership structure at the ministries. And then the -- I would say, the main administration. So once that is done -- once a legal documentation is done. Once the loss of control is done from GIS to Amwaj, which is normally on the first meeting of the new board of Amwaj, then we will start to disclose in the financial statements, the impact of the merger. Because before that date, we cannot consolidate the whole Amwaj from the date of the merger. And for your information, it has been agreed between all the parties that the economic benefits of the merged entity, the merged Amwaj, which is containing as I said, Amwaj, Shaqab and Atyab will start effectively from 1st of January 2023. So all the economic benefits for this year will start to accrue to all shareholders at the percentage of the shareholding from the date of 1st of January 2023. That's a commercial agreement that has been made between all the parties because we knew that the process will be very lumpy. The agreement has been done between all the parties. And then -- so once we -- starting from the date of losing control at GIS level, we will start booking from 1st of January 2023, the impact and our share of profits in the new management entity, which will be 30%. So at the moment after the IFRS-5 requirements, all the financial statements of Amwaj are shown separate are discontinued operation. In the balance sheet and in the P&L. Starting from 1st of October or whatever it will be agreed as well internally with all our experts in accounting. So normally, it will be 16th of October or 1st of October. Starting from that date of loss of control, we will get the share of benefits from that subsidiary or from that joint venture starting from 1st of January 2023. So we'll take only 30%. That's Amwaj. I hope this clarifies a little bit your queries.
Yes. I mean, right, I understand. Just in case, supposed say, for example, the legal and other hurdles takes place -- I mean, it could go on and could go beyond fourth quarter 2023. It goes to first quarter. Do you have that course where you can show that of 2023, the 30% stake, which you mentioned in the first quarter of 2024 also, detach to be done by the end 2023?
So it has to be done. We have announced already clearly on 21st of September 2023, that the Board of GIS has dissolved the Board of the existing Amwaj. So starting from that date until the first meeting of the Board meeting of the combined entity, which is the new Amwaj entity, then GIS lost control. And from that specific date, we can start to book for Amwaj as share of profit from the new Amwaj. So we will not wait until Q1 2024. All the impact of the merger will be booked in 2023.
There are no further questions at this time. So I'd like to hand the call back to [ Shoham. ]
Okay. So if there are no more calls, we can wrap this call up. And I'd like to thank GIS' management for giving us an update on the quarter and for the participants that dialed in, and we'll pick this up again next quarter. Thank you.
That does conclude our conference for today. Thank you for participating. You may now all disconnect.
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