Qatar Navigation Q P S C : Year Q1 2023 Transcript

With respect to Offshore. Offshore continued its growth trajectory with operating revenue

growing by 6% or QR 19 million versus the same period in 2022. This was driven by increased

utilization of key assets and additional diving-related projects which more than offset a drop in

third-partychartered-in vessels' income. Lower chartered-in costs related to the drop in revenue

and the one-off provision reversal drove a QR 29 million decrease in expenses versus the same

period in 2022. The net income result was year-over-year growth of QR 53 million or 627%.

As for Gas & Petrochem, we recorded an 8% increase in revenue with our FSO that was

employed in mid-2022, offsetting loss revenue from our divestment last year from the last gas

carrier. That divestment similarly contributed to lowering our expenses, which came down by

QR 5 million. At the non-operating level, income decreased by QR 18 million mainly as a result

of lower income from our associates, and the net profit of the segment ended down QR 8 million

or 5% versus the same period last year.

In our Trading segment, we were able to reduce bottom line losses by QR 5 million versus the

same period in 2022 by selling more marine-related and heavy equipment and improving

margins. And lastly, capital on the investment side, revenue decreased by QR 3 million with

lower dividend income offsetting higher fixed offsetting...being offset by higher fixed deposits

and other income. And in real estate, revenue remained flat with the same period last year and

on the expense side, we had a QR 16 million in lower bad debt provisions last year. All of which

resulted in overall net profit growth of QR 18 million or 17% versus the same period last year.

And that wraps up the segments and I will now turn it over to Sami to discuss our outlook for

the rest of the year.

Sami Shtayyeh:

Thank you, Akram. Starting with Maritime & Logistics. On the container shipping side, Q1

reflected the large container shipping rate drop and we expect that to hold for the rest of the

year. In logistics, we expect to slow down in the second quarter of the year but expect an uptick

during the second half of 2023. In offshore, on both the support vessels and services side as

well as the harbor side, we expect to see continued growth particularly longer term with all the

expansion in Qatar's oil and gas industry.

In Gas & Petrochem, overall, we expect limited volatility due to the long-term nature of

contracts we have in most business units. Our VLGC joint venture is the exception where

performance is difficult to predict due to volatile spot prices. In trading, we're going to continue

to work on profitable growth and margin improvement. And lastly, capital, our focus will

continue to be on yield enhancement.

And with that operator, we'll now open up for questions.

Operator:

If you wish to ask a question, please press star followed by one on your telephone and wait for

your name to be announced. That is star one if you wish to ask the question. And your first

question comes from the line of Lee Beswick of QNB. Your line is open.

Lee Beswick:

Hi, yes, thanks for the presentation. Just a question on the balance sheet and dividend as well.

The balance sheet is now extremely strong and it's probably...I think now it's probably fair to

label it inefficient. You're carrying net cash of QR 700 million. There's absolutely no need for

you to do that at all. So, the question sort of turns to the dividend and the payout ratio. The

payout ratio is simply too low. You know you should double it minimum. You used to carry a

payout ratio of 50 to 60%. I don't know why that changed. It's now down at 40%. So, the

question is why...what are you doing with the money? Because otherwise, you're just collecting

cash on a balance sheet for no reason, you've got too much capital. I don't...unless there's some

massive growth out there which you're going to tell me about. Your payout ratio is frighteningly

low and very, very inefficient.

Akram Iswaisi:

Okay. Thank you very much for that question. Now, some of that cash that you are seeing is

cash that is parked for redeployment because as I've mentioned in previous calls, we are

basically, we've liquidated certain positions and put some of that cash in deposits and we're

transitioning. So, we have a new strategy for the investment portfolio, and so that cash is

essentially the majority of it has to do with the investment portfolio. So, that's one thing.

The second thing is you've noticed that as an organization, we have been working on building

up some of the core activities like offshore and you've seen a significant improvement in the

offshore operating activities. There's a significant number of contracts that we have in the

pipeline right now that we are looking at, and these require significant CapEx commitment.

And so, there is a significant growth plan on the offshore side. And I have also mentioned...and

these are again, these are capital-intensive investments. We are looking at acquiring more assets

to be able to satisfy the local demand, which is substantial. At the same, mentioned on previous

calls, that we are looking to invest again in new segments like FSOs, FPSOs, and shuttle tankers.

And again, these are large CapEx investments. Now, that cash, as I mentioned, is earmarked

for the investment portfolio as well as to support some of these new investment programs in

our core business.

Lee Beswick:

Okay. So can you talk about if this...some of this cash is earmarked for future CapEx, what the

return on capital and return on the equity you're going to generate out of these businesses

because I would suggest once again you still...I don't know how well, how much are you going

to spend on CapEx, I suppose as a question. But this company has consistently generated a

single-digit return. You have never pushed it into the double digits ever. So, what kind of returns

are you going to generate off this CapEx investment?

Akram Iswaisi:

Honestly, we don't provide guidance on that kind of return, but we are looking at a double-digit

return. If you look at the offshore business in general, it has changed significantly. And it's

Halul or offshore for the first time in a long time, it's actually quite profitable and much more

efficient. And the oil and gas market is hot and robust right now. So again, the returns that we're

targeting in that segment are double-digit returns.

Lee Beswick:

Just in that segment, the other segments, it's less than double digits as it always is. There's

always a segment doing well. There's always a segment doing badly. So, how do you generate

those? That's the whole...

Akram Iswaisi:

But that is the nature of the business. Invest in...when you invest in tanker business and

container shipping that is the nature of the business. And this is across...if you look at the major

liners, they've struggled to make money for a long, long time. The past two or three years is

when those mainliners and container shipping companies started making money. So, if you look

at container shipping and the tanker business in general, it is a cyclical business. If you look at

the logistics business, it is a thin-margin business. And so, cyclicality is basically part of

shipping and logistics. But in the portfolio...

Lee Beswick:

Yes, I completely agree.

Akram Iswaisi:

Okay. And the portfolio that we've got is a sustainable portfolio and this is why we have been

able to consistently pay dividends. And so, you look at the container shipping the past two years

we've done exceptionally well because the market has done exceptionally well. Containership

in the first quarter hasn't done well, but however, we are looking to grow that business. This is

the right time to start acquiring more tonnage. We do have plans to expand our network, but

again, if you look at our business, it is a portfolio of different businesses that complement each

other. And so again, container shipping, tankers, and shipping in general, these are cyclical

segments.

Lee Beswick:

Yes, I completely accept that, that is 100% true. It's still the fact that if I look at the last 10 years

of navigation and you have your peak ROE return on equity is 8%, it suggests that you have an

issue with the way that the capital is deployed and maybe that is too much. In my opinion, and

I may be wrong, but you may have a different opinion, but it certainly seems that there's too

much capital in the business and therefore actually running down the capital and running the

business with a lower level of capital relative to what you're generating, and part of the way to

do that is through increase. Dividends is actually what the business needs to generate a decent

return because a peak ROE of 8% is pretty low.

Akram Iswaisi:

If you see our story this quarter, it's quite promising. You see some of those segments which

have struggled for a while are actually beginning to deliver better results and better

performance. And so. we are optimistic about the future. There's a strong plan to...have to grow

the business and again, you have to rejuvenate the fleet, you have to continue...as an asset-

heavy company, we have to continue to invest in assets and this is where our revenue is going

to come from. So, fundamentally, we are aligned on the fact that the business needs to grow

and you're beginning to see some of that in Q1 where we're beginning to turn some of these

businesses around. And we have for example, trading is beginning to become profitable,

offshore again, multiple earnings calls. I've heard comments about offshore and we said, listen

give us some time, we'll show you what we can deliver, and we've been able to do that. So, I

know for a fact that there's a large CapEx program coming up and we are confident that we will

continue to deliver shareholder value. Milaha is a stable company and we've been able to

weather the storm through various cycles.

Lee Beswick:

Okay, I await the 10% or more ROE return on equity for four straight quarters in a row.

Akram Iswaisi:

We'll put it as a target.

Operator:

Your next question comes from Mustafa Aamer from Al Rayan Investment. Your line is open.

Mustafa Aamer:

Hello, gentlemen, thank you for the presentation. Just wondering on the share of associates and

JV Nakilat's contribution should have really gone up. So, where is that reduction coming from

year-on-year and quarter-on-quarter?

Akram Iswaisi:

It's just an accounting adjustment.

Mustafa Aamer:

Sorry?

Akram Iswaisi:

An accounting adjustment.

Mustafa Aamer:

For Nakilat?

Akram Iswaisi:

Yes. That's right.

Mustafa Aamer:

All right. Okay. Could you elaborate on that? I'm not sure because...

Akram Iswaisi:

Let me, you know year-end there are...we closed the books sometimes based on estimates due

to timing and some adjustments are immaterial. So, if it's immaterial, we close the books to be

able to meet the deadlines, so it's simply an accounting adjustment.

Mustafa Aamer:

Right. All right.

Akram Iswaisi:

Thank you.

Operator:

Your next question comes from the line of Nikhil Phutane of CBFS. Your line is open.

Nikhil Phutane:

Hi, good afternoon gentlemen, Akram, Sami. Thanks for the presentation. Well, you did

mention in your previous answers that you're looking in terms of better performance, and

especially the first quarter was quite in good measure or wonderful performance, but I would

slightly like to defer on this. Actually, on your revenues, overall have come down and largely

on your...you name it, your bunker sales have come down, your Qatar quarries revenues have

come down, and as you mentioned rightly your container shipping has come down. And what

is more important somehow, you've managed to do your operating profit better margin because

of other operating expenses and operating...I mean so many other operating expenses which

have come down quite significantly as compared to the overall revenues. So, wanted to

understand what makes you think that the second quarter, the third quarter is going to be looking

much better? Thank you.

Akram Iswaisi:

Thank you for the question. And I agree with you. Revenue has come down, but our big focus

right now is on profitable growth. We've had contracts in the past that had slim margins and

so what we've done is really focused on number one, for example, in some of the business

segments, increasing uptime. And increasing uptime again results in additional bottom-line

contributions, pure profit, reducing penalties in our operations wherever possible. Again, we

need to grow, but we need profitable growth. So, growth for the hell of growth doesn't make

sense if you're not able to generate margin and this is very much what we're focused on. We

can add another QR 500 million top line at 2% net profit, but that doesn't move much on the

bottom line.

So, a big focus of this company now is improving margins, which are key to our bottom-line

contribution and effectively, liquidity as well. This what you're seeing right now is our efforts

to continue to squeeze more out of our existing contracts and to be able to grow the business

profitably.

Now after that, there's a significant amount of activity and you guys are in the market, and you

know that, and that in the oil and gas sector. So, we have a pipeline of projects and opportunities

in Qatar that we're looking at and we're all quite optimistic that we can continue to deliver for

the rest of the year.

Nikhil Phutane:

Well, I think partly to a certain extent one can understand in terms of you're looking at oil and

gas, which is very robust right now. But my understanding is, let us assume your offshore for

example, your operating expenses overall has come and reduced quite considerably as again the

run rate in the past. Similarly, that goes to a certain extent in your gas and petrochem business

also. So, I just wanted to know whether…will that be maintained in the sense that most likely

your revenues could be flat for the second quarter but margins also whatever we are seeing in

the first quarter will be maintained overall?