Orascom Construction PLC (EGS95001C011.CA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Orascom Construction Q1 2020 Results Conference Call. [Operator Instructions] And this call is recorded today on Thursday, 21st of May 2020. And I would now like to hand over to your speaker today, Mr. Osama Bishai. Please go ahead, sir.

Good afternoon, and good morning, everybody. Thank you for joining our call for the results of Q1 2020. Let me start first with some headlines and give you a flavor of some of the issues that we are facing due to the current situation. And then after that, Ms. Reham Beltagy, our CFO, will share with you the numbers, and then we'll try to be efficient as possible and then allow you as much time for questions and answers. To summarize Q1, we have successfully acquired additional business of $600 million, almost, to maintain a backlog of $5.4 billion, very close to the one we had at the end of 2019, which is something that we are very proud of. We also have achieved results from operation at the level we are expecting at the original budget, maybe with slight adjustments, probably due to either some slow performance on some projects and let's say, slow in the last week, 10 days of March. There is a slight decrease on our EBITDA levels, and that could be attributed to some projects, but also to the fact that we're starting -- a lot of the new contracts that we have signed last year are starting this year, which, obviously, haven't been able to create enough revenues to generate the EBITDA expected. On the cash position, we're still maintaining a net cash profit. Again, it's much less than what we had in last year. Obviously, for several reasons, it's obviously expected that Q1 due to the -- good [Audio Gap] in Q1, although [Audio Gap] plus we have -- and you can see that from the balance sheet. And Reham will maybe allude on that in more details that we have allowed more cash against some borrowing as a concern of potential liquidity squeeze, which is not -- which has not happened in Egypt yet. Plus the fact that we had to get started with a lot of our new contracts, which, obviously, we are consuming some of our advanced payments to get these projects mobilized and started. The operations between Egypt or MENA region and the U.S. has been growing reasonably well as far as the numbers and the volumes. BESIX have also been able to generate new awards to maintain a healthy backlog. Unfortunately, and actually, we're not satisfied with that, but that's part of the businesses that they elected to take additional adjustments on a couple of projects in the Middle East and the Netherlands, similar to what they did in last year, although we have indicated that this is the -- we believe that was it, but they have decided to be more conservative and do that again, affecting the results of Q1. We have discussed the budget and the numbers with the effect of COVID-19, and we believe that the balance of the year will be in a much better shape than that and more normalized than what we've seen in Q4 and Q1 of this year. We have confirmed in yesterday's Board and got an approval from the AGM of the -- our dividend distribution, which we have indicated when we released our results in 2019, but we had the appetite to do higher dividends. But due to the current situation, we've elected make a smaller one to provide still value to shareholders, but at the same time, maintain some of the cash within the group. Looking down at the current situation, we have put together a very strong COVID-19 task force that is represented by a lot of different elements of the group. And they almost meet, whether by phone or physically, daily to address the situation, particularly in Egypt, due to the fact that we have much more of labor force on the ground to address this moving target and also to maintain the health and safety and the well-being of our people, considering also the fact that in Egypt, there has been very clear instructions by the government that the construction sector continues business as usual. So we have good provisions in place in all sites. All sites have been disinfected. All sites are equipped with the necessary resources to support the sort of masks, gloves, PPEs and stuff like that. We check 100% the temperature of everybody going in any site of ours. We have some kind of liaison with certain hospitals just in case there are some of our staff or employees with symptoms so that we can address that. There are instructions anybody with a slight temperature should go home and stay for a few days until we assess the situation. So we believe that we are doing as much as we possibly can and more, because the information about this virus is a moving target and we follow what we get from the Ministry of Health in Egypt and what we get from the relevant authorities in the U.S. where we have our second-largest operation. The -- as far as our head offices are concerned, whether in Egypt and the U.S., we are working with limited staff, in Egypt a little bit more than a 30%, 40% so far due to the fact that we have to support the operation. In the States, it's slightly different because the operation is very well spread all over several states. But there are more -- people are at home when possible. There is unnecessary -- there is no one -- [ necessity ] to attend meetings, We try to avoid that, we keep it using the interconference calls or video conferences. We're, obviously, in a very diligent attitude and discipline as far as the required wearing of masks and cleanliness and handwashing and cleaning offices in order to keep up the requirements for our employees. The other thing is that, obviously, some of these measures are having some additional cost to the organization. But on the other hand, we are being extremely diligent about controls: cost control, project controls, our productivity in order not to have -- not to have these additional constraints and challenges impact our cost structure as much as we can. The other thing is that we are very optimistic that the fact that we have a decent backlog entering into Q2, whether here or in the U.S., that it will give us some additional leverage as -- or a better buying power due to the fact that a lot of our subsuppliers and vendors and subcontractors would like to secure businesses in the next -- in 2020 and 2021, which would probably give us a potential upside as we can see it better. And we try to manage that opportunity in our favor to our best. Last but not least, before we go to the numbers. We are still maintaining our focus on opportunities, whether in the U.S. or in the -- Egypt on the things that or the projects pipeline that we believe that are necessary that won't be affected by the events. Obviously, Egypt is slightly different than the U.S. U.S. majority is private clients who are obviously looking at the way they spend cash and do investments in the next 6 to 12 months versus the government here in Egypt, who has clearly indicated that they will go ahead with all the projects that are on hand. And actually, there is a lot of talk and speaking about maintaining a certain level of [ tools ] on the infrastructure side and projects to maintain opportunities for employment in the Egyptian market. I would like to leave the floor to Reham so that she can go through the numbers. And then we'll go ahead with your questions and answers. Thank you.

Thank you, Osama. Hello, everyone. I will now walk you through Slide 11 of the presentation circulated earlier today on the website. Our revenue for Q1 2020 stood at $827 million, generating an EBITDA of $64.1 million and net income of a little bit under $25 million. Basically, our consolidated EBITDA margin is in the range of 7.7%. That's a bit lower than if we compare quarter-to-quarter. However, looking at that percentage, there are mainly 2 reasons for that. The first one is that U.S. is a bigger contributor to our revenue and EBITDA this quarter. And U.S., in terms of margins, are much less the MENA region. That's one part of it. The other part of it is that the nature of our backlog and the progress on the number of projects that we have is different, and each project has a different contributing margin depending on the quarter. So looking at an annualized EBITDA figure is more fair year-on-year in terms of assessment. Looking at our net income figure and its margins. We will see that the MENA margin, net income margin was around 5.8% versus U.S. 1.5%. Both MENA and U.S. actually have overperformed quarter-to-quarter. However, as Osama has highlighted earlier, BESIX negative contribution for the quarter led to a total net income margin of roughly around 3%. This is mainly BESIX loss, is related to mainly UAE. And BESIX expects to turn around this loss during the remaining of 2020. Moving on to Slide 12, for our balance sheet. And basically, I run you through items that have some changes, equity accounting investees, which I'm sure you're familiar with. It's majorly, primarily BESIX investments plus other smaller investments decreased by $30 million due to partly the loss that we just commented on. And the other thing, due to the effect of movement of the exchange rate, that is dollar-euro, mainly due to the BESIX investment as well. Looking at our working capital. Our contracts work in progress have increased by $70 million, recording a total amount of $940.6 million. However, as discussed previously, we cannot look at the contracts work in progress in isolation. We have to look at assets coupled with the advanced payments due to the nature of some of the contractual situation in the MENA region, specifically in Egypt. So a lot of the cash of these advanced payments is not diluted to new projects where this is an advanced payment, but we need to actually ongoing progress on ongoing projects. Trade and other receivables have also increased to $1.5 billion for this year, showing typically Q1 as a bit of slower month in terms of collection as opposed to closing of Q4 of 2019. Our consolidated equity recorded a total amount of $601 million. Mainly, the increase is typically our profits for the quarter. However, there is a small -- a drop in the reserves that is primarily due to currency transmission risk and currency translation differences. The change is a small amount of around $8 million. Looking at our loans and borrowings, we have a total of $256 million. This is actually linked into our receivable balances that we just commented on. This shows a hike from December of around north of $160 million, and this is mainly due to debt collections in Q4 last year was quite strong both in MENA and the U.S., and that a lot of these collections were divested to settlement of debt as opposed to also getting out payments to suppliers and subcontractors. Starting Q1, a lot of these payments for our ongoing progress on projects for suppliers and subcontractors took place. And that's why we see this heighten our loans and borrowings. This also links in to our cash flow statement, where we can see that cash flow from operating activity is a negative $165 million, as opposed to $100 million quarter-to-quarter for -- this explains, in addition to the loans and borrowings, this [ part ] moving the back to the same.

Thank you, Reham. Please, I think we can adjourn to any queries that you guys may have. So let's get started on the Q&A.

[Operator Instructions] And your first question comes from the line of Mark Adeeb.

I just have a question on the cash burn. Can you give us some guidance on maybe cash burn during April? That's one question. The other one is can you give us some color on the performance by market? For example, if they were like markets that experienced like more severe lockdowns and [ shelter ] measures, how did we perform in these markets?

Okay. If we look at the U.S., to start with, quite honestly, we thought it would be much worse than that. What we're seeing is -- in a lot -- because we operate in places like Iowa, Phoenix and Florida, not, let's say, big cities like Miami and stuff like that, we are seeing projects are still ongoing. We don't see a major drop in the workforce allowed to go on site. So our precautions that we're taking is maybe that we're trying to focus more on the activities that were done on site not to have excess labor force and stuff like that. So we believe that the U.S. will see some minor reductions that the -- as Q2, really, to a certain extent, work in a more normalized fashion than what was in this -- than what we expect. As far as Egypt is concerned, I would like to say the same. We have some challenges in Egypt related to the curfew that was imposed. Although in probably less than 2 weeks, there has been an adjustment in the regulations that all construction firms are allowed to take permissions to work around this curfew, and we are one of those, particularly the ones working on major government projects. So we are able to work, to a certain extent, normal hours. We are being hit by Ramadan, which is a normal factor. Again, next week. It's like almost like an unofficial lockdown. It will affect some of our projects but not all. So I would say that Q2, because I don't want to speak only about April, Q2, we had thought it would be less than 50% efficiency. I think we'll be much more than that due to the fact that operation is, to a normal extent, being pushed by the government and actually, while they expect people to take the precautions, they also have been in our meetings, urging us to continue pushing the work to not -- as much as we possibly can to not decrease the workforce in order to continue, number one, the progress. And also, they don't want the number of unemployment to increase dramatically, knowing that the construction sector has a decent amount of the labor force in Egypt. It is -- so what we have is normal operation like that. We cannot say there is a cash burn. Actually, we are having a normal operational performance. We are very much focused on collection and cost control. Between April and May, we have seen an improvement in collection. So there is no technically like a shutdown, and we have revolving cash to spend on G&A. I hope that answers your question.

I just have one last question. Perhaps it's a bit early, but can you give us some color on like the tender -- like the new tenders, the momentum? Is there like a slowdown or anything on the awards?

That's a good question. In the U.S., we're seeing clients who are benefiting from the current situation, like clients that we work with at the data center space are pushing for more work, are pushing for expansions. We are seeing clients with -- I wouldn't say committed or, let's say, signed contracts, but also clients with committed business are reviewing their investment timing considering the current situation. So that's in the U.S. In Egypt, the tender pipeline is quite tricky because if you are following, particularly the Egyptian market, there has been a lot of work done by straightforward [ direct ] negotiations, particularly the one done by the Ministry of Defense. What I'm seeing is the following: there is a clear push by the different authorities. I think that was also backed by the political administration, that they want to continue keeping a stimulus in the market in order to mitigate or hedge the impact of the COVID-19. I see maybe there is some lag between that push and its realization on the ground. But we're seeing that projects are in the pipeline. We are also seeing that the projects that are clear, like [ unfinanced ], like a line for -- in the metro, like the financial close of the light rail, additional work for the metro to maintain the old lines, the needs for water and [indiscernible]. These projects are ongoing. They might be delayed a couple of months or more, but there is a clear push by the government to get these projects realized. I'm optimistic, personally, that the current situation would force the decisions that the private sector gets more involved in these projects and would allow us to have a much bigger opportunity as far as the infrastructure investments through concessions in PPP because actually, this is a model that we would like a bit to happen. Maybe I'm more optimistic than I should. I think that the -- due to the current financial situation, the fact that tourism is not putting its share of revenues in the country, FDIs, maybe this will accelerate that exercise. But these projects are being put as a priority. They will happen. We'll see if it goes that way or they will maintain getting EPC plus finance. I see the Ministry of Transport is working with EBRD and EIB on financial packages for development of transport infrastructure, not only in Cairo but in Alexandria. So it is quite robust. But I think that it will take much longer than expected due to the fact that most of the focus of the government is also -- they need to attend to the current business at hand, not only the future.

Your next question comes from the line of Karim Sawabini.

I just had a few questions. The first one is just how you see the cash balance [indiscernible] towards the end of this quarter and throughout the year, given cash flow to the extent you have any visibility as you go into the second half. And then if you can just address how you see margins forming in MENA for the rest of the year. And the last question was really on provisions. You had mentioned that BESIX took some conservative provisions in the first quarter. Do you see yourselves taking provisions in the second quarter, third quarter or fourth quarter as you look at the business today?

Okay. As far as the cash is concerned, I think our target is to end the year with -- to be in positive cash, maybe not with the same levels like we had in 2019, but I think, healthy level. That's the target. Obviously, we're dealing in uncertainty -- in a space where uncertainty is the name of the game. We have to be able to deal with that at any time. We are very much focusing on 2 things, actually, 3 things: number one, productivity and efficiency and performance where we're able to provide billing and invoices. Second is collection and cash management furthers cost control. So it's lack of any unpleasant surprise by the market or the government, I think we should be in a good shape and let's say, at a minimum, we should be on the level of Q1, as a minimum situation. But if I can see the future in a normal way, I would be much more bullish than what I know now. But the fact of the matter is that every day, there is like the rule of the day. And we have also to deal with any additional challenges that we may see in order to maintain the health and safety of our people. As far as provisions on the BESIX. I mean, that's a very fair question. We have -- we were given the indication that they were prudent and conservative in Q4 last year. And to be very frank, we were not expecting this to happen. But I would rather address the challenges immediately once we know it, and I think they have, BESIX have done that. We have a particular [ board ] in early June where BESIX a major topic. And we are addressing that, and we are going to be briefed. And they will share with us all the potential upsides and risks and opportunities that they have for the rest of the year because we have the same question, that we want to have a better certainty of any provisions they needed. But on the other hand, we need also to understand that, again, there is a COVID-19 impact on them in Q2, because although Belgium and France started opening up actually in the last week and this week, but the indication that they will be -- have normal results was done considering the impact of COVID-19. So I would fairly -- I'm fairly conscious that they will deliver what they have promised. And I've been personally working with BESIX since 2004. And I would say that over the 16 years, we probably have maybe 2 or 3 years that are not as good as they should. But other than that, generally, they are a performing business. Going back to the vision of the business in the MENA region. I think Egypt will continue to be a very active part of our business. Egypt has -- I always say that, Egypt has always been managing its infrastructure development as a poor country and in difficult positions. I think that today, it's pretty much the same. This is not new. We need to work with the -- with our clients on finding the ways and means to fund projects. I'm seeing that the financial institutes are still actively working on financing the Egyptian infrastructure program like EBRD, European Investment Bank, even the Arab development funds. So that is -- what I'm seeing is that is ongoing and unless something different happens that nobody is expecting, plus the fact that the indication I'm getting with some ECAs and some of the financial institutions. But obviously now, people are -- a lot of the institutions are interested to stimulate their European manufacturers in order to address the COVID-19 impact. And that is probably possible through export to a country who's going through infrastructure development strategy. So the model of EPC+F, or projects or bankable projects, finance coming from outside, I think will still be valid to be implemented with the Egyptian market. And I tell you there are no shortage of projects. It's just simply the funds. So I think there will be a lot of movement in that space because also, on the Egyptian side, we have been very closely working with the government and meeting with different representatives. They are very keen on maintaining stimulus in the market in order to avoid an increase in the unemployment.