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

Ladies and gentlemen, thank you for standing by, and welcome to the Orascom Construction 9M 2020 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. And now I would like to hand the conference over to your speaker today, Osama Bishai. Please go ahead, sir.

Thank you. Good afternoon, and good morning, everybody. We're here to brief you on our results for the Q3 2020 and our 9 months. First, I would like to hope that everybody is safe and healthy. I mean, we're seeing a major uptick in the COVID-19 cases, so I hope that everybody is safe. As far as our group is concerned, we are still maintaining our position on making the efforts to protect our people from the COVID-19 situation. We're continuing to do temperature checks, disinfections, cleaning up of sites, on both sides of the Atlantic in the U.S. and in MENA, particularly in Egypt, in order to avoid any issues regarding our labor force and personnel and also not to be affected by the current situation. Obviously, so far, we're seeing a slight uptick in the cases that we're having. But at the same time, we have not yet seen any disruption in the supply chain or any effect that would affect the performance. Obviously, we don't know what will happen over the next few weeks, particularly in Europe, and in the States, whether there would be a further slowdown or lockdown that could impact the supply chain and our communication with our international partner and our subcontractors and our international vendors. If we go back to the business, we are quite happy with the -- with quarter 3 results. Over the 9 months, we have achieved $2.4 billion worth of revenues, with a consolidated EBITDA of $150 million and a net income of $65 million for the 9 months. We have a reasonable net cash position to a little bit more than $200 million. Obviously, we had better cash on the second quarter. But historically, we have seen that collections are much better in Q2 and Q4. And we're seeing that actually happening as we speak, at least on the Egyptian front. On the BESIX side, we're quite happy with the results that BESIX made over the quarter 3. And as expected, they have returned back into profitability. I mean we have full confidence in our investment in BESIX, and we believe this is an excellent group that we have been working with and investing since 2004. I think it's very important to highlight that our business development group really made a major effort in the acquisition of business. We are able to maintain our backlog at the -- at more than $5 billion level. It gives us a lot of comfort that we are not under pressure to replace that and still maintain our focus on acquiring quality business, whether here, or in the U.S. Obviously, this is not an easy task, and it's not something that should be taken for granted because we're seeing, obviously, in a case like the U.S., in spite of all this, there has been some deference of investments by clients and some delays. But nevertheless, we have been able to maintain our backlog in a healthy level. On the operations side, we are quite -- we're quite consistent. As we mentioned almost 2 years ago, that we are very much focusing on operational excellence, on cost control and project controls to maintain the efficiency and the steady progress of our business, as it is, let's say, helping us to maintain our KPIs and the bottom line because, obviously, there are and there will be some additional costs due to the current situations, any delays and being effective in operation and maintaining our cost control would allow us to maintain our bottom line KPIs at a level that we are happy with. Last but not least, I would like to report that we got an approval from the Board to make another interim dividend. The intention is to make it in beginning of January 2021. And we will determine the exact amount of dividend per share during the month of December, depending on our cash flow, that will be seen before the year-end. I would like to hand over the mic to Reham Beltagy, our CFO, to walk you through the numbers, and then we will take your questions.

Thank you, Osama. Good morning, good afternoon to all. And if I may take you through Slides 10 and 11 of the results presentation. At a high level, our consolidated revenue year-to-date 2020 recorded growth over 2019 levels. Despite challenges of the current operating environment, our consolidated margins rebounded compared to Q2 2020, recovering closer to the 2019 year. U.S.A. continues to show improved results, reflecting tangible progress towards sustainable profitability. BESIX [ returning to ] profitability and reported a positive net profit contribution of $10 million for the quarter, regaining confidence that losses on certain projects are behind us. Lastly, cash flow and collections were impacted by cyclicality, as the current operating environment, like Osama highlighted earlier. Now moving on to a more in depth analysis. Our consolidated revenue for Q3 2020 reported $824.5 million, bringing year-to-date 2020 revenue to the $2.4 billion mark. Q3 revenue shows a 4.4% increase year-on-year and 9 months revenue showed a 6.9% increase year-on-year, driven by solid progress in both Egypt and U.S.A. projects. U.S.A. marked a higher contribution with Q3 revenues roughly 40.8% compared to 34% of Q3 '19 associated with higher margin. Our Q3 EBITDA margin recovered to 6.2% compared to 4.4% of Q2 2020, coming closer to Q3 '19 level of 7.3%. Variation in comparison to Q3 '19 level is the result of MENA's Q3 EBITDA margin of 9.5% as opposed to 15% in Q3 '19, due to progress in lower-margin contributing projects in Egypt mainly, along with a high comparison base. This was slightly offset by U.S.A. Q3 EBITDA positive margin of 1.3% as opposed to a negative of 7.4% in 2019, building on improved results and ultimately, tangible progress towards sustainable profitability of our U.S.A. operation. SG&A is normalized and sustained at the 5.4% level in Q3 of 2020 compared to 2019, reiterating that the hike of 6.7% in Q2 of 2020 was an impact -- was impacted by one-off items as related earlier in our Q2 results call. Continuous efforts are being invested in managing our finance costs, which recorded a total of $8.2 million in Q3 of 2020 compared to $17.6 million in Q3 of 2019. This is a result of optimizing our cost of financing for both Egypt and foreign currency-denominated debt, given that gross debt level remains the same. Q3 2020 EBITDA reached $51 million, marking a 44% increase quarter over quarter and reflecting a solid rebound from Q2 '20, which saw the largest impact of COVID-19. Our net profit for Q3 2020 was at $32.4 million, bringing year-to-date net profit at $66.6 million. Net profit for the quarter was positively impacted by BESIX contribution of $10 million, regaining confidence, as BESIX' management do not foresee any further loss related to certain -- to the certain loss contributing projects disclosed earlier this year. Moving on to the balance sheet slide. Equity accounted investees is lower than last year, recording $415 million compared to $430 million in December of 2019. As evidenced, this is mainly the result of a BESIX year to date loss of $8.5 million as well as the $11.3 million of dividends received earlier this year and is offset by a currency translation gain of roughly $6.9 million. Other smaller investments contributing positively are Orasqualia and NPC, for a total amount of $24 million. Dividends received from these investments year-to-date is a total of $3.7 million. We still carry certain deferred tax assets for $55 million, $24.2 million of which is in relation to our previous losses in the U.S.A., but those are carried forward for around 28. Looking at our working capital, trade and other receivables stood at $1.8 billion, marking an increase of $562 million, which was driven by an increase in net sales in receivables mainly as well as suppliers' advantage due to slow collections for the quarter. This is matched with trade and other payable balance of a total of $1.3 billion. Contracts work in progress under billings marked $906.8 million Q3 closing, slightly above December '19 level by $37 million. However, this marks a $93 million below Q2 closing, evidencing our increased billing [indiscernible]. It is worth noting that it's not abnormal to see a slowdown in collections following a strong quarter of collections, which we saw in Q2. And as highlighted earlier, typically, Q1 and Q3 are slow collection quarters as compared to Q2 and Q4. We see a pickup in collection in Q4 to date and we expect to see positive impact on Q4 cash compensation. However, advances increased by close to USD 300 million compared to December 2019 levels. Under billing and advances should be looked at in consolidation due to the nature of contractual situation in [ EMEA ]. Gross debt stood at $347 million in Q3 closing, reflecting an increase of $256.7 million over December '19 level closing. This is mainly a result of aligning liquidity for both EMEA and U.S.A. operations against COVID-19 risks and challenges -- liquidity challenges of financial institution. The gross debt is also in line with the level at -- of September 2019, yet net cash this year is significantly high. Cash and cash equivalents also increased by $182.5 million in 2020. Our net cash position is $208.9 million compared to $279.1 million in December '19, representing an increase of only $70 million from a net debt perspective. The decrease in our net cash position also reflects low collections for the quarter, yet is sizably higher than the position of USD 64 million at September 2019. Operational cash flow year-to-date is negative $23.4 million, impacted by seasonality, as previously mentioned. This concludes my speech for today. Thank you for listening in, and I now hand back to Osama.

Without any delay, let's go ahead and look at the questions.

[Operator Instructions] And your first question comes from the line of Ahmed Hafez from Renaissance Capital.

I just have 3 questions, if I may. The first on the exclusions in the U.S. and this has been on the high side over the past couple of quarters at the same time when project awards have slowed down given the current situation. So do you feel pressured on a -- in a situation where you need to win awards quickly in order to replenish the backlog? And what are you seeing on the ground in terms of new awards there? That's the first question. The second is just in BESIX, it's reported a net debt position that is relatively on the high side, looking at the third quarter of '20. So although there has been an improvement on the EBITDA side, can you shed some light on the cash flow statement there and if they are seeing some cash flow issues? And the finally on executions in Middle East and Africa, Egypt in particular, they look a little bit on the weak side compared to historical burn rates. So I was wondering if this has something to do with the current situation or just a function of the project compositions and then maybe some of the delays you've mentioned before about the monorail.

Okay. Thank you for your questions. On the U.S. side, there has been an uptick in performance due to the fact that there has been an increase in the size of the business related to data centers. And obviously, data centers are required to be turned around in a very short time on a fast-track basis. So that reflects the uptick on the revenues and the performance. On the other hand, we are still seeing a healthy pipeline. Some of those pipelines are delayed due to the obvious reasons by some investors to delays in their investors. On the other hand, we're seeing the business of data centers is growing dramatically due to the fact that, obviously, the nature of business in the U.S. and the nature of the current situation, there is an increase in the need for the cloud to build data storage, and we're seeing an acceleration of additional opportunities on that. We don't believe that we are under pressure to pick up additional -- I mean, to accelerate additional awards, due to the fact that in the U.S., the cycle is slightly different. We look in the Middle East, where it comes to somewhere between 18 to 20 months of backlog ahead of us. In the U.S., due to the way things are, most of the contractors, except for mega projects, you are quite happy to look at somewhere between 9 to 12 months ahead of you. So we believe we're not really under that pressure. And again, we're taking the same position that we're taking here. We would -- we are adamant on taking quality order intake rather than just growing for the sake of growing. As we go back on BESIX, the thing in BESIX, what people do not really maybe realize is that they have a quite reasonably sized real estate business. So the real estate business is the one that has the debt. On the other hand, the construction business is creating positive cash flow. But obviously, on the consolidation level, you will see that. So we are not alarmed by recurring debt. I mean, obviously, there's been more cash during the last period due to the first half due to the lack of results. But obviously, the majority of the debt is -- or most of it is in the real estate business that they have in Belgium, Luxembourg and a little bit in the Netherlands. Middle East, I think we are -- maybe you're looking at these results as far as numbers are concerned. We have several projects that are actually starting. We have quite a big operation starting in the South of Egypt for the financial arm of the Ministry of Defense. We have -- these projects are just starting. The monorail is -- has started, has not yet geared up to create a major revenue stream, as we are almost complete in the design phase, and we started physical construction, but have not yet geared up. So we believe that some of the projects that we received a lot of advanced payments end of last year and beginning of this year are picking up now. We will probably see this impact on the revenues probably beginning of 2021. I hope I answered all your questions.

[Operator Instructions] There are no further questions at this time. Please continue.

Well, you were making our life easy today.

Osama, we have a couple of more.

Okay. Sorry, go ahead.

And your first question comes from the line of Brad Virbitsky from Equinox.

I was wondering if you can talk a little bit about your outlook for backlog growth in Egypt and the Middle East in the next year or 2? Do you see an environment where you're likely to be able to grow the backlog or are you going to have to really fight in order to keep the backlog where it is?

Okay. That's a good question. First of all, on the short term, between now and maybe end of 2021 and part of 2022, we see a healthy pipeline, particularly in Egypt, because I think this is where everybody is worried about. You need also to appreciate that Egypt is 100-plus million people with a very young population. The need for continuous investment has always been there. So we're seeing a good pipeline, particularly in the Ministry of Transport. I mean they have a major push on infrastructure investments related to road, sports, additional phases of the metro, other railway activities. There's a lot of push on refurbishment of railways, refurbishment of the metro lines that Line 1 is now almost getting into more than 30 years old. So there is a major push. And actually, there is aligned financing from entities such as EBRD, European Investment Bank, and other entities to fund those activities. That's on the Ministry of Transport. The nature of housing are still pushing for upgrading and building new water-related projects, whether treatment or wastewater or desalination, where we have announced a few years ago that we are pushing in that area and actually, we are well positioned to get our reasonable and fair share of that. So we see that the business intake is reasonable. We're seeing also major real estate players that are communicating with us to be able to benefit from our ability to provide a quick turnaround on construction in order for them to improve their cash flow because, obviously, most of them have major payments once we deliver the product. So we are -- I think on the short and medium term, we are quite confident on the backlog. On the other hand, we like to maintain our push to acquire quality projects. We don't mind if we have a slight downtick on backlog because we would rather maintain our KPIs and maintain our ability, not only to show profitability but also to give dividends to the shareholders. On the long term, we are working -- I mean, obviously, I will not share a lot of our inside strategies. But we are looking very seriously on opportunities where we are -- we'd like to create parallel long-term recurring revenues, not only in Egypt, but also elsewhere. And we're also seeing some activities in other cases, such as Iraq and some countries in Africa, and we believe we will be in a good position to benefit from that.

Okay. And just to follow-up on that. Over the course of 3 to 5 years, could you imagine the business being 50% bigger? Or is the business, do you think it's sort of around -- like the current size of the business is around where it will be?

Well, 5 years from today, obviously, I would look at the larger size, but I would rather look at also a different size -- a different nature of the business where we have a decent portion from reoccurring revenue and services, where it provides higher margins. And that combination would be definitely a much healthier outlook. And this is really what we're trying to drive to.

And just one more question for me. Is there any update on the tax case with the Ministry of France?