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

Good day, and thank you for standing by. Welcome to the Orascom Construction Full Year 2020 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Osama Bishai. Please go ahead.

Good afternoon, good morning, everybody. We are welcoming you for our 2020 results call. I'll briefly make an introduction, and then Reham, our CFO, will just run you through the numbers, and then we'll open the discussions for everybody's queries. First, 2020 was a challenging year. It was -- we had an unprecedented situation where it took some time for everybody to start to get acquainted with how to deal with this situation. We believe we are a little bit lucky because our main operating areas, mainly Egypt and the U.S., the confinement and the closing down of the business was quite limited. It allowed us to operate in a reasonable manner. We had obviously to deal with the challenges of the pandemic itself and taking care of our people, plus the fact that there were obviously some challenges on the supply chain particularly when we're dealing with the supplies from Europe as they had a severe lockdown between the period of March till May, June of last year. Our priority was really our -- the safety of our people both in the U.S. and in Egypt. We took all the measures to take care of our labor force and our staff. On site, it was a much easier challenge because technically, the work environment is open air, which is a much easier environment for the COVID-19, but we had to do extra measures in the -- in our offices to make sure that there is no contamination or cases in the -- our office environment. Particularly in Egypt, we had discussions with the government and our clients, and the consensus was to work full force due to the fact that the government and ourselves, we are worried that the welfare of our people from the concept of getting paid and earning enough money to live. I think it was -- we had successfully dealt with the COVID so far. We have a team that is dedicated to manage the situation. We are currently -- since probably end of March, we are monitoring on a daily basis our cases and our employees. We have made certain protocols in order to be able -- to have our people access proper medical care in case of getting infected. So I feel that the team made an excellent progress, considering the fact that in April and May, there was very little information known about how to manage this pandemic. Obviously, today, we are very much focused on the vaccination of our people. In the States, it's rolling out quite efficiently. In Egypt, we are in discussions with the Ministry of Health in order to make sure that we have enough vaccinations for the construction sector, including Orascom Construction. Going back to the business. We believe we have achieved good numbers as far as the -- our top line. We also have succeeded to maintain a decent backlog that keeps us busy and keeps us in a good shape for the average of 18 months, give or take, for the Middle East and a year for the U.S. business. This backlog doesn't put pressure on us to accept contracts that we don't believe are quality contracts for our business. As far as the results are concerned, we have achieved good results from the EBITDA and bottom line numbers. Obviously, the numbers are not -- there has been a slight decline between this year and last year, which reflects a lot of things, the impact of COVID. There has been a slight inflation on main raw materials such as copper and steel towards the last 4, 5 months of this year. The Egyptian pound has appreciated a little bit during 2020. So there has been a lot of events that could put pressure on our bottom line but we're -- we believe that our tighter controls and our management have been successfully able to mitigate some of that. We continue to focus on operational excellence. We like to continue to tighten our project controls, our cost controls, our quality delivery. We believe that our quality is -- has been instrumental in allowing us to secure the quality backlog that we have right now. So I mean we are proud of that. I mean the backlog that we acquired is in the areas where we have core competence, in data centers in the U.S., in commercial buildings in Egypt, in the infrastructure, railways, hospitals, metro program. So this is where we have an edge and we were -- we believe this is where we provide a value to the -- to our clients and to this business. Last year -- on BESIX, BESIX had secured also a quality backlog for this year. They have also had a profitable quarter for Q4, not to the level that we expected but it's a turning point to the positive that happened in Q4, and we believe that they should be -- or we expect them to be in a good form for 2021. And the same goes for our U.S. business. We had a reasonable year for 2020, and they are well positioned to have a good year in 2021. I would like to add that there has been major efforts in our business development towards the second half of 2020. Not only that we succeeded to secure such backlog, but we were well positioned for an interesting pipeline in 2021. And the fruits of that effort will be obvious when we close Q1 and Q2 this year by the new added business that we will announce in the next few. Last but not least, our commitment to our shareholders still stands as it is. We have reviewed our operation and our business and our cash. And we have got an approval from the Board to release another dividend in July this year of a total value of $27 million, reflecting, I think, $0.23 per share for the shareholders. Before we go ahead and have your questions, I would like Reham to step in and walk through the numbers, and then we can go ahead for the Q&A. Thank you.

Thank you, Osama. Good morning, good afternoon, everyone. I will take you through our financial results. Just at a high level, we would like to highlight 6 main highlights for this quarter and for fiscal year 2020: first, our consolidated revenue for 2020 recorded growth over 2019 level despite COVID-19 challenges like Osama alluded to earlier; U.S.A. first year of positive EBITDA and net income contribution. This marks an important milestone towards sustainable profitability of our U.S. segment; tighter margins due to challenging operating environment; improved net cash position of the group throughout the year; lower financing costs driven by focus on gross debt levels throughout the year as well as lower interest expense; and lastly, strong operating cash flow, evidencing continuous efforts on collections and working capital management. Now going more in-depth into analysis. Our consolidated revenue for Q4 2020 recorded $927.8 million, bringing our full year 2020 revenue to $3.37 billion mark. Our Q4 revenue shows a 3.2% increase year-on-year, and full year revenue shows a 5.9% increase year-on-year, driven by solid progress in both mainly Egypt and U.S.A. projects. U.S.A. marked a higher contribution for full year 2020 revenue of 37.5% compared to 2019 level of 31.4% associated with higher margins. MENA full year revenue is in line with last year, while U.S.A. increased by roughly 26%. Our Q4 EBITDA margin recorded 5.1% compared to 7.6% for Q4 '19 and 5.9% for full year 2020 compared to 8.4% of last year. Margin variance in comparison to 2019 level is a result of -- comparison to 2019 is to a high base yield, where our guidance including -- included projects with above-average margin. Some -- we also see some margin [ pressure ] in EMEA given the current operating environment. We also have experienced higher progress of lower-margin contributing projects in EMEA; higher contribution of the U.S., which typically comes with a lower margin; and lastly, SG&A hike mainly impacted by legal expenses and one-off provisions for a total of $4.3 million. Our net financing costs amounting to $9.8 million reflects our continuous efforts in managing gross debt levels as well as interest expense. Financing costs for Q4 2020 as well as full year 2020, represents 1/3 of our financing costs for comparable periods in 2019. This is a result of maintaining a low gross debt level on the back of strong collections; and secondly, optimizing our cost of financing for both EGP and foreign-currency-denominated debt. Our net income to shareholders in Q4 '20 stands at $25.9 million, bringing year-to-date net income to $90.9 million. Net income for the quarter included income from equity-accounted investees of $4.5 million, representing Q4 BESIX, $2.3 million; and Weitz JV, $2.6 million, as compared to a loss of $2.5 million of last year. However, our net income for the year was negatively impacted by a total of $3.2 million loss from equity-accounted investees pool versus $27.1 million positive from last year. This is represented by BESIX loss of $6.2 million versus an income of $22.9 million last year and Weitz JV income of $5.5 million for this year versus $1.7 million last year. That said, BESIX reported profitable H2 2020 results. Worthy to highlight that U.S.A. contributed a total net income of $9.3 million for full year 2020, as said, marking an important milestone. Excluding BESIX, the group would have reported a net income to shareholders of roughly $97.1 million, which would have been in line with 2019, generating net income level excluding BESIX, of course. Moving on to the balance sheet. Equity-accounted investees is lower than last year, closing at $419.4 million compared to $430 million in December of '19. This is mainly the result of BESIX loss year-to-date of $6.2 million as well as the EUR 10 million dividends received earlier this year from BESIX. And they are partially offset by a [ 5.6 ] comprehensive income. Other smaller investments contributing positively are Orasqualia, NPC, Ras Ghareb and Weitz Group JV for a total amount of roughly $31.8 million. Year-to-date dividend received from these investments are around $6 million. We still carry DTA assets of $39 million, of which $27.3 million is in relation to our previous losses in the U.S. and can be carried forward for a total period of 20 years. Looking at our working capital, our trade and other receivables stood at $1.47 billion, marking an increase of $214 million over December '19 balance. This was driven by an increase in net trade receivables, mainly driven by the high progress in projects delaying -- discipline as opposed to slow collection. This is matched with trade and other payable balance of $1.4 billion, also reflecting an increase of $210 million over December '19 balance, and this reflects our -- trying to match, looking at our working capital and matching our receivables and payables. Contracts work in progress marked $854.5 million, Q4 closing, slightly below December '19 level, while maintaining advanced balance of $1 billion. Under billing and advances should be looked at in consolidation due to the nature of contractual situation in Egypt. It is worth noting that Q4 represented a strong collection quarter. As previously related, typically -- and as you aware, Q2 and Q4 are stronger collection quarters, especially in MEA. Gross debt stood at $115.2 million in Q4 closing, reflecting a slight increase over December '19, record low level of $95.7 million, and a reduction of 33% from Q3 2020 level of $347 million. Cash and cash equivalents also increased by $99 million in 2020, bringing our net cash position to a total of $358.6 million compared to $279 million in December of 2019, evidencing our ability to maintain liquidity cushion for both MEA and U.S. operations to mitigate against COVID-19 liquidity challenge while maintaining our low gross debt as well. The increase in our net cash position also reflects on our strong collection for the quarter. Our operating cash flow recorded $161 million for Q4 and $138 million for full year 2020, reflecting our focus on collection and working capital. Thank you for listening, and we are now ready to open the Q&A.

[Operator Instructions] Your first question today comes from the line of Nour Eldin from Arqaam.

Can you shed some light behind the reasoning of the lower EBITDA margin in the MENA region? And what should we expect in 2021?

I think the majority of the MENA region is really limited to Egypt. As I have mentioned before, we have, number one, some costs associated with the currency exchange, where the Egyptian pound has showed some strength against the U.S. dollar. First of all, our balance sheet is presented in U.S. dollars. Second is that it reflects additional costs in Egyptian pound vis-à-vis particularly on contracts that are fully funded and fully paid in U.S. dollars. Similar to [ Bahr al-Baqar ], we have a big portion in Abu Rawash. Already, the portion -- we're seeing the monorails, 100% in euros. So we're seeing some of that and obviously the extra cost due to some of the raw material increase, particularly steel in the last quarter and copper. And obviously, this is not the case in contracts where we have an escalation formula. But also, we have some contracts where we have a fixed lump sum that should not, let's say, enjoy such situation. Plus the fact that we have obviously extra costs due to the precautions that we have to take on each site for COVID-19, which includes constant sanitizing -- sanitization of the camps, the offices on weekly basis, the extra cleaning, the extra health care cost that we have to take care of our people. So there has been some added costs there. Obviously, as usual, we have some costs -- some projects where we are executing without a final defined contract value with the government, which always happens towards the end of the project and where sometimes we've seen in certain quarters in the past, particularly in 2019, where we had a spike in the bottom line due to the closing of a certain quarter. So we believe that this is -- I mean the combination of that has resulted into this lower EBITDA margin. We believe also that it's a tighter operating environment, particularly in Egypt. There has been some concerns by -- particularly by our competition. They have concerns on the pipeline. And it puts pressure on the entire market. Also, the smaller players in the supply chain, they are also seeing some extra costs that some of that is being transferred to us, being their clients. I don't know if that would suffice, but this is basically the analysis of that because we have also been extremely thorough in trying to address that and see how can we mitigate that moving forward.

Yes. Very clear. And so what margin should we expect in the first quarter of 2021 at least?

I think we're -- we think we maintain -- we would probably look at the same level we have achieved for 2020, give or take. That's what we believe will be our forecast for 2021.

Great. Just one follow-up question. Do you see awards outside of Egypt in 2021? Should we expect growth in the backlog?

Look, we have to -- as a contractor, we follow the business. And if you are monitoring the markets, Egypt is the bright star of Africa and the region, whether you like it or not. There has been a great push in infrastructure spending, great push in growth. And this is happening. If you look at other countries in the region, whether on the east side or the -- North Africa -- in Africa, there is -- we are not seeing any activities that could be -- that could resemble what's happening in Egypt. And we're quite grateful that this is our backyard, and we're able to benefit from that. But having said that, we are actively seeking quality opportunities in the region. We are looking at Sudan, South Sudan. We are looking we -- hope that the latest truce in Libya could bear its fruits because Libya has major needs in the next period for infrastructure. Obviously, Sub-Saharan Africa has a lot of work. We have gained a lot of edge in bringing funding for projects to be able to create EPC+F opportunities. I cannot say that growth or maintaining the value of backlog will be driven by Africa. I think it will be driven by Africa and still Egypt.

And your next question comes from the line of Jake Ward from Ashmore.

Just a couple of questions on my side. Just firstly, maybe just following on something asked about, the MENA margins. Just so I'm clear then obviously, I understand the headwinds that you may have faced in Q4 from raw material costs, et cetera. But are you -- in your answer, you're now saying that structurally, given the change in the smaller players putting pressure on the market, you don't feel that you're any longer able to achieve that 10% to 12% MENA margin range? Is that no longer on the cards and we should be expecting this kind of high single-digit to continue. Is that fair? Secondly, on BESIX, you commented -- sorry, go on. I'll let you answer that one first.

Sorry. Go ahead.

Okay. Just BESIX, you mentioned in your intro that whilst Q4, they posted positive net income, you are still slightly level. Could you perhaps break that down a little bit for us? Is there any more provisioning in there that were kind of used to help the first half? Or is it just a weaker quarter?

Okay. Go back to the first question, what we believe is that the headwind against us from the increase in raw material, I mean we're seeing steel changes, have increases -- steel is going up. Copper is increasing. Aluminum is increasing. So we are heading into a situation where inflation exists. So that's a fact, and we need to be able to manage that. We are not worried about smaller players, because we would like to continue focusing on specialty projects where our value and our edge -- and we are able to give, let's say, value for our clients and we're able to get the returns we need to get. But with this consideration and the fact that also, inflation in Egypt is still ongoing and the Egyptian government -- we're seeing a trend that they like to see dollar or euro-loaded contracts more than Egyptian pounds. We feel more confident about the Egyptian pound. So we believe that this headwind will keep us at the levels we had in 2020. I don't believe that, that will be because we are going to compete with smaller contractors on single projects. This was not going to happen. But it's a fact of life that we have to pay a little bit more for some of our services, and we cannot necessarily, every time, pass on that to the client. We are still very adamant on maintaining a lot of contracts with good escalation formula. But whatever formula you can do, you cannot have 100% safety net created. The other thing is that we are going to see this year some extra costs due to the fact that the program of the infrastructure in Egypt is still going strong. There is a new metro program, Line 4. There is the high-speed rail civil works that will happen. So that will put pressure on Egyptian sourced raw material like cement, aggregates and services, will put also a lot of pressure on salaries and cost of labor. So that's something that we are going to face. That's why I want to be on the cautious side and give a guidance that we will maintain the 2020 levels on that. And that's part of the construction business that you could tighten up your project controls, you maintain that level, and then you could get a handful of great projects where you are able to increase by 20% or 30% of your margins. So that's part of that. We believe this will happen. We believe we have an interesting pipeline in the horizon, but we are comfortable to maintain a prudent guidance for our investors. Going back to BESIX, I think Q4 -- is again to go through a weaker quarter. They might have some cleaning up here and there, but they have moved to the black for Q4. But we believe that 2021 is well positioned for -- they could return to their normal results. But obviously, they have the headwind of the confinement and the pandemic in -- particularly in their European business as Belgium is under confinement. Luxembourg is the same. But again, construction is allowed to perform but not to the full extent that they would like it to do.

That's really clear. If I could just jump in with one quick follow-up on BESIX. Are you able to confirm whether there was any provisioning for the 3 projects that BESIX heavily provisioned for in the first half? Was that present in Q4? Or were there other provisions in cleaning up done?

Yes, there has been an additional amount of roughly EUR 15 million.

Okay. Perfect.

So just not on any other new ones.

The existing ones? Yes. Understood.

Yes.

Yes.

And your next question comes from the line of Ahmed Hafez from RenCap.

I just had a question about the burn rate in the U.S. Should we expect these levels to continue given the change in the project mix more towards the data center business? Or should we return to historical levels? And how is the project pipeline looking at the moment? And in terms of expected project awards for this year, do you think it would be higher than 2020 or more or less in line? That's it.

Okay. On the burn rate on the U.S., that's a good question. The business of data centers is time-sensitive and time-driven. So obviously, the burn rate is quite aggressive because we have fast-tracked dates to deliver the modules in order to serve the business. The pipeline is quite interesting on that. So I think the speed of the burn rate is also matched with speed of additional awards in that. On the other hand, we still -- we start seeing that the normal conventional pipeline is getting to be stronger. There is the optimism and the indications that the efforts done for the vaccination in the U.S., people are starting to do a much more forward planning for 2021, considering that there is a possibility that they have a much more active second half of the year. But if we -- but looking at the global picture, as I mentioned in my introduction, we -- our business development and our -- let's say, the management team has made extra efforts in 2020 to position ourselves for an interesting pipeline of new business both in Egypt and in the U.S. We know for a fact that there are a lot of opportunities that will be booked quite soon. And as I indicated, this will be announced in the next few weeks. We feel that we may be in the same level of 2020 as far as adding additional business.

Okay. Just another quick follow-up question on margins. You mentioned some one-off provision and legal expenses of around $4.3 million. Were these mainly in the fourth quarter of the year? And what are they related to?

Okay. So the $4.3 million is -- they are, yes, related to the fourth quarter. The $4.3 million is a provision to a legal case on OCI SAE, where we share 15% off as a result of the split agreement between the OCI and OC group earlier at the demerger. So this is -- this amounts to $4.3 million. And then the legal expenses for the year, we have a hike of roughly $4 million in addition to the $4.3 million provision. That is related to a couple of legal cases that we have, litigations that we have.

Okay. And should we expect any more provisioning on this legal case against OCI SAE or that $4.3 million gets recovered?