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

Good day, and thank you for standing by. Welcome to the Orascom Construction Q1 2021 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today on Thursday, the 20th of May 2021. I would now like to hand the conference over to your speaker today, Osama Bishai. Please go ahead.

Good morning, and good afternoon, everybody. Welcome back to our Q1 results call. First, I would like to reiterate the fact that we are still acting diligently on addressing the current pandemic situation on all our sites, whether in the Middle East or in the States. We are staying vigilant. We are seeing, obviously, major improvements in the U.S. On the other hand, particularly in Egypt, the situation is pretty much under our monitoring due to the fact that we're seeing some increase in cases. Nevertheless, we are maintaining our protocols that we have started almost 1.5 years ago, monitoring our employees, our labor, tracking everybody. We have an excellent committee that is overseeing all issues related to the COVID-19. And on top of that, we are actually promoting and pushing vaccination to our staff, although vaccination is not available in Egypt in a similar fashion to what's -- to its availability in Europe and the U.S. But nevertheless, we have been pushing for that. We have made available quite a good number of shots for our employees, and we are promoting that. And we believe that even the country would start having a heavy promotion for vaccination very soon because we're seeing more shots coming in every month. This has not been a major impact on the business. But nevertheless, we have a duty towards the health and safety of our team, and we are working hard to maintain that. Coming back to business. I think there are 2 issues that I would like to stress in this quarter. Number one, we have maintained the order intake at a level that keeps us comfortable as far as the future is concerned. We maintain the number of $5.4 billion as a consolidated backlog at the 31st of March this year. There was an order intake of $660 million. Maybe less than $100 million was in the U.S., the rest was in Egypt. Nevertheless, in Q2, the pipeline was very promising. And actually, we know that the U.S. will reverse that the second quarter. The other issue that is also a highlight of this quarter is that our Building Materials group, we have been working hard on all those subsidiaries over the last 6 to 8 months, and it's bearing fruit. There is a good contribution of the Building Materials group that is not -- part is consolidated, part is not. They are contributing a decent share on the -- in the bottom line. And I think Reham, when she presents the financials, she will give you a much more detailed numbers of that. So these are 2 important factors that we are kind of quite pleased to see in Q1. On the other hand, there are certain highlights that it's important to bring to the table. First of all, as indicated on several calls before, usually, we see collections in Q1 drop as -- particularly in Egypt, as the majority of our work is with the government. And they have paid or held our cash flow Q4. Usually, we see a drop in the collection. And obviously, that's not something we like to see, but it is the fact that it's happening, and we are working very aggressively in order to try to pick that up between Q2 and Q3. The other issue that needs to be brought to the attention is that, unfortunately, BESIX did not contribute its fair share on the -- to the bottom line because of Q1. There has been, obviously, several reasons. Historically, unless there is a material event, Q1, particularly in Europe, usually is a slow quarter due to the winter season. And obviously, the third lockdown did not help that much, particularly in Belgium. Belgium had a much more severe lockdown compared to the rest of Europe during Q1, and they will start to relax and open up maybe during the month of June. Plus the fact that there has been also some adjustments on the cost to complete on certain projects. Obviously, that's not something we are satisfied with. We had several calls with the management, and we are going to have -- we are working with them to have some kind of clear visibility for the rest of the year. The current knowledge we have is that the rest of the year looks promising, but we need to get the right assurances so that we don't have this situation again. The other issue is that, obviously, our operation reflected steady performance. The numbers on Egypt reflected similar or slightly better numbers than Q4 last year, but we are still at the level of the single digit on the EBITDA and the profitability. But the -- but it's important also to understand that we are going through a period where in the next couple of quarters, there will be a pickup on the new projects that we are starting, so that will reflect on the numbers. And there will be a couple of projects that will close down, and they may give us some upside that happen. Plus -- but on the other hand, we are facing a situation where we are seeing a historical increase in commodity prices, particularly steel, copper and aluminum. Obviously, we have a big chunk of our projects where we have escalation formulas, and that protects us reasonably well from this situation. But there was always a lag between application of those formulas because they are subject to the release of the formal indices, whether on the local level or on the international level. Lastly, going back maybe to the backlog. We are quite pleased with the bidding and the prospects pipeline that we're seeing on both the Middle East and the U.S. And we're still seeing Egypt fairly strong so far, which gives us the comfort that we will be able to maintain order intake to the levels that gives us the ease of mind so that we are not under pressure, and we try to keep the quality of order intake to the level that we want. Last but not least, yesterday, we had our general assembly, and we got the approval for the share -- for the dividend release that was announced in March, and the target is that we will release that in July after the close of second quarter. I'd like to hand over to Reham to walk you through the financials, and then we will be ready for your questions. Thank you.

Thank you, Osama. Good morning, good afternoon, everyone. If I may take you through our financial performance. At a high level, we would like to highlight -- to give highlights to important points. We are on a positive trajectory from our Q4 2020 results. Despite a slight revenue decrease quarter-on-quarter seasonality in the U.S., EBITDA increased to 7.4% quarter-on-quarter, resulting in improvement in EBITDA margin to 6.2% as opposed to 5.1% in Q4 of last year. It is also worth noting that absolute EBITDA in the Middle East and Africa increased to 7.7%, while U.S. was -- maintained its EBITDA generated in Q4 2020 despite a 29% decrease in revenue. On a year-on-year basis, consolidated revenue for Q1 2021 is in line with previous year. Despite challenges of current operating environment, our consolidated margins rebounded compared to Q4 of last year, in line with full year 2020 levels, as we had indicated on our previous earnings call. Optimized financing costs for EGP and foreign currency-denominated debt, driving a reduction of 85% in net financing costs. Cash flow and collections were impacted by cyclicality that is typical to Q1 and Q3 of every year, as highlighted by Osama. Moving on to more in-depth analysis. Consolidated revenue for Q1 2021 reported $816 million, in line with Q1 2020 levels. MEA operations showed progress over Q1 2020 levels, comprising 71% as opposed to 67% previously of consolidated revenue, while U.S.A. accounted for the balance of 29% compared to 33%. MEA progress is a result of Egypt contribution, representing 97.7% of MEA operations. U.S. operations' slowdown is a result of lower new awards, which is expected to pick up strongly in Q2 of 2021, as Osama has highlighted earlier. Q1 2021 EBITDA marked $51 million, representing a margin of 6.2% compared to 7.7% of Q1 of 2020. However, increasing from 5.1% of Q4 '20 and 5.9% of full year '20 level. Valuation in comparison to Q4 '20 and full year 2020 is MEA EBITDA margin of 8.5% due to higher progress and higher-margin contributing projects as well as high margin in the Building Material. Just to give you a flavor, Building Materials group contribution to Egypt's net income profitability ranges in the range of 18%. SG&A is normalized, the same at 5.5 level, which is in line with 2020 level. Financing costs marked a negative $6.6 million, representing $3.4 million of total outstanding financial indebtedness, optimizing cost for financing for both EGP and foreign currency-denominated debt. Moving to highlight that net financing costs of negative $0.9 million for the quarter is compared to a negative $6.1 million same quarter last year. Net profit to shareholders for Q1 2021 is at $23.9 million compared to $25 million in Q1 last year, reflecting a margin of 2.9%, positively affected by MEA net income contribution of $24.7 million, but negatively impacted by U.S.A. slower progress and BESIX negative contribution for the quarter, amounting to negative $1.4 million of that. BESIX loss is mainly attributable to a loss in certain projects in Europe. That was expected to be compensated by real estate sales that was delayed, and we expected to see that in -- positively in the coming quarters. Moving on to balance sheet. Equity accounting investees recorded $411.7 million, the majority of which is BESIX investment for $373.8 million, in addition to smaller investments that include Australia, Weitz JV and Building Material associated. Our working capital this quarter follows the seasonal trend that we have described a number of fronts. We usually see a slowdown in collections following a strong quarter of collections, which was evidenced in Q4 of 2020, mirroring the Egyptian public sector's typical range. Typically, Q1 and Q3 are slow collection Qs as compared to Q2 and Q4. Trade and other receivables stood at $1.5 billion mark, a slight increase over 2020 closing level, which is driven mainly by an increase in supply advances related to new projects, such as [ Morris ] and LRT. This is matched with the trade and other payable balance of $1.3 billion. Contact work in progress marked $1 billion in quarter 1 closing, above December 20 level by $154 million, reflecting slower billing approval process, especially in Egypt-related market. Advances recorded $1.1 billion in Q1 of 2021, reflecting advances received for new awards, especially in MEA. Gross debt stood at $193.7 million in Q1 2021, reflecting an increase of $78.5 million over December closing levels, but a decrease of $71.4 million over Q1 of last year's level. Net cash position is at $140.2 million, evidencing our ability to maintain a liquidity cushion for both MEA and U.S. operations despite distributing a dividend in January and the slower collections that resulted in a negative cash flow from operations of $188 million, which is more or less in line with Q1 last year's level of $165.8 million, impacted by collection cyclicality, as previously mentioned. Thank you for listening in, and I think we're now ready to open the Q&A portion.

[Operator Instructions] At the moment, we do have one question. This comes from the line of Ahmed Hafez of Ren Cap.

Yes. Congratulations on the numbers. I just have 2 questions. The first is related to the balance sheet. You've mentioned slower collections, which is the norm in the first quarter. But when I look at the trade receivables on its own, it seems it's more or less in line with the level seen in 2020, end of 2020. And it's rather the contracts work in progress is the one that have seen a big increase. Historically, that has been compensated by higher downpayments, but it's not happening this quarter. So is there a delay in the billing process? Is it just a timing thing that you are about to bill a significant portion of work but didn't manage to before the end of the quarter? So that's the first question. The second is regarding BESIX. My understanding is that the poor performance this time is not from the same problematic projects in Netherlands and the UAE. So if you can just confirm that. And the net position for -- the net debt position for the company is at the highest levels probably that we've seen in years. If you can also just explain a bit the cash flows of the business and if this is something that we need to be worried about going on.

Let me give you a flavor to respond to those questions, and maybe Reham could follow up with that with maybe some specifics. It's absolutely right. There are some projects that had certain delays in putting in an approval of invoice. One of that, for example, is the monorail. There has been delay in the first disbursement, not because of anything related to the funding, it's related to the paper work associated with the client being more familiar with export credit funding and the paperwork associated with that. So -- and that's -- I mean the monorail will be a contributor to the revenues moving forward. The same on some big projects like the water treatment plant. Some projects that we have, for example, like the closure of 4B that was handed over towards the fourth quarter of last year. The final invoicing, which is quite a hefty amount, is associated with the paperwork and documentation for the taking-over certificate. That also is taking a much longer time. So what we're trying to say here is that there is a delay in invoicing. It's not that we are worried about that. I mean it's not acceptable, but it's not that it's something that we worry about. It's a matter of timing. And that, obviously, on the other hand, we have to continue doing business, and maybe that's had an impact on our overdraft level. That's why you see that the net debt has changed. So that's on the 2 issues, and Reham maybe will add a little bit more on what I said. Particularly on BESIX, there are -- first of all, it's not the same project. The amounts are not alarming. But I think what Reham has mentioned in the -- while she's making my presentation, there was an expected sale of the -- for the BESIX real estate business. And obviously, when the sale takes place, the entire profitability of that transaction is recorded in that quarter. Once this sale is delayed for a reason or another, then you missed that. So I think that if this sale took -- would have taken place in Q1 as forecasted, we would have not seen this number. Again, we are not taking this for granted as far as BESIX. I personally have been collaborating with BESIX since 1992, and we have been partners since 2004. Again, I reiterate my confidence in the firm. But again, as I mentioned in my introduction, we are working with them on having a review on the forecast for 2021 in order to see the opportunities and the risk and where is the money coming from so that we do not have this surprise again.

Commenting and adding some flavor on the net cash position. As we always said, there's a cyclicality embedded in the collection cycle, especially in Egypt. If you actually compare Q1 of this year to Q1 of last year, where our net cash for this quarter is roughly around $140 million, where as we compare to March 2020, it was at the level of $114 million. So we are even at EBITDA. Our growth, that has evolved quarter-to-quarter compared to the past couple of quarters. We acknowledge that. But as said, this was -- our cash was mainly used to support our operations and continue the progress on site given the flowing collection as well as funding the second portion of the dividend that was funded in mid-Jan of this year -- during this quarter.

Yes. Maybe -- sorry, maybe I wasn't clear. I was talking about BESIX net debt position, not response. The -- this figure is mostly, again, related to the real estate business? Or is the cash flows for the construction business with the lockdown in Europe? And I don't know, there may be some problematic projects that you said in Europe are creating an issue from a cash flow perspective.

No, the net -- the debt on the BESIX balance sheet is strictly related to the real estate development. I mean the construction is not really even having a better cash flow position in spite of the situation.

And the uptick that we have seen last quarter and the increase in that was related mainly to one of the acquisitions that was related to the real estate business as well. So this is basically because also of the slowdown in operations. And typically also in Q1, because of the weather conditions in Europe, is a slow progressed quarter, the accumulation of cash flows of the quarter is a bit slower than the past couple of quarters. But with that, the uptick was the last quarter. And it was, like we mentioned, Q2 and the financing and acquisition of the real estate project.

Perfect. Just one last thing to confirm really quickly. You said that the contribution of the Building Materials division was 18% of Egypt's net profit, 1-8?

It's actually 1-8%, 18%.

18%, that's correct.

[Operator Instructions] We do have 2 more questions on the line at the moment. Next question comes from Nour Sherif of Arqaam Capital.

Just a couple of questions for me, if I may. So we've seen the EBITDA margin is down mainly on the lower MENA margin. So is this a continuation of cost escalations we've seen in Q4? Can you give us some more details about it?

Okay. Actually, we -- on the last call, we had the same discussion, I think, with the -- let's say the members available on that call at that time. We said that we believe this will be an ongoing trend as a floor. We are seeing some challenges on the commodity materials and some additional costs due to the inflation worldwide. But nevertheless, we have a visibility on upside and opportunities in the projects that we are -- at a level where we are more than 70% or 80% complete. But at this moment, we would like to maintain that level until we realize the upside of the improvements that we see. I mean it is a situation where we also are in a position where we're starting a lot of projects. And at this stage, with the start of projects, it is also quite prudent not to indicate a more optimistic or a more bullish EBITDA or net profit levels until we are quite confident that this will be achieved.

Yes, clear. And on the legal cases, is there any update about Sidra case? Or should we expect an update this year?

Well, on the Sidra case, there has been some hearings. It is just kind of process-related hearing. We don't expect Sidra will have anything before end of the -- probably sometime in 2022. The other case is the tax. It is an ongoing issue that's taking forever, but we are not that concerned. We have some smaller legal issues that are related to the day-to-day business that we are not -- we don't believe there will be a material impact on us. But on Sidra, we don't expect anything before next year.

Yes, clear. And one final question on BESIX. Can you give us guidance on what should we expect for the rest of the year?