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

Good day, and thank you for standing by. Welcome to the Orascom Construction H1 2021 Results Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Osama Bishai. Thank you. Please go ahead.

Thank you very much. Good morning, good afternoon, everybody. I'd like you -- to welcome you back. I hope you had enjoyed the good summer. First, I would like to make a quick tribute. We have -- in August, we had the event of losing the founder of our organization. He passed away at the age of 91. He was a great captain of the industry. He was a great philanthropist. It was a major loss for a lot of people that worked with him and obviously, more to his family and friends. Moving on to the numbers. For the first half of this year, we have achieved slightly shy of $1.7 billion of revenue with, let's say, the expected or targeted EBITDA margin of 6% consolidated. Obviously, on -- the MENA region provides a higher EBITDA versus the U.S.A. But more importantly, we have closed the second quarter at $5.9 billion of backlog, which quite honestly gives us a good comfortable backlog looking ahead. It gives us the comfort that we are not under pressure to be able to recover the backlog eroded from production over every quarter. We are still very much focused on core businesses on high-quality contracts where we maintain a certain level of acceptable returns in order to maintain the quality of our performance and our numbers. The other issue is that why we're seeing these numbers, we are still looking at mitigating as we call, the challenges of price inflation across the world and particularly the increases in the raw material that were being seen -- that we are seeing. We're quite happy to see that a lot of our contracts are giving us some protection due to the escalation clauses and provisions that are already embedded there. On the -- particularly on the Building Materials, we're quite glad to see the continuous performance of that business unit or that -- or those investments to capitalize on the boom in the real estate and construction sector in Egypt. And they are, quite honestly, gaining traction as we go and we are currently looking at several initiatives that we could make in order to enhance and maximize our returns from the Building Materials sector. The other issue that we are also looking at is that we are continuing to do a lot of initiatives in the concessions and renewable area. We believe there will be -- we see quite a lot of opportunities in the pipeline over the next 4 to 6 months, and we believe that our efforts will be bearing fruit over that period. Last on BESIX. BESIX continues to provide a healthy backlog. They have -- if we have a pro forma backlog for the group, assuming 50% of BESIX, we reached in excess of $8 billion, which basically reflects that they have $2.6 billion of new awards during the first half of this year. And it slides at EUR 4.2 billion at this moment. They continue to make structural adjustments within the group. We're quite confident that this year they're going to deliver positive results. They continue to do more cleanup in the last quarter. And we have extensive collaboration and meetings with the management. And we are quite comfortable that they will achieve the target results that they are indicating to us before -- by year-end. We have hoped to recover the negative cash flow that we have seen in Q1. Q2 was slightly on the positive side, but not to the extent that it could recover what we've seen in Q1. Reham will maybe elaborate on that. But we are confident that the pipeline of receivables is continuing to be healthy, and we will -- we expect to be in a very good shape by year-end. The other thing that I would like maybe to go back and mention is the pipeline of new opportunities. We continue to see a healthy pipeline. We're also happy to see that the U.S. on new awards were able to secure quite a sizable additional work in Q2, particularly in the sector of data centers. We have acquired -- we have today acquired a very specific expertise in that field. And we believe that field will continue to grow in the U.S., and we feel that we are in a very good position to continue to benefit from that. That's on the, let's say, the overall picture. I would like to pass on to Reham to maybe go specifically to the details of the numbers. Thank you. And then we'll go back to Q&A.

Thank you, Osama. Good morning, good afternoon to everyone. I will take you now through Q2 2021 results at a high level. Solid revenue progress recording year-on-year of 9.7% for Q2 of 2021 and 4.1% for H1 2021, supported by strong backlog and new awards on both MEA and U.S.A., as Osama had mentioned earlier, consolidated margins recovery in Q2 of 2021, sustaining financial performance for H1 2021. Our portfolio of subsidiaries and building materials contribute 22% of our total net profit in H1 of 2021, generating an EBITDA margin of 24%. Positive operating cash flow of $31.8 million for Q2 2021, still not compensating Q1 2021; however, moving positively towards better working capital management. Now moving on and having a closer look at our results. Our consolidated revenue for Q2 '21 recorded a total of $868.4 million, showing a 9.7% increase year-on-year, bringing H1 2021 revenue to the $1.7 billion mark. MEA operations accounted for 70% of the total revenue for Q2 '21 compared to 60% in Q2 of 2020. MEA progress is a result of Egypt contribution, representing 98% of MEA operations, where we experienced continued progress on a number of existing projects as well as accelerated progress on new projects that were awarded earlier this year and later of last year. U.S. revenue slowed down as a result of, first, the closing out or completion of a number of projects in late 2020 as well as the slower new awards that was experienced in the past couple of quarters. However, and as you can see, this quarter, the trend has reversed, and we experienced an uptick in the U.S.A. new awards for Q2 of 2021 of close to $800 million, which we expect to see the effect on the revenue in the second half of the year. Q2 2020 consolidated EBITDA marked $49.4 million, reflecting an increase of 40.3% year-on-year and bringing first half EBITDA to the $100-million mark, generating a margin of 5.7% and 6%, respectively, for Q1 and H1 of 2021. Both MEA and U.S.A. contributed positively to an uptick in margin year-on-year comparison with 7.6% and 1.2% in Q2 '21 compared to 6.8% and 1% in Q2 2020. MEA positive margin is a result of positive margin adjustments on a number of projects for better efficiency as well as contribution of subsidiaries and Building Materials group higher EBITDA generation of 24% for Q2 that was referred to earlier. Our net profit to shareholders for Q2 '21 marked $23.8 million compared to $9.8 million in Q2 2020, marking a 142.9% increase year-on-year. This reflects a margin of 2.7% that was positively affected by MEA and U.S.A. net profit contribution of $22.3 million and $1.7 million, respectively. MEA higher net income contribution is due to higher progress while maintaining same SG&A as well as higher income from equity accounting in this year, which recorded $3.7 million in Q2 '21 versus a negative of 6.9% in Q2 of 2020. BESIX slight net loss contribution for the quarter amounted to negative $0.2 million, bringing the year-to-date loss to a negative $1.6 million. Loss in BESIX that Osama alluded to earlier is mainly attributable to operational issues in international and UAE contracting as well as the fact that the sales delays in real estate sales in this quarter. On the balance sheet side, equity accounted investees is recorded at $419 million, the majority of which is BESIX investment for $382.5 million. In addition to similar investments, including Weitz Group JV, Orasqualia and Building Materials associates. For the group working capital this quarter, trade and other receivables stood at $1.6 billion, marking $141 million increase over fiscal -- full year 2020 level, which is driven mainly by an increase in supplier advances related to new projects, such as monorail as opposed to an increase in AR balance. This is matched with trade and other balance of $1.5 billion. Contracts work in progress under billings marked $1.05 billion in Q2 closing, above December 2020 level by $198 million and in line with Q1 2021 level, reflecting slower billing approval and progress, especially for some Egypt-related backlog. Under billing and advances should be looked in, in consolidation due to the nature of the contractual situation in MEA, advances recorded a total of $1.097 billion in Q2 of 2020. Although Q2 reflected an improved cash flow from operations of roughly -- a little bit under $32 million, it did not compensate for Q1 outflow. We are continuously focused on collections and billing differences with target of improved cash flow from operation level in the second half of the year. We have experienced this quarter a break in the typical trend of collection where we typically see strong quarters in Q2 and Q4 and slow quarters in Q1 and Q3. As alluded to earlier, while Q2 showed positive cash flow, it did not compensate for Q1. However, we see good momentum in Q3 collection, moving more towards a gradual buildup of cash flow from operation throughout the year rather than 2 strong quarters and 2 weak quarters. Our gross debt stood at $191.7 million in Q2 of 2021 closing, reflecting an increase of $76.8 million over December 2020 closing and in line with Q1 2021 level. The group still enjoys a healthy net cash position of $151 million, evidencing our ability to maintain a liquidity cushion that is sufficient for both MEA and U.S.A. operations despite the slower collections that we received. Thank you for listening in. And I believe we are now ready for the Q&A session.

[Operator Instructions] We got 1 question on the line. It comes from [ Dina Alnajdawi ] from Client Securities.

I just have 1 question about U.S. revenues. We saw a decrease in U.S. revenues; however, it's net income increased. So could you please explain more about this?

I think on the increase of the net income, part of that, there is some joint venture operations that are not consolidated on the revenue side, and it provides with, let's say, a net profitability that comes in at the profit line item. So this explains the increase.

[Operator Instructions] Next question comes the line of Zeyad Ahmed from Al Ahly Pharos.

I just wanted to know more about the -- I would ask about the...

I'm sorry, we can't hear you.

Line is disconnected or we can't hear the question.

He was disconnected, sir. [Operator Instructions] All right. The line of Zeyad Ahmed.