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

Good afternoon, ladies and gentlemen, and welcome to the Orascom Construction 9 Months 2021 Results Conference Call. [Operator Instructions] Just to remind you all, this conference call is being recorded. I would now like to hand over to Osama Bishai, CEO of Orascom Construction. Please go ahead, sir.

Good afternoon and good morning, everybody. Welcome to our 9 months results call. Let's get to our -- we'll go through our usual. I will just make a quick presentation. Reham will elaborate on the financials. And then we will be ready to take all your questions and queries. Basically, this quarter reflects -- and Reham will go into the actual numbers. We had 9 months revenue of $2.5 billion for the 9 months and an EBITDA of $146 million, again, for the 9 months. We believe that we have a steady performance as far as our revenue and EBITDA. Our EBITDA over the 9 months are within our targets. We are aware that Q3 reflected a lower EBITDA margin. I believe this is a time issue related to accruing certain costs and some inflation. Some of the recovery of this inflation will follow either in quarter 4 or Q1 due to the way inflation is being adjusted in most of our contracts, plus the fact that we believe that we will end the whole year within our guidance that we shared before since the 9 months are already slightly above that. I think the most important subject that I would like to touch upon is our backlog. We have indicated last year and in Q1 this year that we are quite comfortable with the pipeline of opportunities that we have been seeing, both -- on both sides of the ocean, in the Middle East and in the U.S. And actually, the current backlog is the testimony to that. We are at almost $6 billion of backlog at -- on September 30. This number also, to be clear, includes 1/3 of the high-speed network that we are part of as we only booked what we have actually signed. We believe that this should be indicated very soon as we are in current contract formalization for the balance of the network jointly with Siemens with the Ministry of Transport in Egypt. On the U.S., also, we've seen a great progress on backlog acquisition, particularly in the space of data centers and in the niche business of Weitz, which is student housing and senior living. On the other hand, the quarter has been showing a positive operational cash flow. But unfortunately, the quarter -- or the last 2 quarters did not recover the negative that was realized in Q1. We believe we are on the right track, hopefully, to close the year in a good fashion as far as our cash flow and our cash on hand. It has been a very -- an important subject for management focus. And actually, this is what we are focusing on in the next 6 weeks in order to achieve that before year-end. On the other hand, after the quarter, there had been some interesting events. We have signed the agreement for developing the additional 500-megawatt wind farm with the same partners, the way we did the first one, Engie from France and Toyota from Japan. Hopefully, we will be closing -- achieving financial close within a few months from now. We are very excited of our continuous expansion in the renewable business plus the fact that we also are involved in critical projects, projects such as the connection -- the power connection between Egypt and Saudi, obviously the continuation of the high speed. Last but not least, we have also achieved construction completion and commissioning of the largest water treatment plant, which is Bahr al-Baqar, where we have achieved the completion within schedule, on time, actually within budget. And this project also achieved some awards. But more importantly, it's a testimony to what we have been speaking about, our involvement in the water business and our leadership there. Last thing before I give the floor to Reham. This quarter shows BESIX coming back into profitability. We believe this is one of the first steps of our long journey to bring BESIX to what it's usually -- to its usual performance and plus the fact that also they are enjoying EUR 4.9 billion of backlog, which also gives them the luxury of project selection and the fact that they can improve the bottom line using the synergies on this large backlog. Reham, please go ahead.

Thank you, Osama. Good morning, good afternoon to all. I will now take you through the group's Q3 2021 results. At a high level, I would like to highlight solid revenue and net income progress year-to-date and record backlog in both MEA and USA. Consolidated overall margins, stable and in line with previous guidance despite higher raw material cost environment and given improved margins in the U.S. Continued sustainable performance of our subsidiaries and investments in building materials, facilities management and infrastructure assets, showing material improvement contributing 20% of our total net income in 9 months '21 compared to 10% same period in 2020 and achieving higher EBITDA margin of 24%. Positive operating cash flow of $42.8 million for Q3 '21, building on $31.8 million in Q2 of 2021 and moving positively towards our year-end position. Moving on to a closer look at our results. Consolidated revenue for Q3 '21 reported $857.7 million, showing a 4% increase year-on-year and bringing the 9 months '21 revenue to the $2.5 billion level. MEA operations accounted for 68.5% of total revenue for Q3 '21 compared to 59.1% in Q3 of 2020. MEA progress is a result of Egypt's contribution, representing 99% of MEA operations, where we experienced a 20.4% increase in revenue. U.S. revenue had a 19.7% decrease over Q3 2020 level. This is a result of closing out completion of a number of projects in late 2020 as well as lower new awards that was experienced in 2020 and first quarter of 2021. This trend has reversed, where we experienced a substantial increase in U.S.A. new awards in Q2 and Q3 of 2021, where new awards for 9 months '21 has doubled compared to last year's. Consolidated EBITDA marked $45.9 million for Q3 '21 and $146.2 million for 9 months '21, reflecting a 2.9% decrease compared to 9 months 2020. We generated margin of 5.4% and 5.7%, respectively, for Q3 and 9 months of 2021. MEA EBITDA margin dropped to 6.8% for Q3 '21 compared to 9.5% in Q3 of '20, mainly due to higher progress of lower-margin contributing projects for the quarter. U.S.A., on the other hand, recorded an EBITDA margin of 2.2% in Q3 '21 as compared to 1.3% in Q3 last year as a result of new higher-margin contributing projects that was added to the backlog earlier. Net profit to shareholders for Q3 '21 stood at $28.4 million compared to $30.2 million in Q3 of 2020 and $76.1 million in 9 months '21 compared to $65 million in 9 months 2020, marking a 17.1% increase year-on-year. This reflects a margin of 3.3% and 3% for Q3 and 9 months of 2021, respectively. That is positively affected by U.S.A. higher net income contribution of 2.1% compared to 0.4% in Q3 '20 driven mainly by investment income from equity investments. BESIX also returned to profitability, generating a net income of $6.5 million for the quarter. SG&A is maintained at 4.3% level while financing cost has been reduced by 20% compared to Q3 of 2020. On the balance sheet side, equity accounted investees recorded $422.6 million, the majority of which is BESIX investment for $377 million in addition to smaller investments, including Orasqualia, Weitz Group JV and building material associates. For the group, working capital this quarter, trade and other receivables stood at $1.4 billion, marking a $69.6 million decrease compared to full year 2020 level. This is driven mainly by a decrease in receivables collections obviously. This is matched to trade and other payables balance of $1.3 billion. Contract work in progress under billings marked $1.016 billion as of Q3 closing. That is slightly below Q2 '21 level, reflecting progress in billings, especially for some Egypt-related backlog. Under billing and advances, it should be looked at in consolidation due to nature of contractual situation in MEA. Advances recorded $1.076 billion in Q3 of '21. Q3 reflected an improved cash flow from operations of $42.8 million compared to $31.8 million last year. However, Q2 and Q3 positive flow did not compensate for the Q1 outflow. We are continuously focused on collection and billing. Q2 and Q3 had good momentum, as highlighted earlier, and moving towards a gradual buildup of cash flow for the year-end close. Our gross debt stood at $203.6 million as of Q3 '21 closing, reflecting an increase of $88.4 million over December 2020 and in line with Q2 '21 level. The group still enjoys a healthy net cash position of $144.7 million of cash, evidencing our ability to maintain liquidity for both MEA and USA operations. Thank you for listening in. Operator, we are ready to open the Q&A session.

[Operator Instructions] We have one question coming from the line of Johan de Bruijn from 337 Frontier.

Just a few questions from my side. Osama, can you just reconfirm? You mentioned that you believe -- MENA margins, you stand by your previous guidance there, that they'll be in line with last year. I just wanted to make sure that's right. That would imply around about 12% MENA margin for the fourth quarter. Is that something that you guys think is achievable? If you could just confirm that. Second, and it's related to that, is around the -- I mean you've done -- you guys have done a fantastic job of winning new awards. I'm just wondering, given the obvious decrease in MENA margins that we've seen over the last few years and the ramp-up of new awards, just how selective can you be with those new awards. Are those new awards coming at the price of lower margins? Or do you think you can get back to the kind of high single-digit, double-digit margins that you've had in the past? So the third question, I'll just run through all the questions just so we get those out of the way, is just on dividends. At the beginning of this year, I think you paid an interim dividend and then a second dividend later in the year. Is that something that you're considering continuing on that path? And then finally, sorry to hog the call here, but can you just -- you had this big net cash position, but your net finance costs are still very high. And I know that you have various projects and various facilities. Is there not some way to make that more efficient, to use the cash more efficient so that your net finance costs aren't such a drag on the accounts? You would think that with such a big net cash position, that you wouldn't have a net finance cost. In fact, it should be the other way around. If you can talk about those few things, and then I'll hand over the call to others.

Okay. Well, I hope with all those questions, there won't be any other. Okay. I'll try to answer, and then probably Reham will fill in the gaps after me. First of all, on the guidance, if you recall, we have given an early guidance beginning of the year of a high single-digit EBITDA, if you remember that. And we have indicated this. And the 9 months results so far are -- for MENA is showing that, although there is decrease in Q3, but the overall 9 months are showing that. So we are confident that the entire year will be in that high single digit. Obviously, we are working hard to make it better. But we are also -- you need to appreciate we are fighting a wave of inflation and escalation, and that's a challenge for everybody. And I think -- and I'm confident that we are doing a reasonable job on that front. As far as the backlog and the profitability, first of all, I think a big chunk of the backlog jump was related to 2 things. One is the high-speed rail project, which made a considerable increase, and we hope it will make also another increase when we close the 1,800 kilometers, and the sizable contract in the data center space that was acquired by Weitz in the East Coast. So basically, there are 2 single events there which is -- which lies within our core competence. Actually, the data center business has been reasonably doing well in the U.S., and that's part of why the U.S. is performing. On the railway, it is -- I always believe that in infrastructure, when you have a business that is so repeatable -- I mean you are installing track for 660 kilometers. There is the -- I wouldn't say [ returns improved ], but the improvement in the efficiency allows you to maintain decent returns. So basically, we have not went crazy about acquiring business left, right and center. It is very much focused in areas where we believe we can deliver the returns we would like and gives us also the comfort that we are not under pressure as far as recovering backlog that has been eroded. I think there's -- the other question that I remember is about the cash, and maybe Reham would elaborate more than I do. But there is also a portion of our cash that is under joint ventures and it is left there. So basically, when we take a picture on September 30, there is some cash under joint ventures where it is not 100% under our control. And we cannot use that in order to -- as you said, to efficiently use the cash. Obviously, the Egyptian operation has certain overdraft, and we have been paying interest on that. So that's why you see the cash and you see the cost of money. There is a fourth question, if you could help me there.

It was just on the dividend. Is there a change in policy there?

No. On the dividends, there is no change in policy. We are standing behind that. But having said that, we have announced that we are in consideration of acquiring the service business owned by the family. We believe that this is complementary to our business and also expands our asset-light, reoccurring cash flow positive concept. We have submitted our recommendation to the Board. We are waiting for the Board to make a decision soon. Obviously, depending on that, there will be a decision whether we are able to make an interim dividend in January or not. But our dividend policy has not changed. But obviously, if we can use the potential dividend in creating more value to the shareholders, obviously, we will be doing that. But we are still hopeful that we will continue to do that, depending every time on what we do. So if the decision is positive by the Board, we will probably make another assessment in our March Board to have another interim dividend maybe and such. Reham, do you want to add?

Yes. Yes, I'm here. Building on what Osama has highlighted, we actually as a group benefit from very competitive interest expense on our facilities. I understand where you're coming from, where you see cash balances and yet you see interest expense on the outstanding debt. But as Osama has highlighted, a lot of this cash is at the JV level where we maintain this cash until the project is complete or near complete. And then at this stage, we take a decision with our partners and upstream the cash, and it's then available at the corporate level, whether to earmark to reducing the debt at the corporate level or paying dividends or investments or whatever. That's number one. The second thing is that since COVID in late 2019, early 2020, we have opted to build in a cash cushion at the group of -- ranging, over the past 6 quarters, from $30 million to $50 million to combat any risks and any liquidity issues that we might see as a result of the COVID situation. I hope this answers your question.

And our next question comes from the line of Nicholas Engel from Equinox.

Just one question on my end. In the third quarter results, you achieved $6 million of EBITDA from the U.S.A. business but $5.8 million of net income. And I was wondering if you could discuss why the delta there is so small.

Okay. Reham, do you want to take that?

Yes. Because of the taxes and there's -- as you know, there's always the benefit of the NOL that was carried forward. At the end of every year, we make an assessment of the taxes and what amount of the DTA assets to take. So therefore, looking at the quarter by quarter would not be very correct. Looking at it from a year's perspective would be more accurate and give more guidance.

[Operator Instructions] We have a question coming from the line of Brad Virbitsky from Equinox.

Two questions for me. The first is I wanted to get a little bit more clarity on your MENA margins. So you hope to have high single-digit MENA margins for the year. Do you expect your Q4 MENA margins to be higher than Q3 MENA margins? Or should we expect sort of further deterioration? And then can you give your outlook for MENA margins specifically next year and sort of what margins you're pricing into the backlog as you're bidding on new projects? And then I have another question after that.

Okay. Okay. The MENA margin, I don't believe that Q4, there will be a deterioration from Q3. Actually, there should be an improvement. But I think that the -- I personally try to look at the entire year. So the entire year on the MENA margin, we believe it will be the same as the 9 months or even better for the overall. And again, it is -- there are also timing issues as far as incurring inflation costs and recovering the escalation through the contracts we have. There is a delay when the indices are released and all that. It's a very complicated process. So that's part of what we're seeing right now. I think as far as the guidance is concerned, I believe we will maintain the same guidance for next year. Again, I'm hopeful that we can do better. But I think prudently, considering the inflation environment that we have, we will maintain the same guidance for the MENA. One thing that's important for us to consider, we are -- we have made a great job and some -- and a lot of risk mitigation for the new business that we have. Two very important factors is that we have escalation provisions that would allow us to recover maybe not 100% but a big chunk of the potential escalation that we're going to face. Plus the fact that we have embedded also a lot of currency pegging to the U.S. dollar. We're seeing some pressure on the Egyptian pound, and we wanted to be somehow hedged. And we have protection because that could be also another risk. So we are really much -- we are very much focused on risk mitigation and risk management considering the current volatility in the Egyptian market.

Okay. That's good to hear. Because it feels like we're in an environment where inflation might persist, and it's good to know that you're accounting for that in your incremental backlog. The other question I have is with respect to the potential acquisition of the Sawiris family business. Is that something that you would pay for in cash? Or would that be a share? I know you mentioned the dividend. So I'm assuming it's cash, but would you pay for that 100% with cash? Or would there be shares involved?

Okay. No, we will pay 100% in cash. Let me elaborate on that. In our shareholder base, the family members do not have equal shares while, in that business, they are equally -- they have equal ownership. So it was very difficult. I mean it was the easiest -- a rather easy structure is to pay in cash and get the business. And we believe that since we're using the cash to create more value, it will probably maybe offset one of the interim dividends that we started paying over the last couple of years.

[Operator Instructions] We have Zeyad Ahmed from Al Ahly Pharos.

So I have like a couple of questions. First of all, regarding the award momentum of the U.S. We've seen growth in the awards this year. Do you expect this -- like some of awards of about, I'd say, $1 billion or over in per year sustainable for next year and so on? And also, we have seen improvements in the margin in the U.S. at 2.2%. Would you believe that this would sustain in the next quarter and going forward? And yes, the last question is regarding the cost escalation and the inflation that's impacting margins in MENA region. How is this implemented or accounted for in the contracts themselves? Is this like cost overruns? Or why does it cause this pressure on margins?