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

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

Good afternoon, good morning, everybody. Welcome to our end of year conference call. Obviously, once we were preparing the results and getting ready for our Board and announcement, I believe that the world has changed a little bit between now and then. But nevertheless, I would just give you a quick snapshot of what happened in 2021. And Reham, our CFO, will go through the numbers. And then we'll allow the Q&A because, obviously, I fully appreciate that everybody wants to address a lot of queries due to the events of the last 48 hours in Egypt and also the current global events. 2021 was a challenging year. It was a continuation of the COVID-19 saga. Nevertheless, we felt that we sailed in a steady way over that year. We had, obviously, to address a lot of things, including, particularly in the second half of the year, some inflation and price fluctuation issues. Let me start, let's say, first, with our safety record. Our track record numbers in 2021 has improved drastically compared to the 2020 numbers as far as the lost time accidents were compared to the number of manhours consumed, whether in the U.S. or in Egypt and MENA region. We have also addressed a lot of our -- particularly on the projects that is financed by financial institutions. We have met most and all of the environmental targets that the funding institutions demanded, which is, I wouldn't say challenging, but it's a work in progress on a daily basis, particularly in Egypt. And we continued our efforts on the social responsibility across the board, and we are proud of that program. Going back to the business. I think the main issues that we need to address is that we ended up with an impressive $6.1 billion of backlog, that gives us some breathing space considering the current world issues and issues in both markets we are working in. We have achieved slightly more than $3.5 billion of consolidated revenues with an increased EBITDA and an increased net profit from what we have achieved in 2021. More importantly is that we had an impressive quarter as far as collection. And we had a good positive cash position of more than $400 million by December 31. I think that the achievements we did during the year, which basically we completed major projects and particularly in the water space and in the U.S. in data centers and the fact that we're able to secure strategic projects like the high-speed rail, like particular data centers with large-size dollar value has proven that the performance and the efficiency of the group has led its partners and clients to continue to work with us and provide business that created the current backlog that we have. On the BESIX side, I think BESIX in the last quarter turned to the black. We feel that management has already put their hands around all their concerns and their issues. And also, they have ended up with a staggering $4.9 billion of backlog in Europe and the Middle East and in Australia. So we are looking forward to have that BESIX to continue to perform, obviously, with the new challenges that are set in the market in 2022. Significantly, our Investments and Building Materials business has performed very well in 2021 and had a significant contribution to the total net profit, reaching up to 19% of that. And we will continue to support that business. We believe that it will continue to give value to the group. And that number includes the concessions and the building materials and our investments outside the construction business. Last but not least, there are a few comments that, obviously, are related to the current situation. Our policy of dividend has not changed. We will continue to assess the fact that we continue to do a dividend twice a year. We elected to consider that in light of the current market conditions in the world and in Egypt. We will make a formal statement on that in May where we have our general assembly. We don't need any formal actions to do this interim dividend. But our policy is still the same. And we believe that lack of any unusual events, we should be continuing that trend. The other hand is that, obviously, the changes in the global market due to the current events in between -- I mean in Russia and Ukraine has affected dramatically a lot of commodities, particularly the steel, the cost of energy, which will affect some of our vendors and suppliers in Europe. And we'll definitely have a spillover on Egypt, both on the inflation and on -- impact on raw materials such as rebar, plus the fact that this will definitely have an impact on the cost of fuel. We are protected to a certain extent due to the provisions that we have in our contracts that have escalation formulas and provisions that would allow us to be able to come back to the -- to our clients with the impact of these changes. Nevertheless, these provisions are related to indices and has timing issues. So obviously, the real impact of that will only be clear to us by Q2 and Q3 of this year. We are looking at this in a very, very close manner. We are managing it very closely. We feel that we have weathered several devaluations in the past, over the last maybe more than 20 or 30 years. But I think everyone has its own challenges because it's -- it could be a momentary impact. And it could also have a much longer term effect that, obviously, it's not quantified at the moment, not by us, but even by a lot of other people because it's -- we are still waiting to see the global events and its impact on all the markets and particularly Egypt. Then I will leave the floor to Reham to go ahead and share with you the numbers for 2021.

Thank you, Osama. Good morning, good afternoon. Going through our full year 2021 results, we would like to highlight a few points at a high level: continued revenue drop on the back of record backlog in both MEA and USA; stable consolidated margins year-on-year for full year 2021 will have improved net income generation despite higher raw material cost environment; solid performance of our Investments and Building Material subsidiaries, showing material improvement, contributing 19% of our total net income in 2021 compared to 15% in 2020 and achieving higher EBITDA margin of 24% versus 17% in 2020. USA marked the second year of positive contribution to the group with improved EBITDA and net income margins. BESIX returned to profitability, regaining confidence that losses on certain projects are behind us. Positive operating cash flow of $201 million for full year 2021, marking a 45.6% year-on-year increase. Now moving on to a closer look at 2021 results. Our consolidated revenue for Q4 '21 recorded $1 billion, showing 7.8% increase year-on-year. This is mainly driven by MEA Q4 revenue, recorded $717 million, marking a 20.5% year-on-year increase and accounting for 72% of the total revenue for Q4 compared to 64% in Q4 of 2020. Egypt operations contribute 97% of MEA. U.S. revenue had a 14.9% decrease over Q4 2020 level. This is a result of closing out and conditions on a number of projects ended 2020 as well as lower new awards that was experienced in late 2020 and early 2021. However, EBITDA increased significantly to $8.7 million from $1.8 million a year earlier. As highlighted in Q3 call, this trend has already reversed starting Q2 '21 where USA awards for full year 2021 totaled $1.6 billion, marking a 72% increase over last year level. These developments bring our total revenue for full year 2021 to $3.5 billion, reflecting a 5% increase year-on-year. Consolidated Q4 EBITDA marked $58.1 million and $204.4 million for full year 2021, reflecting a 22.3% increase compared to Q4 of 2020 and a 3.3% increase compared to full year 2020, generating stabilized margin of 5.8% for both Q4 and full year 2021. MEA EBITDA margins dropped to 6.9% for Q4 '21 compared to 7.7% in Q4 of 2020, mainly to higher progress and lower margins contributing projects for the quarter. USA, on the other hand, experienced an increase in Q4 EBITDA margin of 3.1% in Q4 of '21 as compared to 0.5% in Q3 of 2020 as a result of new higher margins contributing projects. That brings the total EBITDA margin for the year to 1.9%. Net profit in Q4 '21 increased 43.2% year-on-year to $37.1 million and 24.8% year-on-year to $113.4 million in full year 2021. This reflects a margin of 3.7% and 3.4% for Q4 of 2021 and full year of 2021. That is positively affected by solid continuous progress in MEA, USA higher net income contribution, BESIX return to profitability, generating a net income of $10.7 million for the quarter, SG&A stable with a slight improvement to a level of 5.4% in 2021 compared to 5.5% in 2020. On the balance sheet side, equity accounted investees recorded $426.4 million, the majority of which is BESIX for $388.9 million. This is in addition to smaller investments like Orasqualia, Weitz and the Building Materials Group. For the group working capital for this quarter, trade and other receivables stood at $1.46 billion, marking a $10.8 million decrease compared to December 2020 level. Despite strong collections in Q4 of 2021, receivable balance experienced a slight decrease only, driven by solid [ progress and billing ] during the quarter. This is matched with trade and other receivables balance of $1.5 million. Contracts work in progress marked $1 billion as of December '21, that is above December '20 level by $245 million, matched to the increase in advances by $275.1 million in December of 2021 compared to Q4 of 2020, recording a total advances of $1.36 billion in December 2021. Q4 reflected the strong collection evidenced by cash flow from operations of $316 million for the quarter and $201 million for the full year of 2021. Q4 gross debt stood at $64.1 million as of December '21 closing, reflecting a decrease by $51 million over December '20 closing, while our net cash position for the year-end December 2021 increased to $441.6 million. Thank you for listening in. We are now ready to open Q&A session.

[Operator Instructions] We will now take our first question. Your line is now open.

This is Nour from Arqaam. And congrats on strong results. I have 3 questions, if I may, if we can take it one by one. My first question on awards. Can you give us some guidance on how the market is developing into 2022 and expected awards into the year?

You are referring to future awards?

Yes, in 2022. Yes.

Actually, that's a good question. We feel that we have a pipeline that is very clear to us. There are specific projects that are particularly related to the transport of the business in Egypt and to data centers and some specific recurring clients in the U.S. We believe that this is, let's say, in the pipeline. I need to, let's say, be patient on Egypt side. There could be some delays because we are meeting here with the government that could have slightly different priorities. But nevertheless, I mean, it's -- we're talking about projects like [indiscernible] road improvements, bridges. So these are specific projects in the pipeline, in their plan that we are confident that we'll have our decent share of that. Obviously, our target is to -- I wouldn't say maintain a top record backlog, but I would like to focus and make more emphasis on quality backlog where we have even further provisions to protect our business from the current market volatility. But we would like, always, to keep in the MENA region at least 18 to 24 months ahead of us. And in the U.S., we have already more than a year and thus, we want to maintain somewhere between 10 to 12 to 14 months ahead of us. We have that right now. It will give us also the confidence that we don't need to put ourselves in a situation where we compromise to be able to fill the backlog. But we are quite confident of what we're seeing right now. We see that between now and maybe the next -- by the end of the next -- the second quarter, there will be additional work added to our portfolio.

Right. Okay. And can you give us some color on what to expect on the margin side given the inflationary pressures and the recent depreciation in Egyptian pounds?

Well, this has happened less than 24 hours ago. So it's a challenging question. If I knew how to answer your question, I should have been doing other things right now. But no, let me give you some color, maybe not on the margins, but on the situation. Particularly on Egypt, we are seeing a few things. Number one, there is a commodity volatility that is -- some of that, I believe, is temporary. There is a clear inflation that will -- that is taking place and will continue to take place, and obviously, there is devaluation. On the devaluation, from our side, it's not all negative because there will be a portion where we have foreign currency income with Egyptian pound expenses. So we believe that it could be a wash or could be -- there would be some windfall. So [indiscernible] very pessimistic on the outcome of that. But I think it's literally on that side to be able to give proper guidance that we can stand behind because of the volatility and because also it's very dependent on how long the global events will continue to take place. You need to -- I mean, obviously, you appreciate that Ukraine and Russia is providing a big portion of energy to Europe. Where it will affect the cost of energy for a lot of our suppliers, not only raw materials, it's essentially for our transformer manufacturers, our pipe manufacturers in Europe and others, who are today, at this moment, are unable to even to commit to certain -- to provide offers or proposals because they have a very big question mark on the cost of energy. So it's not really just us. I think it's the entire market to have -- let's say, they need -- we need some certainty so we're able to commit to a solid number.

Right. I just remember last year that you guided for a slightly lower margin because of inflationary pressure. Should we expect the same for 2022? Should we expect the trend to continue?

Look, I mean, obviously, I hope not. But it is a very premature situation as we speak. I mean it's -- you obviously know that the steel rebar prices are fluctuating. And actually even the vendors are not honoring delivery schedules. But I think that if some of the global events calm down and disappears, there will be a major reverse of the trend, which would obviously -- could bring us back to some kind of normality. But today, your guess is good as mine.

Right. Right. Okay. My last question on dividends. Can you guide us on when should we expect an update on 2021 dividends? I see that free cash flow is very strong and net cash position is very resilient. So when should we expect an update on dividend?

I mentioned that in the statement. We have our general assembly on May 19, so we will confirm that. Our trend and the discussion with our Board is along the same trend that we have indicated in the past. But we have elected that we needed to confirm that by May, again, in order to see where are the current conditions taking us and, let's say, payments for the Egyptian government and all the related market events, how they would affect our business. So -- but we are not retracting from that -- from our position that intend to give money back to the shareholders.