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

Good day, and welcome to the Orascom Construction H1 2022 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Osama Bishai. Please go ahead.

Thank you. Good afternoon, good morning, everybody. Welcome back to our results call. I hope everybody had time to enjoy a good summer. Today, we are releasing our H1 results. We believe that we have a steady progress on our revenues, even our revenues are increased 13% year-to-year. We're showing a slight decrease on our EBITDA and net profit, but that obviously is due to the current situation in the overall global market. Before we get into the details of that, we are happy to report that we are progressing well on our health and safety efforts regarding across the whole group. The U.S. are performing extremely well as far as the number of LTIs compared to the number of man hours consumed. The same for Egypt, particularly on the second quarter. Plus the fact that we are still progressing on projects that are related to the environment, such as Dammam Water Treatment Plant. And we are progressing on some other discussions related to renewables, and I will allude to that shortly. Going back to our numbers, we are still facing challenges as far as the market conditions let it -- I mean, between inflation that is not only related to Egypt. And also the slight or continuous devaluation that we're seeing on the Egyptian pound, and we are working diligently so that we manage any potential devaluation that may take place in the near -- in the coming future. A big effort has been made as far as price adjustments with our clients. And we believe that it will bear fruit, maybe if not in the second half of this year, it will bear fruit at least in the first quarter of next year. On the other hand, we're seeing our Building Materials group continuing to progress in a healthy manner. Obviously, because the selling price is very much updated, reflecting the additional cost due to the raw material and to the inflation in Egypt. And that was -- it was easily passed on to the consumers. On the U.S. side, we're seeing steady progress in spite of the inflation in the U.S., I mean, obviously, they don't have any impact due -- there is no devaluation there. There's only the management of price increases due to the raw material, which is partly being managed or partly being passed on to our clients. On the U.S. specifically, the contribution of backlog was quite healthy. They are progressing extremely well on the data center space and other projects. And the management of, let's say, issues such as price adjustments, claims and variation orders has been very successful so far as far as the first half is concerned. On the BESIX side, obviously, not the best results that we expected, but only -- but I think it is important to highlight the fact that it has turned to black the second quarter, and we believe it will continue like that. And also, they have -- they are enjoying a healthy backlog with quality returns. This will continue to be monitored. We are continuing to be engaged with management on a lot of details of the financial results. And I think we believe that the second half should be reasonable. There are also interesting pockets of upside, particularly in the area of real estate and concessions. And we will see that. I mean, they will obviously be booked once they happen, whether they happen this year or beginning of next year. We are focusing very much on a lot of other activities such as diversification, whether geographically or from activities. And you will be seeing a lot of that also bearing fruits in the next 6 to 8 months. The most significant development is that our 500-megawatt project has started on a limited basis. We expect to achieve financial close before year-end. And we expect that some mobilization will take place around the time of COP27, plus the fact that physical construction will start immediately after. So we are quite excited that this project will start. Maybe to remind everybody that we had a successful experience on the 250-megawatt that we codeveloped with Engie and Toyota. And it is currently producing power, and we're selling power to the Ministry of Electricity. So the 500 megawatts will be our second investment in the renewable space. And we believe that, that will be -- looking forward, it will be as successful as the first one. To go into the details of the numbers, I will just allow Reham, our CFO, to step in and share the numbers with all of you.

Thank you, Osama. Good morning, good afternoon to all. At a high level of our Q2 2022 results, our consolidated backlog marked a solid level of $6.5 billion, driven by new awards in data centers, water treatment projects and transportation. We continued solid revenue progress recording year-on-year 7.7% for Q2 of 2022 on the back of both USA and MEA operations. That said, we continue to see a tighter margin environment, especially in Egypt, due to recent geopolitical events and its effect on global inflation and supply chain disruption as well as devaluation of the EGP. Nonetheless, USA operations maintained same level of EBITDA margin and slightly higher net income margin for the [ result ]. Continued solid progress of our investment, building materials and equipment services subsidiaries by recording EBITDA margin of 24% and contributing to total net income an amount of $17.7 million for H1 of 2022, which accounts for 52% of total net income during the first half of the year. In quarter 2, BESIX contributed positively, as Osama highlighted, to the group profitability with an amount of $4.5 million, compensating some of Q1 losses. We also received a dividend of $5.3 million during this quarter. Q2 2022 witnessed a positive $88.9 million cash flow from operations compared to negative $250 million in Q1 earlier this year as a result of improved collection and BESIX Group. Moving on to a more closer look at our Q2 results. Our consolidated revenue for Q2 marked $934.9 million, recording 7.7% increase, bringing H1 revenue to $1.9 billion. MEA accounts for 68% of Q2 total revenue, reporting a growth of 4.4% during H1, which was attributable to positive contribution coming from recently awarded roads projects. As mentioned earlier, strong performance by our investments in Egypt subsidiaries, such as building materials and equipment services businesses. And third, the accelerated progress from other projects in MEA region, mainly wastewater treatment plant projects in [indiscernible]. USA recorded revenue growth of 15.3% year-on-year on the back of high backlog as of December '21 and some new awards achieved first half of this year, particularly in data center sector. This strong momentum in new awards has resulted in an increased year-on-year in backlog of the USA by 34%. Consolidated Q2 2022 EBITDA marked $42.6 million compared to $49.4 million in Q2 last year, generating a margin of 4.6% compared to 5.7% in quarter 2 2021. Our consolidated net profit for Q2 2022 recorded $20.8 million, with a margin of 2.2% compared to 2.7% in quarter 2 last year. Main drivers are MEA lower gross profit margin due to slower progress in high-margin projects during Q2 and the increase of raw material costs that negatively affected some of Egypt's construction and building material projects gross profit margin. These were partially compensated by positive margin change that took place in other Egypt construction and roads project. USA EBITDA contribution marked $3.6 million, in line with Q2 last year, margin of 1.2%, reflecting [indiscernible]. Positive contribution from BESIX and other equity accounted investees and higher financing costs in quarter 2 by virtue of higher overdraft balance and higher interest expense as a result of the rising interest rate environment globally. On the balance sheet and working capital side, trade and other receivables stood at $1.5 billion, marking a $47 million increase compared to December '21. This is despite higher collection, evidencing stronger billing discipline. On the other hand, trade and other payable balance declined from $1.5 billion to $1.37 billion. Contracts work in progress marked $904.1 million as of June, reduced significantly by $195 million from the $1 billion mark earlier in December of 2021. As a result of closing out on a couple of sizable Egypt-based projects, allowing billing and collections to follow during the second half of the year. Advances stood at $1.1 billion in Q2, a decrease of $279 million compared to December 2021 level. Our gross debt stood at $357 million as of June closing, reflecting a significant increase of USD 293.6 million over December closing of '21. However, net debt -- sorry, gross debt as of closing this quarter was reduced by $25 million over the closing of Q1 of 2022. The group still enjoys a healthy net cash position of $104.3 million compared to $37 million closing of Q1 2022, evidencing our ability to maintain the quality and support our operations. Lastly, our cash flow from operations for the quarter amounted to $88.9 million, partially compensating for Q1 deficit and moving towards the target of ending full year 2022 positively, similar to previous year's trend. Thank you all for listening in. And we now hand back to the operator to open the Q&A session.

[Operator Instructions] We'll take our first question from [ Ihab Khalil ] from [indiscernible].

Mr. Osama, can you elaborate about Amazon is building $5 billion data centers that we made. Do we have to participate in the bid for these centers? Or can you elaborate, please?

Look, in principle, on data centers, we are 1 of 4 certified builders in the U.S. for Microsoft. And it represents actually a big chunk of our revenues and backlog in the U.S. And we have the capability. And interestingly enough, some of the key players in managing this program are Egyptian electrical engineers that we have sent to the U.S. due to our capability on electrical works as -- in the Egyptian market. Obviously, we will be pursuing that bid if it is done in a, I would say, in a transparent manner or in selective -- they selected contractors, whether we do that alone or jointly with BESIX. I would like to highlight a very important thing in the business of data centers. The investment that is always announced includes a lot of the specialized IT equipment and also includes some of the equipment such as the electric -- such as the generators and the power supply and the refrigeration equipment, which is usually the likes of Amazon and Microsoft and Google have a global and worldwide agreement to get very preferential treatment. So the value of construction works that end up in such an investment is not, let's say, reflecting to the announced number. Not saying that this is not an interesting target for us, but it is also important that investors and shareholders have a perspective of the business opportunities.

What about renewable energy business in Egypt in the next 5 years, especially hydrogen? And Orascom can see -- Orascom as a local contractor for BigCommerce coming to Egypt?

Okay. I think we are probably the only Egyptian contractor who has developed or codeveloped a wind farm. This is the 250 megawatts that is currently operational, and we are selling power to the Ministry of Electricity. As I said in our introduction, we are rolling over another 500 megawatts that we will start construction in the last quarter this year. And as I said, we'll do groundbreaking or start physical work during COP27. And we will achieve, hopefully, financial close by -- around that time or shortly after. Obviously, we are looking at the renewable program very closely because we will be, again, the only local Egyptian company that is physically involved in the wind program. On the hydrogen side, I am sure you are aware that we are part of the consortium or the joint venture with our fertilizer sister company, OCI N.V. through Fertiglobe and the Norwegian Scatec that we are developing 100-megawatt hydrogen project to sell hydrogen to the ammonia plant owned by OCI N.V. Having said that, as a normal -- as, I would say, a serious player and strategic player in the construction market and particularly in that industry, we are actually talking to a lot of the developers. The current developers are, in reality, are having a very generic MoUs. The key issue for any project in the hydrogen is to have a serious offtaker, which we have on our project. And obviously, I believe that this is what all the other developers or investors are looking at to create or to establish an offtaker. We are basically talking to everybody because everybody considered Orascom Construction as a key player, not only on the renewal, but also on the hydrogen side. And by the time the other projects will be coming into play, we will be very advanced in our 100 megawatts, and we will probably have -- we'll be one of the rare contractors in the region with the experience in executing that.

[Operator Instructions] We will take our next question from Karim Sawabini from Moon Capital Management.