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

Good day, and welcome to the Orascom Construction FY 2022 Results Conference Call. [Operator Instructions] And finally, I'd like to advise all participants that this call is being recorded. I'd now like to welcome Mr. Osama Bishai to begin the conference. Mr. Bishai, over to you.

Good afternoon, and good morning, everybody. First, I would like to wish the guys in the Middle East a Happy Ramadan and I know this is the first day of Ramadan, and probably we will have much less audience today compared to other calls. Let me first start that -- to start by -- Reham will run the numbers, but I would like to highlight a few things that we have actually achieved last year, and that puts us in a much better position for 2023. Number 1 is that our strategy to build a wind platform has been -- is going forward in very serious steps. We broke ground for the 500-megawatt wind farm in Egypt just before COP27. We are a shareholder of 25%, and we are the EPC contractor for rap other than the supply of the turbines. It's not a secret. We have achieved financial flows in the last few days. So this project is -- while has started in November, but it will be going full speed moving forward. For us, it's not only a project where we do a wrap up. We are establishing ourselves as a developer of wind farms in a very stable manner. We don't want to go to make major -- let's say, huge developments. We want to go steady, solid with the right returns and the right business model. So we are very happy with that development. The other thing also that it's important to highlight for 2022 is that we have commissioned the first demo for the production of hydrogen during COP27, November last year. The significance of that is that we created the skill set within the organization to understand and work and deliver the wrap up around the electrolysis technology from power to hydrogen production plus the fact that we are part of the development team, and we are working with our partners on the main investment, which is the 100 megawatts, where we'll be selling hydrogen to Fertiglobe, which is a subsidiary of OCI N.V. The other important thing also for last year is that we have concluded with the Ministry of Supply, a small logistics center where we are building, owning and operating that. It's not a big investment as far as our size is concerned. I think the total CapEx will not be more than $30 million. But having said that, it's, again, creating the platform for recurring income and investment associated with construction. And our contract, so that if anybody asks has all the provisions to protect against inflation and devaluation that is currently happening in each. We're very proud of the progress of our U.S. operation. They have progressed very successfully in the data center space. They continue to build units after units. The cloud business is still booming as far as the U.S. is concerned. We are creating major expertise in that field that probably will become handy for us, not only in the Middle East, but also in Europe for our partners BESIX plus the fact that it is considering a decent share of our revenue, backlog and bottom line, plus the fact that we are -- we have started working with consumer products, manufacturers and chip makers in the construction of their facilities, which is creating a specialty within our U.S. business that has -- that we believe that will continue to improve our bottom line. On another note, our Building Materials group is doing extremely well. They are contributing a decent share of the bottom line, and we are really focusing very hard on the controls and the governance of those subsidiaries in order to continue to have an impact on our balance sheet and our net profit. The other thing is that we have been working very hard as wearing the hat of a general contractor to create a pipeline of opportunities in the next coming months, in two areas. Number one, geographically. There has been a focus in the last 6 months on UAE and Saudi. Obviously, everybody is aware of the progress of investments in the construction sector or affecting the construction sector positively in those two areas. And we are trying to be selective because there is a lot of work, but we would like also to be able to receive work that is to make -- with quality terms and conditions and to protect our target returns. Plus the fact on Egypt, while everybody is probably concerned about the economy, there are projects that have international institutional funding, where those commitments have been signed way back. We believe we are in a very good position to be -- to take our fair share, and there are quite a few opportunities similar to those that are in the pipeline now, very much like the Metro Line 4 funded by the Japanese government. And obviously, we understand that there's a big chunk of that is really dedicated to the Ministry of Transport, where we are a very active player as a contractor with them. Coming back to BESIX. BESIX has delivered good results by the end of the year. What I think it's worthwhile highlighting about BESIX is that BESIX has three businesses. And obviously, we understand that every business is cyclical to a certain extent. BESIX has a construction group, has a real estate business and has a concession business. The concession business has a steady contribution to the bottom line. The construction group, let's acknowledge, it had challenges over the last 2 to 3 years. that had a negative impact even on the concession results. And the real estate is like typical real estate where every once in a while, we record the sale and the success of your development, and it has also a positive impact on the balance sheet. So the real estate has contributed to the good results of quarter 4 of BESIX, which is reflected in our numbers. We are confident that modestly, if we look at next year, that the real estate and the concessions will maintain their contribution, assuming the construction will be flat. So we are quite also positive about BESIX, and we believe that 2023 will be a reasonable year as far as results and contribution to us. So I mean, I kind of portrayed the current picture from, let's say, a high-level view and I would leave the floor to Reham to share with you the numbers in detail. And then after that, please feel free to send questions so that we can address your query.

Thank you, Osama. Good morning, good afternoon to all. So building on what Osama has just highlighted, and at a high level for a good Q4 '22 results, we would like to highlight a few points. Our consolidated new awards reached $3.6 billion year-to-date December 2022, retaining mainly to infrastructure projects in Egypt, in addition to commercial and data transit projects in the USA, in line with the strong level achieved last year. Consolidated backlog, excluding defects, decreased 13.4% year-on-year to $5.3 billion, reflecting further devaluation that took place in Jan of 2023. Total devaluation impact year-to-date is almost $1.1 billion. Excluding the deval impact, the backlog would be at $6.2 billion in line with the level for the previous year. Continued solid growth recording -- continued solid revenue growth, recording year-on-year of 12.4% for Q4 of 2022 on the back of USA growth of 50.5%, building year-to-date December 2022 revenue growth to 17.9% year-on-year with solid contribution from USA of 32.7%. EBITDA and net income for full year 2022 came in at $200 million and $114 million, respectively. Both of these are in line with the levels achieved last year. Full portfolio of subsidiaries across Building Materials, O&M and Equipment Services continues to record strong performance, recording double-digit EBITDA and net income margin, contributing 36% of year-to-date December 2022 net income. BESIX recorded another profitable year, with our 50% net income from BESIX, increasing 26.6% to a total of $19.9 million. The end of the year with healthy positive operating cash flow of $193.9 million, reflecting the group's continued focus on cash management and collections, net cash position closing of 2022 maintained at $325.7 million. And now moving on to a thorough analysis of our Q4 2022 results. Our consolidated revenue amounted to $1.12 billion in Q4 2022, up 12.4% year-on-year. MEA operations reported a decline of 2.6% year-on-year, impacted by the EGP deval diluting translation of Egypt's quarter-to-date revenue to PLC by $290 million. Excluding the deval impact, MEA's revenue would realize a growth of 38% year-on-year, driven by substantial achievements in Egypt goal on the back of the newly awarded project. Continued growth from other investments in Egypt, including building materials at Orascom Industrial Park formerly SIDC. This is accompanied by positive contribution from Orascom Services acquired in early 2022. As well as accelerated focus from other MEA regions, projects mainly in Saudi and UAE resulted in an increase of $16.3 million. USA reported a considerable drop of 50.5% for Q4 2022, owing to the strong new awards achieved in 2022, mainly from data centers and commercial projects. This generated a 17.9% increase year-to-date December 2022 revenue with solid year-on-year growth in MEA and U.S.A. of 12.8% and 29.9%, respectively. Consolidated Q4 2022 EBITDA was $50.1 million compared to $58.1 million in Q4 of 2021, generating a margin of 4.5% compared to 5.8% in Q4 of last year. This is triggered by MEA lower margins adversely impacted by inflation and supply chain reduction that consequently resulted in expansion of time and reducing project profitability. These were partially compensated by the accelerated progress in high-margin projects, positive margin change that took place in other Egypt construction and road projects and our other subsidies. USA EBITDA stood at $9 million, in line with previous year at 2.1% margin compared to 3.1% margin in Q4 of 2021. Consolidated net profit and its related margin increased from $37.1 million, at 3.7% margin, to $55.8 million at 5% margin. This is attributable BESIX highest contribution amounting to $26.6 million for Q4 of this year, versus $10.7 million of Q4 of last year, resulted from the major sales realized by BESIX revenue. It is important to remind ourselves that BESIX has sizable concessions and military operations alongside its main construction business as Osama has also highlighted in his intro. USA net income increased by $14 million from the increase in deferred tax assets observed the result of management latest projections for taxable income. FX gain of $15 million in Q4 of 2022 compared to an FX loss of $4.5 million in Q4 of 2021. These were slightly offset by higher finance costs as a result of higher over tax balance to finance each operations, coupled with higher interest rates as a result of the rising interest rate environment. On the balance sheet side, equity accounted in these recorded $462.5 million, the majority of which represents BESIX investment for $416.5 million. The group's total equity slightly increased to $691.3 million in December of 2022, driven by the net profit for the EBIT, materially offset by the reduction in reserves related to -- primarily to currency translation differences of the group's subsidiary operating release, where the function of currency [indiscernible]. During 2022, a dividend declared and distributed to shareholders of $27 million in addition to the disbursement of an additional $27 million for revenue declared in 2021. To be noted, as evidence of $21.6 million was declared subsequent to year end in Feb of 2023. For our working capital, it is important to note that cash flow from operations for 2022 was driven by a reduction in receivables and contract working book compared to 2021, which was driven more by [indiscernible]. Trade and other receivables stood at $1.29 billion, down $168.4 million compared to December '21 level, diluted by EGP deval of USD 499.7 million. Excluding the deval effect, the accounts receivable balance was increased by $288 million compared to December 2021. The resulted mainly from the reduction in underbilling balance to more USD 742.5 million compared to $1.1 billion in December '21, indicating the progress in billing process and accordingly collection, which resulted in better cash position. Trade and other payable balance declined from $1.5 billion in December 2021, to $1.4 billion for Q4 2022 closing, which was also diluted by EGP deval of $595.2 million. Excluding the FX impact, the balance increase resulted mainly from increase in safe payable compared to December '21 balance. Advances stood at $777 million at December 2022, excluding deval impact, the balance received [indiscernible] million compared to December '21 level as a result of final contracts for a couple of Egypt-based projects. Gross debt stood at $212 million in December 2022, higher than 2021 level of $64.1 million despite good collections, but lower than the level in Q3 of 2022 closing of $357 million. The group is maintaining a healthy net cash position of $325.7 million, significantly higher compared to Q3 of 2022. Net provision as a result of positive cash flow from operations for Q4 of $304.6 million, which attributed positive cash flow for operations of USD 193.9 million at year-end aligned with previous year. Thank you all, and we can now open the Q&A session.

[Operator Instructions] At this time there are no further questions. I'd like to turn back to our presenters.

Well, we're very happy that nobody asked any questions -- there's a question on can you please elaborate about the $69 million of FX gains in 2022 with almost $50 million only in Q4. What is the driver of this FX gain?

So on the income state and size for full year 2022, there is a total FX gain or net FX gain of around $15 million. And that's basically the assets being related to our balances, our receivables, our cash on the balance sheet for the different subsidiaries.

We've received a few more questions thorough the webcast. The first is why not pay a special dividend given that the cash balance is effectively equal to the market cap of the company.

I think -- I mean our strategy really is to maintain a steady policy to pay dividends to the shareholders. Obviously, if we believe that the excess cash that we have is not needed neither for the operation more for the additional investments we will definitely consider that. We believe that the picture portrayed on the 31st of December that the cash balance that we have. Number one, it is -- we are strategically trying to save foreign currency and use Egyptian pound overdraft to maximize protection against further devaluation. So we need to keep that for a certain time, plus the fact that we are embarking on the 500-megawatt investment. We are considering other investments in the wind space and others and not only in Egypt. Obviously, we will assess the situation in our board and -- when we release our Q1 results, and we will indicate the July tranche, which will be the first for [ 2012 ] for, let's say, '22 results, and we'll indicate that. Obviously, we would like to maximize shareholders' value. So we will -- if we are able to maximize the size of dividends to the shareholders by June, July this year, we definitely do that. Okay. We have a few more.

The next question is, are you worried about delayed payments from the government going forward, the likes of current economic conditions in Egypt. Thank you. Congratulations on the very good Q4 results.

Actually, I'm worried about a lot of things. I'm worried about the Ukraine war. I'm worried about supply chain. And one of the lists of -- my worry list is obviously the Egyptian pound payment. What I believe is helping us on that. Number 1 is that we have a decent portion of our work funded by international institutions and ECA. Having said that, obviously, the 100% -- work that we had that is 100% based by the Egyptian government. We are -- I mean, there's no secret about that. We are experiencing delay. And obviously, we're monitoring that very closely, but these contracts that we 100% in Egyptian -- are 100% in Egyptian pounds, I believe the Egyptian government has been maybe delayed, but they have delivered on paying Egyptian pound. I'll be very worried if those contracts with the Egyptian government that are not funded by the international institutions are in foreign currency, because that definitely would be a major challenge. But let us be clear, we are gradually trying to decrease our exposure to 100% Egyptian government contracts that are not internationally funded. Our experience over more than 50 years of work in Egypt is that the Egyptian government respects the contract that has an international institution that is paying whether 100% or a portion of the payment in the -- in that, let's say, to the contractors or to the service provider.

Our next question is, what is your expectation for new award growth in 2023, especially after the government decision to lower spending on new projects in U.S. dollars?

Okay, it is very difficult to put a number today because we have -- I have indicated in my statement that we are only focused in Egypt on projects that are funded by international institutions. There are maybe quite a few projects where the financial agreement have been signed way back such as the Line 4 Metro, which is funded by the Japanese government. This is an agreement that was signed way back. We have already one of our packages in that program, the mechanical work that is currently under construction. So there is another package that we are discussing with the, let's say, the national authority of France. There are public tenders with the Ministry of Transport where projects are funded by EBRD. These projects are going on, and we have verified that with EBRD, and they are committed to continue. Those agreements were signed maybe 4 to 5 years ago. So on the Egyptian side, we are strictly focused on guaranteed or funded projects by international institutions, which is something that we are used to do since the '80s. On the other hand, we are aggressively looking at Saudi, at Emirates, but we would like to be able to maintain our strategy to be selective with contracts that has a quality terms and conditions that is a balanced relationship with the client and that we are able to provide value, thus creating a better bottom line. There is a lot of that in the pipeline. It is very difficult to put a tag on that now because, like any projects, there are delays in the award. There are delays in the release of the tender package, but we are following that. We are quite confident that during this year, we will get our fair share of this business. It is important. We are very proud that we are one of the very few contractors that have the reputation to deliver on time, quality work and within budget. We are seeing that the brand -- our brand name is being respected and wanted in the region and which gives us the confidence that we can do that.

Our next question is, what are your expectations for revenues and EBITDA this year in light of further devaluation of the Egyptian pound, let's say possibly EGP 40 per dollar.