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

Thank you for standing by. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Orascom Construction Half Year 2023 Results Conference Call. [Operator Instructions] I'd now like to hand you over to Osama Bishai. You may now begin the conference.

Thank you. Good afternoon, everyone. Welcome to our H1 2023 call. It has been a very interesting quarter for us. We have continued our steps towards executing our strategy. Number one, we have extracted value from what we consider mature assets and created a windfall for the shareholders doing that. And that has been an ongoing discussion for quite a while, but has been materialized in Q2 this year. The second main event that we had, we made a share buyback for a tranche of the shares equal to 5.6% at an interesting value, again, technically giving back value to the shareholders, which we have been doing for quite a while. And we believe that this was done during an opportune time for us. The other event also is that we continue to focus on our strategy by investing our cash flow into concessions where we create construction opportunities and also recurring value. And this is demonstrated by the award of the project with ADNOC in May. And in addition to that, the progress of our second wind farm is quite impressive. We're quite ahead of schedule, and we believe we can even deliver power earlier than the target [ schedule ]. Going back to our operation. We have maintained our backlog from this quarter -- from the first quarter. We are still focused on high-quality projects where we are bringing the right returns to the to the business, plus the fact that we would like quality contracts where we are mitigating risks, whether in the MENA region or in the U.S. On the operational side, we continue to deliver progress on site. And because of the nature of the contracts that we have, they enjoy a decent portion of foreign currency, where the foreign currency offsets a big portion of the inflation and the escalation that we face, particularly in our Egyptian operation. It is worthwhile mentioning that most of our contracts also has adjustment formulas, where they compensate the indices issued by the government for the inflation. Unfortunately, this is -- has a time lagging effect, where this is -- always happens between 3 to 5 months later than the event itself. But again, I think all in all, we feel that we are managing the headwind in Egypt reasonably well. On the other hand, BESIX has performed reasonably well. They continue to add a decent backlog every quarter, plus the fact that this quarter, they have turned to the black. And that's -- and the same for our U.S. operation, they are still performing in a healthy manner, achieving the backlog and the awards as planned, with the relative profitability that we can see that we can get in the U.S. One of the other things that we are very proud of is our steel fabrication yard work is actually today locking and almost its entire backlog geared for export for steel fabrication for EPC contracts in the MENA region, in Europe and the U.S. I think I can hand over to Reham, so if you can walk you through the numbers and then we move to the Q&A.

Thank you, Osama. Good morning, good afternoon to all. And actually, Osama highlighted, this was quite an eventful quarter, which included many of the achievements Osama just mentioned on the call, we have reported a set of results that highlight our ability to extract value across our matured assets and reallocate them to activities with higher shareholder returns, such as the share buyback and concessions. We also saw resolution and the final ruling issued in favor of the group in relation to the legacy claims brought by the Egyptian Tax Authority. In this quarter -- quarter's financial statement [ Indonesian ] liability was formed, which was subsequently paid to an Egyptian development fund. Going through our quarter 2 2023 results at a high level, our consolidated [Technical Difficulty].

I believe we lost Reham. If you give us a couple of minutes, please. She'll be back on. Thank you.

Hello, everyone. Apologies, I just got disconnected. Yes. So going through our quarter 2 results at a high level, our consolidated backlog, excluding BESIX, is maintained at a consistent level of $5.5 billion, in line with Q1 2023 and slightly higher than Q4 2022 level. Year-on-year revenue figures remain distorted by the [ EGP ] value against the U.S. dollar that commenced in H2 of 2022 with a higher average exchange rate of 30.5 for the period compared to 18.3 same period last year. Revenue for the group decreased 18.9% year-on-year, diluted by the devaluation. Excluding the deval effect, revenue would have increased by 11.3% year-on-year. We expect large foreign currency denominated projects to start towards the end of this year or latest beginning of earlier [ next year ]. It is worth noting that while the EGP deval has impacted revenue and EBITDA, year-to-date, our deliberate favorable foreign currency position has had a positive impact on our net income. Our investments and subsidiaries in building materials, equipment services, facility management and concessions continue to contribute in a positive manner and collectively contributed $11.5 million or 20% of our net income for H1 of this year, excluding all one-offs. In Q2 2023, BESIX contributed positively with an amount of $6.5 million, owing to solid performance in concessions as well as construction in Middle East and specialized activities. We also received a dividend of [ $10.9 million ] during the quarter. Q2 2023 reported cash outflow from operations of [ $53.4 million ] mainly pertains to advances paid to suppliers and subcontractors for newly awarded projects while maintaining strong collections in both MENA and USA. Moving on now to a closer look for H2 results. Revenue decreased 18.9% year-on-year, mainly due to the EGP deval or due to a dollar FX rate, went from 18.5 to 30.5. Excluding the deval effect, MEA operation reported a solid growth of 17.7% compared to a revenue decrease of 28%. Revenue in the U.S. was slightly higher at 1.8% compared to last year. EBITDA increased 2.7x to $115 million, with a margin of 15.2%. This was driven by the divestment of building material subsidiaries. Other income of $108.6 million is related to the divestment of 2 building material subsidiaries. SG&A expenses includes $15.7 million related to one-off items such [ Indonesian ] expense. Excluding these one-offs, EBITDA would have stood at $22.4 million at a margin of 3%. Net income [ tripled ] to $62.6 million in quarter 2 of this year, driven by the divestment of the building material subsidiaries, improved contribution from BESIX and foreign exchange gains due to the group's favorable currency net asset position. Excluding the one-off items above, net income stood at $20.8 million in quarter 2 of this year, in line with the level achieved last year. On the balance sheet side, equity accounted at [ BESIX ] amounted to $457.6 million, the majority of which is BESIX for $415.8 million. The group's total equity increased to $662 million as of June, driven by the net profit for the period, however impacted by reduction in [ reverse ] as a result of currency transition differences, the dividend declared and distributed to shareholders of $21.6 million as well as the purchase of treasury shares for a total of $19.6 million that took place in June. For our working capital, trade and other receivables stood at $1.4 billion, up by [ $17 million ] compared to December '22 level, mainly, as mentioned earlier, related to advances paid to suppliers and subcontractors for newly awarded projects. Trade and other payable balance declined from $1.48 billion as at December 2022 to $1.34 billion in Q2 of 2023 closing. Our gross debt stood at $267.8 million and in June closing, higher than December 22 level of $212 million, but declined compared to $302 million in March. The group is maintaining a healthy net cash position of $163 million compared to $104 million in quarter 2 of 2022.

[Operator Instructions] We have our first question coming from Mark Adeeb of CI Capital.

I just have a few questions, if I may. The first one is on MENA performance. So excluding the capital gain, and the performance was actually quite weak on the margin front and well below guidance. So if you can give us some color on like the performance that happened during this quarter and whether you're expecting some recovery during the second half of the year? Or how are they going to look like? My second question is on the legal cases. I understand that the case of the tax authority is now closed. But can you also give us some color on the other cases, specifically to [ their ] medical center? Is there any update or any amounts that we should expect like next year or this year? And my third question is mainly on the debt level. So excluding the sale of the assets and [ dividends ] from BESIX, should we expect the debt to rise further, going forward? If you can also give us some guidance on this.

Let me address the performance at MENA question first. Number one, we have a very challenging environment in MENA, particularly Egypt. Our contracts have adjustment formulas, which periodically, we get compensated based on the terms and conditions. But as I explained in my earlier statement, it is a lagging process. So basically, we have to perform for maybe 3 months, and then wait for the [ NDCs ] to be released formally. We include that in the formulas that we have, and we submit an invoice for the price adjustment, which is for work done almost 5 months ago. So that's the process. Again, there is also another issue that is not considered, which is, let's say, the upside or the windfall coming from exchange rates. The fact that we have managed to position ourselves to sign major contracts with decent foreign component, that also helps to address the challenging environment that we're working with in Egypt. Unfortunately, ForEx cannot be considered part of the EBITDA. So basically, this is operational cash. So I think we should always be looking at a global number of the bottom line, including the ForEx from the business, to see, let's say, the returns on the construction operation. And this environment will continue to be like that because we are facing two major issues in Egypt right now: Number one, the high inflation that we're still seeing on a monthly basis, plus the fact that, okay, the devaluation took place, but everybody is expecting another devaluation, and some of the costs are being perceived at -- let's say, people are using internal rates or other rates and their costs. So we cannot isolate the results of the operation from the ForEx gains that we have. So I think from our point of view, under the current conditions, if considering the ForEx, we believe we are getting the right returns in the construction market, considering what it is today. I believe it will continue to be going better once there is more stability in the prices or we continue to get the compensation of our price adjustments. We have to consider that there could be another devaluation whether this year or beginning of next year, which will again have impacts on both sides, whether positive and negative, it would lower our revenues when we have things in Egyptian pounds, but also could increase our bottom line for projects where we have foreign currency and expenses in Egyptian pounds. I don't know if I responded to that question, but I merely explain the situation that we have in the operating side of the business. As far as the legal issues on the tax case -- sorry?

So just to make sure that I'm getting this right. So for the second half of the year, we should expect pretty much the same performance as second quarter. Would that make sense?

Well, it also depends on how quickly we're able to collect price adjustments. So -- because basically, we book our costs, and then when the price adjustments materialize, it comes later. So I think we will continue as a group performing well. We might -- when we take a picture, a snapshot at the end of a certain quarter, we could overachieve or underachieve. So we just have to continue monitoring closely. As far as the legal cases, the tax case is closed permanently. As far as [ Sidra ], we believe the arbitration is still ongoing. We believe a decision may take place second half of next year. We still are unable to define, let's say, what we believe could be an outcome. Like any arbitration, there is many probabilities, and it will be misleading if we focus on one or forget the other. As far as the debt level, I mean, I would make a small comment, and I will let Reham comment on that. Our debt level is limited to overdrafts or let's say, the majority of that to overdrafts in Egypt, supporting the operation. And we are continuing to bring it down by collections. I mean the current level is much better than what it was in 31st of March. But nevertheless, it is still slightly higher than what we had in December '22. So that's a continuous target, we have to bring the debt level down. But other than the debt at the concessions level, this is strictly overdraft to support the operation. So it's a timing issue third quarter. Reham, please comment if you feel like.

Yes. Thank you, Osama, for that. [ I'm through ] and also, we look at it from a net cash position. And as Osama highlighted, we're more in line of first quarter of last year, although our gross debt has dropped compared to Q1 of this year as you appreciate [ technicality ] trend and the nature of the collection that varies across the quarters. We do build up another pattern throughout the year, which is normal and following our normal trend.

While we're on the subject, we received the question online that is along this, it asks how much of your gross cash is in foreign currency? And how much of your gross debt is in foreign currency?

Yes. So our gross cash, roughly 80%, a little bit under 80%, 78%, to be exact, is in foreign currency. From a cash perspective, on the debt side, 10% -- 8.5% of our debt is in foreign currency, while the delta is all denominated in EGPs. And as Osama has highlighted earlier, it's in the form of overdraft.

Ellie, any further questions to the call?

Yes, we do. We have another question coming from Nour Sherif from Arqaam Capital.

Just a couple of questions for me. On the outlook for awards, especially for Egypt, given the current macro environment. And if you can comment on potential dividends by end of the year.

I think we are well positioned for certain awards before year end, both in Egypt and the MENA region. In Egypt, we are only focused on contracts where it is funded by financial institutions, where there was an agreement to fund those contracts way back, such as Metro Line 4, which is funded by the Japanese government. There are a couple of projects where we are pursuing, where it's funded by the European Investment Bank and EBRD. So this is our focus in Egypt right now. We are minimizing any projects that are 100% funded by the -- let's say, by our clients, with the exception of 2 top real estate developers that are using our services, and they are willing to pay us the premium for that, and we have the right provisions to protect us against the current situation. And we are looking at several opportunities, particularly in Saudi. I mean we're not at liberty to give names of the projects because they're still under competition right now. So we feel comfortable with the pipeline between now and year-end. And we feel also comfortable that we will end the year with, I would say, a relatively comfortable backlog that keeps us ongoing in a safe math. Speaking about the dividends, it's our intention to make a dividend. We just have to start the process with the Board in a few and maybe a couple of weeks. And it's our intent to do that. We are just going to determine the exact value and the exact timing, and we will make a release on that very soon.

[Operator Instructions] It seems like we don't have any questions coming from the attendees. I'd now like to hand over to the management for the final remarks.

So we received a few questions through the webcast. The first one is, are the price adjustments for inflation retroactive? If so, implemented in Q4, would they account for billings in first 9 months?

As I mentioned on the price adjustments, I wouldn't call them retroactive, but they always reflect the past period. So if -- maybe to go into a little bit more detail so that everybody understands. For the, let's say, period between January and March 2023, the indices will be released maybe in May. We have to put our invoicing immediately after, and let's say, we get paid in June or early July. So you get in July for the period of the first quarter. And it continues like that, it's perpetual. And sometimes you get very high amounts because the work done in that quarter is quite big or you get very low amounts because the billing that's approved over that quarter is less. So that's the way it works. And as I said, we have to take a snapshot at the end of the quarter, and it depends whether we're able to put this number in that quarter or put it in the following quarter. But at the end of the day, if we look at the big picture, there is a big recovery of these additional costs and in addition to the offset by the availability of foreign [ cards ].

Our next question is, are there other subsidiaries or investments you are looking to sell?

Well, at this moment, there is nothing particularly in mind. But obviously, we will continue our path towards extracting value. We believe that the value of the company is completely undervalued. And we would like always to extract cash to support our further investments and to give money back to the shareholders.