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

Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orascom Construction Full Year 2023 Results Conference Call. [Operator Instructions] I will now turn the conference over to Osama Bishai, Chief Executive Officer. You may begin your conference.

Good afternoon, and good morning, everyone. Welcome to our 2023 and results call. Maybe I'll give you a bigger outline of what we have done in 2023 and our targets for 2024 from a strategic point of view. And then Reham, our CFO, will give you the detailed numbers, and then we can go to the questions and answers. 2023 was a challenging year for us, but we have consistently followed our plans and our strategy, which have proven successful, and that really created a solid basis for our entity to progress well in 2023 and to position ourselves in a good way for the coming challenges. On the construction side, we are enjoying a healthy backlog, whether in the MENA region, particularly in Egypt or in the U.S., and that's a testimony for the performance and delivery that our construction operation has been doing over the last few years. We have been able to successfully acquire healthy contracts funded internationally with balanced terms and conditions. The same in the U.S., we have continued to diversify our activities between infrastructure, aviation and data centers. So we are quite happy with the [ LT ] backlog that we have today. And that gives us the luxury that we become selective in any additional business that we acquired over the next months. On the performance side, the construction operation has delivered reasonable returns in particularly in Egypt in an environment where we were struggling with the dual pricing for the foreign currency, a very high inflation. But again, we have been able to deliver under those circumstances. If we go to the concessions, 2023 marks an important milestone on that road. We have closed our second wind farm 500 megawatt and construction is underway, and we're ahead of schedule. And we believe that by the end of this year, half of the or the first phase of that wind farm will be operational. And then beginning of the third quarter, 2025 with operation, the balance of the wind farm. The other important milestone on the concession side, we have been able to successfully get awarded the seawater treatment plant in Abu Dhabi, where we're selling water to ADNOC for the purpose of their of oil out -- ejecting them in the oil wells. This is -- this contract really has several folds. Number one, it's a major step for our concessions. Number two, it reflects our leadership in the auto business. And number three, it's another diversification from -- for our business. By the end of 31st December, now 11% of our backlog is in GCC countries mainly doing, which is a step forward for the geographical diversification we're looking at. Last but not least is our successful capital allocation strategy. We divested mature building material assets, creating a healthy gain after tax of more than $50 million. But using that, we have been able to bring back to our shareholders almost $50 million in dividends, and we acquired through a share buyback, 5.6% at also a very attractive price of $3 per share. So basically, 2023, why a challenging year, we have been able to bring value to the shareholders and deliver on all fronts. I would like to have Reham maybe walk you through the numbers, and then we go to the Q&A.

Thank you, Osama. Hello, everyone. First, at a high level, for our Q4 2023 results, our consolidated backlog is sustained at of $8.1 billion, driven by strong new awards in Q4 with an amount of $1.9 billion, split 66% in Egypt and the balance in the U.S.A. Even assuming the dollar EGP rate of 50, backlog is still at a record level of $7.4 billion. Year-on-year revenue figures remain distorted by EGP devaluation against the dollar that commenced in H2 2022, with an average exchange rate of [indiscernible] for the period compared to 22.6 same period last year. Excluding the deval impact, revenue would have reported a slight increase of 3.6% year-on-year. Our investments in subsidiaries and building materials, equipment services, facility management and concessions continue to contribute in a positive manner and collectively contribute $24 million year-to-date in December 2023 or 20.5% to the net income of the year, excluding contribution from and capital gains related to divestments in quarter 2 of 2023. Positive cash flow from operations for Q4 2023 is USD 302 million, concluding the year with positive cash flow from operations for a total of $211.6 million, which does not include the proceeds from the divestments occurred in Q2 of 2023. Positive cash flow from -- sorry, moving forward now, we'll have a closer look at quarter 4 2023 results. MEA revenue decreased 33.4% year-on-year, mainly due to the EGP demand. Excluding the EGP deval effect, MEA operation dropped 10.1% year-on-year, impacted mainly by the completion of existing projects and lower contribution from Building Materials sector following the divestment. We expect our large foreign currency-denominated projects to start towards the end of the year and beginning of next year. U.S.A reported a solid growth of 26% for Q4 of 2023, triggered by the acceleration in newly awarded projects, mainly mission-critical projects that commenced in quarter 3 of 2023. The group reported a consolidated EBITDA of $48.7 million with a margin of 4.9%. Excluding EGP deval effect, group EBITDA would have increased to $57.7 million compared to $50.1 million in Q4 last year, generating a margin of 4.9% compared to 4.5% in Q4 2022, enhanced by higher margin achieved from commercial products. Consolidated net profit margin before minority dropped from 5.7% in Q4 2022 to 4.4% in Q4 2023, impacted by higher finance costs as a result of a higher overdraft balance to finance Egypt's operations coupled with the higher interest rates on foreign currency denominated debt. Most of this debt is related to projects in Egypt, new completion and most new large projects are funded by international institution and denominated in foreign currency. In quarter 4 2023, USA net income boosted by $6 million from the increase in DTA observed the result of management latest projections of taxable income. In Q4 of 2023, BESIX also contributed $3.8 million to the group profitability, leading to a total contribution of $11.2 million for year-to-date December 2023 compared to $19.9 million last year. On the balance sheet side, equity accounted investees amounted to $464.7 million, majority of the BESIX investments of $419.7 million. The group total equity increased to $689.1 million as of December 2023, mainly driven by the net profit for the period, however, impacted by a reduction of reserves as a result of currency translation differences. Dividend declared and distributed to shareholders for $51.9 million. And lastly, treasury purchase of treasury shares for a total amount of $19.5 million, which were constant and reduced from the share capital and share fee. It's worth noting that another dividend of $0.19 per share, amounting and totaling to $20.9 million was distributed on February 22nd of 2024. Looking at our working capital, trade and other receivables retained at the same level of December 2022 of $1.3 billion, backed by strong billings and collections in MEA and U.S.A. in addition to advanced state to supplier subcontractors or newly awarded projects. Trade and other payable balance of $1.4 billion, same level as of December 2022 balance. Gross debt stood at $249.8 million as of December, despite slightly higher than last year level of USD 212 million while lower than the level of debt closing in quarter 3 September 2023. The group is preserving a healthy net cash position of $446.8 million compared to $325.7 million in December of 2022. We now open the Q&A session. Thank you.

[Operator Instructions] We currently have no phone questions at this time, but we do have one webcast question.

So our first question, could you please provide some color on concessions contribution to revenue and EBITDA margins going forward? What would be a normalized EBITDA margin for concessions?

First of all, concessions, once they operate, they will be dealt on the equity method because we are not a majority on all of our concessions. We're -- on the wind, we're, I think, between 20% to 25% shareholder on the projects in the Emirates were ending up with 17% due to the fact that ADNOC themselves at 51% and the rest is shared with our partners. So we believe that we'll be seeing starting '25, '26 and '27, an increase of, you can call it, dividends coming back from those 3 concessions, the 2 wins and the water project. We will probably hit in '27 around $15 million of net profit on the overall. Obviously, we are continuing to expand in this activity, we are discussing. We are one of the entities that signed a global agreement with the Ministry of Electricity for 3 gigawatts of wind. We believe that this year, we'll start our wind drilling. So that's a potential increase beyond the current 3 concessions that we have. Also, we understand that there are more in the pipeline in the UAE, and we are well positioned now to look at those. I hope this answers that question.

Our next question is, congratulations on a great set of results. What do you expect the impact from the EGP devaluation to 50 to be on revenues and net income?

Well, interesting question. On the revenue side, since we still have a portion of our backlog is in Egyptian pound, we believe that the backlog will shrink a little bit, reflecting the deval for that portion, plus the fact that we believe that, number one, our overall overdraft in Egyptian pound will decrease. And there will be a windfall due to the current currency, foreign currency reserves that we have, plus the fact that we have a healthy portion of our revenue will be in foreign currency. We do not know the exact amount because the relationship between the dollar and Egyptian pound has been varying over the last week, and it will only be clear when we close the books on the 31st of March.

On the same topic, can you provide us some guidance on the balance sheet implications of the recent EGP devaluation?

So basically, the effect of that would be an FX gain on the income statement side for, of course, at the one quarter of 2024, but as well on the equity side, there will be a hit on the reserve for the translation difference.

Our next question, would you expect a change in working capital structure and cash conversion cycle in light of growing awards from the U.S. business?

First of all, the U.S. business has been providing dividends from the U.S. operation to the headquarters. They did that last year. We received $23 million as dividends, and we expect to get the same or even a little bit more this year. So obviously, that is providing a healthy upstream of cash to the operations. We are -- we will be considering what to do with this capital, whether to -- I mean, a main action will take is that we will provide -- we will consider dividends and the decision will be taken in the AGM next May.

Our next question, do you have any idea of the contract attention of the Ras El Hekma development? Are you bidding for work in Ras El Hekma and El Dabaa any size of the total awards there?

Okay. I think Ras El Hekma is a little bit on the early side. I don't know if the UAE developers have already took over the land or not. I'm not aware that they are already present. But on the other hand, we believe that we will get -- we will be a recipient of our fair share of the business. Orascom is perceived as the high-quality fast track contractors. I think the developers of Ras El Hekma would like to deliver early products to the market, whether it's on the real estate or on the tourism side, and they would like to show a robust developing plan. And we believe that we can be one of the entities that will benefit from that, and we will serve them well to deliver this. I mean, we have done that with Emaar. We have done that in other contracts. And I don't see why that -- any reason that we will not take a reasonable share there. We are not participating on El Dabaa program. We're quite busy with our transportation and infrastructure business, and we focused actually more on diversifying our business geographically. So we're not involved in El Dabaa. But on the real estate side, we are very selective. We're only working for Emaar and Silver Sands or Ora. And I believe that Ras El Hekma is a potential client for us once they have boots on the ground and get started.

Our next question, could you please give us guidance on the execution in Middle East and Africa and the expected EBITDA margin taking into account the latest devaluation?

I think it's too early. The devaluation took place last week. I would -- we would be more confident responding to that in -- when we release Q1. We are currently actually reassessing our budget because of the change in exchange rate. You have also to appreciate that most of our contracts have a provision for price escalation and price adjustments. And Egypt have shown quite a high inflation rate in January and February. So that also will affect the compensation amount that we will receive due to the price changes. So I think we'll be able to give you better guidance in end of Q1, but we are quite confident that we will deliver healthy results.

Our next question. Any updates regarding B6? What is the outlook for them in 2024?