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

Good day. 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 First Quarter 2024 Results Conference Call. [Operator Instructions]. I'd now like to hand over the call to our first speaker for today, Osama Bishai. You may now begin the conference.

Good afternoon and good morning, everybody. We welcome you to the Q1 2024 Results Call. I'll be making a quick introduction, and then I would allow Reham, our CFO, to go through the numbers, and then we will be accepting questions and queries either by call or through the web. For Q1, we have achieved a revenue of $766 million with an adjusted EBITDA of almost $38 million. Our adjusted consolidated backlog after the evaluation that took place on March 6 of this year, it's $7.3 billion and if we add our share in BESIX, the pro forma backlog is $9.9 billion as of 31st of March 2024. We have secured the OC level, slightly more than $600 million worth of additional awards split 60-40 between the MENA and the U.S. and BESIX also added for our share slightly shy of $900 million in Q1. BESIX as a standalone, their backlog is EUR 4.8 billion and the new awards of EUR 530 million. We also got an approval yesterday from the Board and the Shareholders to make our second dividend for this year, which is $0.2 per share. We feel that we have been progressing in a steady manner over the last few years to create some strong fundamentals that would allow us to navigate the challenges of this construction market in the region, particularly in Egypt over the last few quarters. We are also proud of the positive progress in our U.S. business from both on the top line and the bottom line and the backlog. And we are trying to convert our U.S. business to become a niche contractor where they have specialty, capability and particularly in data centers and the aviation sector. On the concession side, there is considerable positive progress on our Wind Farm, the 500 megawatt. We believe we are on time to deliver power for the first phase by the end of this year, and construction is progressing reasonably well. And the construction is progressing on our Water Treatment Project. In the Emirates with ADNOC also in the right direction while it's a little bit too early to start seeing real progress as far as the construction itself. This is an EPC where design is really today is the critical path and procurement. And then eventually, we'll see boots on the ground in a big way. We are still monitoring a decent pipeline in Egypt, in Saudi and the Emirates and the space. We are also very much focused in the, particular in Egypt on internationally funded projects as it will allow us to have access to foreign currency, which is definitely needed in the current environment. As I've mentioned before, we're still adamant on committing to the shareholders to provide value. And while we have provided over the last maybe 18 months, almost 3 dividends and the share buyback. We're continuing our commitment, and we are offering a dividend of $0.2 per share. That will probably be disbursed sometime in July. I would like to hand the mic to Reham to walk you through the numbers and then go ahead with the Q&A.

Thanks, Osama. Hello, everyone. So, at a high level, for our quarter 1 2024 results, our consolidated backlog has maintained a new record levels of $7.3 billion, fully reflecting the deval of the Egyptian pound. New awards for the quarter stood at $609.5 million, split 58.9% and MEA and the balance in the U.S.A. Revenue recorded a slight decline of 4.8% year-on-year to $766 million in Q1 of 2024. Excluding the deval effect, revenue would have reported a slight increase of 2.7% year-on-year. Our investments in subsidiaries in building materials, equipment services, facility management and concessions accounted for 36% of the group's net income. Net income for this segment was driven by our equipment services and steel fabrication subsidiaries. BESIX contribution with an amount of $0.6 million in Q1 of this year compared to a USD -0.1 million in Q1 last year. And now, moving on to a closer look at our Q1 financials. MEA revenue decreased 19.7% year-on-year, mainly due to Egypt devaluation. We are ramping up for several large projects, so, that will start contributing in H2 of 2024, most of which are foreign currency denominated projects. USA operations witnessed a consistent growth of 13.9% year-on-year on higher contributions from specialized sectors, including data centers and aviation projects. The group reported a consolidated adjusted EBITDA of $37.8 million compared to $35.5 million in quarter 1 of last year, generating an adjusted EBITDA margin of 4.9% this quarter compared to 4.4% for the same quarter last year, impacted by one-off non-operating expense of $7.3 million. As such, adjusted EBITDA margin in MEA improved to 7.2% for the quarter from 6.5% same quarter last year, and adjusted EBITDA margin. The U.S. operations also maintained the improved performance from last year and recorded adjusted EBITDA margin of 3% in Q1 2024, up from 1.8% in Q1 2023. Consolidated Q1 2024 net income and its related margins increased from $36.1 million at 4.5% margin to $46.1 million at 6% margin, driven by operational performance in addition to our financial management explained and highlighted on previous calls. On the balance sheet side, our equity accounted in this deal amounts to USD 449.7 million, the majority of which is DIFC for $414.5 million. The group's total equity decreased to $670 million as of March 2024, primarily impacted by further reduction of reserves as a result of the currency translation differences of the group's subsidiaries operating in each and by the dividend declared and distributed to shareholders of $20.9 million. These were partially absorbed by the net profit for DIFC. Concerning our working capital, trade and other receivables slightly declined to $1.2 billion compared to December 2023 level, impacted by the Egyptian deval and backed by strong billing and collection in MEA and U.S.A. Trade and other payables balance reached 1.17%, down from $1.44 billion at December as a result of the Egyptian deval compensated by advances received for newly awarded projects. Our gross debt stood at USD 213.6 million as of March, lower than the December level of $249.8 million, and we maintained a net positive cash position. Thank you for listening in, and we now open the Q&A session.

[Operator Instructions]

We received our first question through the webcast. Congratulations on a very strong set of results. U.S. operations have been doing extremely well recently. Are you able to upstream cash from there? And if so, by how much? And what are your plans for the U.S. business as the markets will not recognize this value.

Well, thank you for the kind words. We have upstream $23 million last year from our U.S. operation. And we are working on upstreaming the same amount or maybe $1 million more. This year, we have already up-streamed a quarter of that in Q1. So, that's actually continuing. Obviously, when we continue showing positive cash coming from the U.S. to the holding, I think the market will eventually because the fundamentals are correct, and we are converting this business to become a niche business, value will be recognized.

Our next question, could you please shed some light on the expected Middle East and Africa and U.S. margins going forward and the nature of the one-off expense? You're also currently having a hefty net cash balance. Are there any new investments you are looking at?

Okay. On the margins, we had indicated last year that we are having the right trajectory as far as the margins are increased. And this quarter shows our EBITDA levels are going in the right direction. So, I think we will continue with that trend. The one-off expense on the G&A, it is a reflection of the improved stock price cost for the LTIs or the options to the increase. So, that has to be accosted and it's a onetime because we have adjusted that moving forward. So, you won't see that again unless the share comes to be at $10 per share. So, that's something nice to have. The cash balance, there are 2 things. #1, we have been receiving some advances for projects that just have started. So, obviously, we have to perform. And some of that cash will be used to start the project, spend money on the projects until the projects start to provide revenue of this cash flow. On the other hand, I'm sure you are aware, we are also building up ourselves. Next year, our bridge loan for the 500 megawatts will be due sometime in summer. And the year after our equity also due for the project in the Emirates will be due. So, we are building up cash gradually for those investments. And, obviously, we would like to have maybe some cushion if an opportunity that comes for a concession or for an investment that makes sense to our shareholders and the business. On the buyback, we have done some last May. Obviously, if we find the right, let's say, tranche or opportunity, we'll do that. And also that we will weigh whether it's a buyback or an additional dividend. I mean, we're yet to see, what we're seeing that there are several shareholders that are not willing to sell at this price level.

Our next question, can you shed some light on hikes and income taxes?

Well, the income tax went up because we have more profits, that's close without saying, but I kind of don't understand really what's the question.

Can you elaborate on this question in terms of where do you see these hikes?

Yes. Okay. It's on the web. So, we might give a follow-up e-mail.

Our next question. Are you involved in discussions around Road to Hikma? You're an ideal candidate given your work and reputation both Egypt and UAE, how big can you share be? Any details you can share?

Well, actually, Road to Hikma, we are all aware that their land will be handed over as we speak. I believe that the developer is still polishing or putting down their master plan. They need to do some surveying, some investigation. So, I think it's a little bit too early. But we feel very confident that we will take our fair share. We have been very successful with [indiscernible] in Egypt and actually the critical projects that they have were awarded to us. Again, we are the contractor that delivered a lot of fast-track projects, and we understand that the Road to Hikma developers are looking at some of the projects that are fast track, and we believe we are well positioned to do that. It is very difficult to determine a share because we don't know the size of the investment, let's say, in the first 1 or 2 years, but I think we will have a reasonable share there.

So far we haven't received any more questions. We'll give it just a few moments.

Well, I mean, unless we have something that we have overlooked, we're not receiving any questions. We say in Arabic that silence is satisfaction. So, I'm sure you're all happy today. We have a question.

Our next question is, what is the potential for unlocking value from your investments in BESIX?

Well, actually, we believe that this is an ongoing discussion with our partners of BESIX. We believe they have the right mindset to create value to the shareholders. This is a long-term process, and we believe that we are on the right track to do that. We are adamant as far as we are concerned to create value to our shareholders, whether from this asset or any other asset.

Also on BESIX, our next question, is there any update on the operation of BESIX?

Well, the operation of BESIX for this quarter, I mean, obviously, in winter and the first quarter usually is a low level activity as far as the numbers are concerned. But they are in the black for Q1. We believe that they have been successful to align quality contracts moving forward. We believe that this year will be also a reasonable year. And the target that we're seeing with management is that 25% will come back to our normal previous levels.

Our next question is, can you give us any guidance for the projects currently under study and potential new awards for the coming quarters?