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

Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Orascom Construction FY 2024 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Osama Bishai, CEO of Orascom Construction. You may begin your conference.

Thank you for joining us for the year-end 2024 results. I will just give you an overview of the business and the outlook forward. And then Reham, our CFO, will walk you through the numbers. And then we will expect to get any queries in the Q&A session. Basically, we're quite glad to see a good 2024. We have achieved a lot of the targets that we had announced at the beginning of the year. Basically, we are at a healthy record of backlog of $7.6 billion. And as we alluded several times in the different quarters that we are focusing on maximizing the foreign currency component on the Egyptian portion of the backlog. I think overall now, and Reham will confirm that, if we look at our backlog, foreign currency represents -- or U.S. dollars and U.S. dollar-denominated currency represent almost 80% of our backlog. On the construction side, we have been progressing on the execution side on acquiring quality contracts, whether in Egypt or in the U.S. The U.S. has been progressing very well in different areas and particularly the data centers and aviation. Egypt, we are progressing well on the infrastructure programs and on our EPC contract in the UAE. Outside the construction, on the concessions, again, to touch on Wave, Wave is a major target for us as far as our concessions program. And our target is to monetize on time, which is June 2026 of next year. So that's the completion of the EPC and going into commercial operation. And we believe that the progress of the EPC works is going on track so far. As far as our wind investments, as you all know, we had a 500-megawatt wind farm. We have commissioned 300 megawatts of that before year-end, in November of last year, 4 months ahead of schedule. And already, we are commercially selling power to the Ministry of Electricity as we speak. We have also added to that project another 150 megawatts. We have achieved financial close for that. And it's on schedule that we will complete the balance of the 500 and the additional 150 in Q3 of this year, thus coming to a total capacity of 650 megawatts. And we believe that 2026, we will enjoy a full year of revenues and dividends from the wind business. Other than that, we have -- we continued giving back to our shareholders. We have, during 2024, we have paid twice dividends, beginning of the year and in the second half of last year. And also, we have paid a dividend beginning of this year for the profits of 2024. So we are in a steady manner delivering on our strategy. We are focusing on performance excellence. We're focusing on discipline in contract signatures. And we have positioned ourselves in a good way to sign quality contracts outside of Egypt. And we have announced actually a couple of days that we signed a 3-giga power plant in joint venture with Técnicas Reunidas from Spain north of $2.6 billion. So we are focusing on the geographical diversification on the core competence that we currently have. We are also building on our power experience that we have created in Egypt over the last 10 years, and it's actually paying back. And actually, we're also focusing only on projects where we believe we create value because of our expertise and create better bottom line to our balance sheet. I will leave the floor to Reham to walk you through the numbers, and then we'll open the session for Q&A.

Thank you, Osama. Hello, everyone. So full year 2024 results displayed strong resilience despite challenging and uncertain environment. Our consolidated backlog, as Osama has alluded, is for an amount of $7.6 billion for full year 2024. This compares to reported backlog of $8.1 billion in full year 2023. However, 2023 backlog would have stood at $7.4 billion assuming a U.S. dollar-EGP rate of 50. And confirming on Osama's earlier note, 76% of our Egypt backlog is denominated in foreign currency. Consolidated full year 2024 revenue, resilient at $3.3 billion, decreased slightly by 3.3% compared to full year 2023 despite the EGP devaluation. Egypt accounted for 42.8% of total revenue; while other MEA, 68%; and U.S.A., 50.4% in full year of 2024. Adjusted EBITDA increased 13.3% year-on-year to $158.3 million with margins improving from 4.1% to 4.9%, reflecting stronger margins, as previously indicated, across MEA and U.S.A. Adjusted net income stood at $117.3 million, in line with the levels achieved in full year 2023. Our investments and subsidiaries in building materials, equipment services, facility management and concessions accounted for 28% of group's net income for full year 2024. BESIX also continues to display improved results, contributing a total of $22.6 million of net income compared to $11.2 million last year. Now focusing on quarter 4 2024 results. Revenue decreased by 6.7% year-on-year to $935 million in Q4 of 2024. Revenue in MEA increased 15.1% in Q4 of 2024 despite EGP devaluation, while revenue in the U.S.A. decreased by 25.6% year-on-year for quarter 4, impacted by the slowdown in commencement of new projects that is anticipated to accelerate in first half of 2025. While gross profit remained resilient, EBITDA reported a decrease of 20.1% year-on-year to $38.9 million in Q4 of 2024, but recognized an increase of 13.3% year-on-year to $158.3 million in full year of 2024. EBITDA in Q4 2024 was impacted by one-off expenses of $20 million attributable to the MEA region. If these one-offs were excluded, then EBITDA in quarter 4 of 2024 would have increased 20.9% year-on-year to $58.9 million, and EBITDA margin in MEA would have stood at 7.9%. U.S.A. also demonstrated positive results, delivering an increase in EBITDA margin from 3.3% to 4.2% in Q4 of this year compared to -- and from 2.5% to 3.4% in full year of 2024. Net income attributable to shareholders decreased by 29.2% year-on-year to $31 million in Q4 of 2024, but was impacted by the $20 million in one-off expenses as well. In quarter 4 2024, BESIX contributed $9.3 million to the group's net income compared to $3.8 million in Q4 of 2023. On the balance sheet side, equity accounted investees amounted to $450 million, majority of which is BESIX for $417.3 million. The group total equity slightly decreased to $647.5 million as of December of 2024, reflecting dividends declared and distributed to shareholders of $43 million during 2024 and $24 million of declared in December and distributed in early Jan of 2025 and currency translation related to group subsidiaries operating in Egypt. These were partially absorbed by the net profits for 2024. At the working capital level, our Q4 of 2024 cash inflows from operations is $391 million and $641 million for full year 2024, resulting from a combination of strong billings, improved collections and advanced payments. Trade and other receivables increased to USD 1.4 billion compared to December 2023 level of $1.3 billion generated from strong progress on site and billings in both MEA and U.S.A. Trade and other payables reached $1.5 billion compared to $1.44 billion in December of last year, reflecting optimized liquidity utilization and strategic working capital management. And the gross debt level stood at $313.2 million in December of 2024 compared to $249.8 million in December of 2023. And finally, the group is preserving a healthy net cash position of $728 million compared to $446.8 million in December of 2023. We are now ready for Q&A. Thank you.

Mark, we are ready now for Q&A. Have you received any by phone?

[Operator Instructions]

We received already a couple of questions on the webcast. The first question, what is a reasonable EBITDA margin for the U.S. business? It seems to be exceeding expectations, and I'm wondering whether current margins are sustainable.

So thank you for -- go ahead.

Go ahead, Reham. Go ahead. No, no, go ahead.

Okay. So we expect the U.S. margins to remain in line with full year 2024. The margin increase that we see is a result of select self-performance work on certain projects that we expect to continue.

Maybe to add to what Reham has just said, we have selectively created a capability, particularly related to data centers on the specialized electrical works to self-perform that with a specialized partner. So basically, that allows us to tap in on margins of what usually be perceived as subcontract works. And this is why we see an uptick on the numbers. So we believe this will continue. This not only creates an improvement on the numbers, but also creates an edge that would allow us to continue to expand in the data center space. And actually, this capability also could help us in other businesses such as the aviation and industrial work if we elect to do so. But today, it is pretty much helping us on the data center business that we are pursuing.

Our next question, what's the nature of the one-off expense of $20 million attributable to the Middle East and Africa region in Q4 2024?

Good question. So basically, the nature of the $20 million is a combination of 2 things: accruals and reserves that we feel makes our results prudent going forward.

I mean part of the accruals are related to the long-term incentive plan for employees. There has been an increase in the share value, and we needed to reserve for that early on.

Our next question is, why such a big cash balance? With such a big cash balance, why is there still a large net interest charge?

Okay. So basically, our cash -- gross cash is denominated in foreign currency, where our debt is mainly denominated in EGP for booked at the Egypt level where the interest rates are higher, of course, at a high level as we speak now. So that's why there is this mismatch.

So this is closely tied with another question we received, which is interest expense has grown in 2024 to $76 million by 49%. Yes, the gross cash balance has grown to over $1 billion. Why do you not redeem the expensive EGP debt?

Again, that's a good question. But basically -- and I think everybody have seen that in 2023. Basically, due to the fact that we have a larger size of our backlog and our revenues are in foreign currency, particularly in Egypt, we still have a big chunk of our expense. It is a natural mitigation of -- against devaluation. Obviously, we cannot speculate. We are obviously -- I mean this is part of our plan for 2025 is that we look into, in particular, this suggestion of trying to decrease or minimize the interest expense against some of the dollars that we currently have.

Our next question, we've seen a sharp increase in net cash position. What is the sustainable or target net cash position?

Well, that's, again, a good question, but it's not an easy one to answer because also it depends on the pool of projects and the stage that each of these projects are in. Conceptually, we believe that on a net cash basis, the level that we see is more or less in the $400 million range, similar to our previous quarters.

I think in addition to what Reham has just responded to, basically, we have a snapshot 31st of December. And that snapshot reflects the start of several contracts where advanced payments have been paid. That also reflects some strong billing and collection that are taking -- that took place in Q3 and Q4. And obviously, it's good payment plans that we have with our suppliers and vendors. So again, it's a snapshot that we take every quarter. There is no perfect cash. I mean perfect cash is infinity as far as I'm concerned. But we need to look into that, and [ big focus ] is strong billing with a focus on collection, good management of our payables and maintaining a healthy position. Today, it's -- we need to focus on our performance, and excellent performance is also -- is always supported by a strong cash position.

And our next question, what dividends should we expect for 2025?

I think we're trying to -- we will continue to be consistent as a minimum. If we feel that our operation is -- doesn't need the excess cash, we'll definitely bring back the value to our shareholders. But I would like to bring everybody's attention too that we will be committing equity for our wind business in the second half of this year as the business will come into operation and our equity bridge loans will expire. The same will go for the second half of 2026 where we'll get into operation in our Wave investment, and that also our equity bridge loans will expire and we need to put our real equity. So the cash situation is not only related to dividends. It's also related to our obligations that are coming in the second half of this year and second half of next year.

Our next question, I would appreciate your insights on the U.S. business under the Trump administration, particularly regarding government spending, imposed tariffs and immigration laws that may have an impact on costs. I'd like to understand how you view future margins from the U.S. in this context.

Well, part of the -- I mean I don't want to opine on politics here, but I'll tell you some observations. There is a push on AI and technology. So that would really help chip manufacturing, industrial investments and the continuation of buildup of data centers. So that's one side of that. We're also seeing foreign countries such as Japan, such as the Taiwanese chip makers looking at long-term investments in the U.S. Our friends from UAE were actually in the U.S. last week, and there was a big announcement of long-term investments in the U.S. So while there will be pressure due to tariffs, there will be pressure due to immigration laws, but also there will be a surge in investment. Construction always lags by a year or plus because when somebody decides to invest, by the time he spends the money and has permits to build, it takes a year to happen. But we don't see that it will have a pure negative impact. I think it will even out. We will see some difficulties in resources, in getting labor forces. But also, we will see extra investments and additional players coming in to build their facilities to be able to be labeled as made in America. So I don't see a pure negative there.

Our next question, can you give us guidance on margins in the Middle East and Africa segment going forward?

Well, we believe -- first of all, we are more focused on bottom lines, and that question addresses that. I mean we expect to grow, but bottom line is our -- and I believe there will be an improvement on the EBITDA and profits from the current levels. Maybe they could improve by, let's say, 10% to 15% from the levels we have today. But that's our target that we continue to improve, and we continue really to aggressively negotiate deals that will give us the right returns. And we need to acknowledge the fact that there are scarce resources in the region or, let's say, scarce availability of reliable contractors, and that's something that is, let's say, some tailwind on our side.

Any guidance on new awards in Middle East and Africa and U.S. in general? When do you expect to see some contribution from Ras El Hekma?

Well, actually, Ras El Hekma, we are currently working on several assignments or tasks. And we believe that it will start kicking in on backlog and revenue between Q1 and Q2 this year because we are working on some kind of an open-book approach. So by the time we define -- definitize the values and the numbers, it will take time. But that's already -- you will start seeing impact on that in the first half of this year and moving forward. There, most of them are fast-track projects. So probably most of them will end between 2025 and first half of 2026.

Our next question is on concessions. What's your guidance for concessions contribution to the bottom line in the medium term?

Reham, would you -- could you give a percentage of what we expect in the second half of '26 when we have Wave and all the wind farms operation?

Actually, we have -- or we're on track to achieving our 2027 target where the total contribution would be 15%.

From the bottom line?

$15 million of our bottom line.

Yes. I mean, basically, it's equity [indiscernible] dividends, correct?

This is with our existing pool of concessions without adding any additional concessions in the coming 1.5 years.