Earnings Call: H2 2024

Mar 26, 2025

Summary

FY 2024 adjusted EBITDA rose 13.3% to $158.3M, while the $7.6B backlog supported 2025 EBITDA-margin guidance of 5%. Wind and WAVE projects are advancing, with cash generation and capital commitments shaping shareholder returns.

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Osama Bishai, CEO, Orascom Construction. You may begin your conference. For joining us for the year-end 2024 results. I will just give you an overview of the business and outlook forward, and then Reham, our CFO, will walk you through the numbers. Then we will expect to get any queries in the Q&A session. Basically, we are 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. As we alluded several times in the different quarters, 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, represents almost 50% 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, in particular 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 is the completion of the EPC and going into commercial operation. 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, four months ahead of schedule. We already 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 is on schedule that we will complete the balance of the 500 and the additional 150 in Q3 of this year. That is coming to a total capacity of 650 megawatts. We believe that 2026, we will enjoy a full year of revenues and dividends from the wind business. Other than that, we continued giving back to our shareholders. During 2024, we have paid twice dividends, beginning of the year and in the second half of last year. Also we have paid a dividend beginning of this year, for the profits of 2024. We are, in a steady manner, delivering on our strategy. We are focusing on performance excellence. We are focusing on discipline and contract signatures. We have positioned ourselves in a good way to sign quality contracts outside of Egypt. We have announced, actually a couple of days, that we signed a three gigawatt power plant in joint venture with Técnicas Reunidas from Spain, north of $2.6 billion. We are focusing on the geographic and 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 is actually paying back. Actually, we are 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 will open the session for Q&A. Thank you, Osama. Hello, everyone. Full year 2024 results displayed a 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 Egyptian rate of 50. Confirming on Osama's earlier note, 76% of our Egypt backlog is denominated in foreign currency. Consolidated full year 2024 revenue resilience at $3.3 billion, decreased slightly by 3.3% compared to full year 2023, despite the Egyptian devaluation. Egypt accounted for 42.8% of total revenue, while other MEA 58%, and USA 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 USA. 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 concession 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. Focusing on quarter four 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 Egyptian devaluation, while revenue in the USA decreased by 25.6% year-on-year for quarter four, 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-off were excluded, then EBITDA in Q4 2024 would have increased 20.9% year-on-year to $58.9 million, and EBITDA margin in MEA would have stood at 7.9%. USA also demonstrated positive results, delivering an increase in EBITDA margins from 3.3% to 4.2% in Q4 of this year 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 Q4 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 investments 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 declared in December and distributed in early January 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 $1.44 billion, compared to December 2023 level of $1.3 billion, generated from strong progress on sites and billings in both MEA and USA. 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. At a gross debt level, stood at $313.2 million in December of 2024, compared to $249.8 million in December of 2023. 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 synced me by phone? Yep. For the question and answer session, if you would like to ask a question during this time, just press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. 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 am wondering whether current margins are sustainable. Thank you for- Go ahead, Reham. Go ahead. No, go ahead. Okay. 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. Basically, that allows us to tap in on margins of what usually be perceived as subcontract works. This is why we see an uptick on the numbers. We believe this will continue. This not only creates an improvement on the numbers, but also creates an edge that will allow us to continue to expand in the data center space. 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 is the nature of the one-off expense of $20 million attributable to the Middle East and Africa region in Q4 2024? Good question. Basically, the nature of the $20 million is a combination of two things, accruals and reserves, that we feel makes our results prudent going forward. 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. Our gross cash is denominated in foreign currency, where our debt is mainly denominated in EGP, booked at the Egypt level, where the interest rates are highest, of course, at the high level, as it is now. That's why there is this mismatch. 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 is a good question. Basically, I think everybody has 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 against devaluation. Obviously, we cannot speculate. 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 have seen a sharp increase in net cash position. What is the sustainable or target net cash position? Well, that is, again, a good question, but it is 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 net cash basis, the level that we see is more or less in the $400 million range, similar to our previous quotes. I think in addition to what Reham has just responded to, basically, we have a big snapshot, 31st of December. That snapshot reflects the start of several contracts where advanced payments have been paid. That also reflects some strong billing and collection that took place in Q3 and Q4. Obviously, it is a good payment plan that we have with our suppliers and vendors. Again, it is a snapshot that we take every quarter. There is no perfect cash. I mean, perfect cash is infinity as far as I am concerned. We need to look into that and this is a strong billing with a focus on collection, good management of our payables, and maintaining a healthy position. Today, we need to focus on our performance, and excellent performance is always supported by a strong cash position. 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 doesn't need the excess cash, we'll definitely bring back the value to our shareholders. I would like to bring everybody's attention to 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 get into operation in our WAVE investment, and that also our equity bridge loans will expire and we need to put our real equity. 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, 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. That will really help chip manufacturing, industrial investment, and the continuation of build-up of data centers. 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. 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 the margins in the Middle East and Africa segment going forward? Well, 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 10%-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 return. 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 tailwinds 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. By the time we define, definitize the values and the numbers, it will take time, but that already you will start seeing impact on that in the first half of this year and moving forward. Most of them are projects, so probably most of them will end between 2025 and first half of 2026. Our next question's on concessions. What's your guidance for concessions contributions to the bottom line in the medium term? Reham, can you give a percentage of what we expect in the second half of 2026 when we have WAVE and all the wind farms operational? Actually, we have or we're on track to achieving our 2027 target, where the total contribution will be 15%. From the bottom line? 15 million of our bottom line. Yeah. I mean, basically it's equity methods and dividends, correct? This is with our existing pool of concessions, without adding any additional concessions in the coming year and a half. Okay. A question back to Tal. Is there any more color on the recently announced EPC contract in Saudi Arabia? OC share in the EPC contracts and start dates and execution horizon? Well, I think it was clear in the press release. We are a 50/50 joint venture with Técnicas Reunidas. The contract is north of $2.6 billion, so basically, we have 50% share of that. This is a three gigawatt power plant. Obviously, it is taking much longer than the ones that were done in Egypt. I think it has to do with the supply chain limitations that are currently in the market. The contract that we have includes some intermediate milestones, but it is a 3-year contract. So we expect that to be executed over around, I think, 44 months, if I'm not mistaken. But the majority of the work will be done between 36 and 40 months. The beauty of this contract is that it's almost a replica of what we have executed with Siemens in Egypt. This time, the clients with ACWA Power have selected GE as the supplier of the turbines. But again, these are identical turbines to ones that we installed for Siemens. So for us, it feels like a repeat of what we have done in Egypt a few years ago. Our next question, when should we expect updates on Sidra Medical Center? As we have indicated, we are expecting the results of the arbitration to be the second quarter of this year. We might sense some further delays. I mean, I don't know. We are aware that this is the states or the neighborhood that we are talking about. We don't have neither a color or a flavor or any expectations of the results. Our next question, congrats on a set of strong results. Account receivables as a percentage of sales stand at 44%, which is below the average of last year's. Could we expect improvement in cash collections to be sustainable? Well, actually, this is a function of our pool of projects in our backlog, and its type and contractual structure. Given that, like we said, the interest-based contract is mostly foreign currency denominated and the private sector composition is higher, and it has earmarked financing from financial institutions, we believe that this trend will continue. Our next question, what is the driver of the 23% increase in SG&A expense? This includes partially part of the $20 million one-offs that we referred to, and part of it is the LTI program that Osama has alluded to. We have another question that is related to the one before. Could you give us color on working capital dynamics, given the latest improvements in cash collection cycles? Yes. As we said, we believe, given the quality of our backlog, we will continue to see improved and normalized working capital going forward. And this has been an effort that we were consciously working towards over the past 2.5 to 3 years. Another question on Ras El Hekma. Just a quick follow-up. Can you give us more information regarding the expected contribution to revenue and backlog? Are we talking major contributions such as $1 billion-plus or something closer to $500 million? Also, what is the status of the high-speed electric train in Egypt? Okay. On Ras El Hekma, it is very difficult to quantify that in billions. We will see a few hundreds of millions, and I do not know exactly the timeframe. We are basically getting, so far, specific tasks on fast-track basis that would help jumpstart and launch the project in a speedy manner. Obviously, if you do a couple of hundred million dollars in one year, it is like $600 million in a normal lifespan of a project. So it will have an an impact on either a quarter or a year. We cannot determine the long-term impact, because this is like any real estate project, it is a huge number of several projects between hotels and residential units and infrastructure. They will not be developing the entire area at the same time. Again, it is a good flow of business for us. We believe that it will create a decent annual, let us say, intake of orders and business. I do not believe it is a game changer because, at the end of the day, it is real estate. The biggest thing will be there will be if there is a huge 300-room hotel or this, which we have not seen yet. I think most of them are still working on the final or the overall master plan and getting it internally approved and obviously approved by the Egyptian government. So that is on that. On the high speed, the portion that is currently working full speed is the green line, which is almost 600 kilometers between Sokhna Port, going through close to Cairo, north to Borg El Arab, and then west to Marsa Matruh. The construction of the rail is progressing. We are actually having almost four to five crews working in different areas. There will be delivery of trains very soon. I think we are looking at somewhere between 18 to 24 months to start seeing a real operation of that line close. The other section of the agreement, which is what they call the blue and red line, which is between Cairo and Abu Simbel, and then stretching from Qena to Hurghada and Marsa Alam. I think our share, which is the rail and the delivery of trains, will get started very soon. We are expected to achieve financial close for the financing part of the ETC plus X program, I think by the early of the second half of this year. Once that, you will see real progress on the ground. The government, which is the Ministry of Transport, is progressing on the infrastructure on the blue line, relatively in a steady pace. Our next question, given the positive turnaround in the ETIC business, can we expect cash dividends paid to Orascom to return to historical levels of $20 million to $30 million? I think that's the intent. We have been discussing with management cash dividends, and we will be receiving something this year. We have a board on April 1st, and that will be decided then. The principle is agreed. It's just the amount. We expect in 2026, we return to the historical values of cash dividends. Our next question, could you please provide a breakdown of a gross cash balance of $1 billion? How much of the cash is tied up in projects and what portion is held as treasure? Typically, we don't break down our cash balance. However, it's important to note a few things. First of all, 90% of this cash is dollar-pegged or euro currency denominated. Secondly, this is a combination of the cash for advances for the projects or billings and collections, and typically upon project completion, the possibility is released to the corporate level. Our next question. My understanding is that 100% of Orascom Construction's Egyptian pound overdraft has historically been raised exclusively to finance overdue payments from the Egyptian government. Given the shift to EPC contract financing from international banks, when should shareholders expect this expensive form of debt to decline? A lot of our foreign currency denominated projects still incur local EGP denominated costs. We are long in foreign currency in our cash balances, and it's a continuous assessment that we do on quarterly basis on running of this exposure. Our next question. Have the majority of the inflation adjustments to EPC contracts in Orascom's favor been recorded in 2024 results, or should we expect more of these adjustments to accrue in 2025? No, I think the price adjustments, they have a process, which is basically the contract that has escalation formulas. We submit those impacts based on the release of the indices by the Egyptian government on monthly and quarterly basis. So basically, what's included in 2024 are probably an average of 10 months or maybe 11 months of impact of escalation during that period. And we will continue to submit for 2025 the related escalation impact. The escalation in 2023 and 2024 were quite substantial due to the nature or the level of inflation numbers that were released by the government. We believe those numbers will decrease in 2025 and will decrease even more in 2026 if the trend of inflation continues the same as it is now. Our next question. The current cash position is $728 million, which is higher than the value of the company. How does the group intend to unlock value for shareholders, and has there been any plans to unbundle any part of the business? I think it's important to look into that. I think when Reham was responding to the results, we need to put the highlight on several things. First of all, there is part of this cash are the joint ventures, where the joint ventures are technically, I wouldn't say independently run, but they are run separately from the treasury part. We deliver from those joint ventures on monthly basis G&A back to the company. And obviously once we reach a certain level of completion and we are able to comfortably release dividends, we do that. Part of that cash is really under joint ventures such as the high speed, some of the metro projects, a portion of Abu Qir, where we are working with Colas Rail from France. That's one thing. The other thing is the projects that are 100% under our control, where we said that there are advances. Obviously the advances will not be used to fund the dividends. We have strong billings, and as I said also, we have commitments in the second half of this year and second half of next year to fund our equity in the wind program and in the WAVE program in the UAE. Considering all that, let me reiterate, we are maintaining our position on steady dividends, but also if we realize that we have excess beyond that to be able to share with the shareholders, we'll definitely do that. We did that in 2023 when we had the sale of one of the assets. Not only we have made the share buyback, but we made an early dividend release in October of $30 million. That's part of our agenda, and we'll continue doing that. And a follow-up to this question as the second part. Is there any plan to unbundle part of the business? As we said, we will not oppose any opportunity to create value to the shareholders. We need to have the right opportunity. The different aspects of the business are doing well. Obviously, if somebody comes with the right price tag, we will definitely entertain that. Other than that, we won't. My next question, do you see Egypt's backlog dropping to less than 50% in the future? Can you repeat that, Sham? Do you see the backlog in Egypt dropping to less than 50% in the future? This was asked in the context of the growth and projects outside of Egypt. No, actually, our long-term view, we would like to see a third of our business in the U.S., a third our business in the Gulf, and a third our business in Egypt. Obviously that's a target for us. But again, we are subject to the availability of good quality contracts, whether in Egypt or outside. Egypt grew last year because there was a couple of projects that are internationally funded with high quality, such as Abu Qir Metro, the rehabilitation of line 1. These are funded by EBRD, European Investment Bank, international competition. We were able to fetch decent price levels. We look at the opportunity and assess it, but our long-term view is that we would like that Egypt backlog should be in the neighborhood of give or take of third of our business. What is your guidance or target for EBITDA and bottom line for 2025? Well, given As I mentioned before. Sorry. Go ahead. Go ahead. Okay. Basically given our quality backlog, as we have said, and the quality of our clients, some key masters, we believe that for 2025 guidance at the EBITDA level, we will be in the 5% range, where the U.S. will be more or less maintained at the 3% similar to this year, and MEA will be in the range of 7%. This, of course, will trickle down to net income. We have no further questions through the web. Have any been received by phone? There's no question at this time. I will now turn the conference back over to Osama Bishai for closing remarks. Osama? Well, thank you very much for this engagement in our results. We are very bullish for 2025, and we look forward to meet with you again. I think our next results will be released for Q1 and probably towards the end of May, in a couple of months. Thank you. That concludes today's conference call. You may now disconnect.