Earnings Call: Q3 2024

Nov 25, 2024

Summary

9M results featured an $8 billion backlog, higher adjusted EBITDA and net income margins, and positive operating cash flow. 2025 revenue is guided flat to up 5%-10%, with further bottom-line improvement expected, subject to currency and operating risks.

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orascom Construction 9M 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, again, press the star one. I would now like to turn the conference over to Osama Bishai, our Chief Executive Officer. You may begin. Thank you. Good afternoon, everybody. We are pleased to be here today to announce our nine months results 2024. Basically, I will provide an overall picture and then Reham, our CFO, will give you the details of the numbers. Basically, we have been progressing in a steady manner all over our activities. Mainly on the construction side, the different geographical diversified locations we have, and on the concessions. Regarding the concessions, we are happy to see the progress of our water projects in UAE with ADNOC progressing on the EPC level in a steady fashion. We are not seeing any delays or any concerns as far as the progress of the project is concerned. On the concessions on the wind in Egypt, we have progressed in a great way. The 500 megawatt that is currently under construction, we have already completed phase one, which is 250 megawatt, and currently we are running the reliability tests where we hope we complete that by the end of the month. This means that we are ready four months ahead of schedule. In addition to that, we have succeeded to sign with the Egyptian government and add on 150 megawatt on the same site. We are going to expand the 500 megawatt to become 650, making it probably the largest in Africa as far as wind farms are concerned. Again, our target is to have the 150 megawatt operational by next summer. On the construction side, we are having a healthy backlog. It is $8 billion between the U.S. and the Middle East. We are progressing well as far as our bottom line numbers, the EBITDA and the net profit. On the U.S. business, again, it is progressing in a healthy manner. Our backlog is healthy in the U.S. and we are, as we have indicated before, focused on data centers, the aviation sector, where we are able to improve our bottom line. Last but not least, BESIX has maintained a positive trajectory, a healthy backlog, and we believe that BESIX will be delivering the expected results by end of the year and obviously better for 2025. Two important issues. We are heading confidently in our diversification and soon we will be having projects in the MEA region to continue our strategy to diversify the MEA region and not to be dependent only on Egypt. The other thing is that it is our intention to, before year-end, we will announce a dividend to be paid to the shareholders in January 2025. Now I leave the floor to Reham so that she can walk you through the numbers. Thank you, Osama. Good afternoon all. First, I would like to take you through highlights of year-to-date group results. Our consolidated backlog marked the $8 billion mark, sustained by strong new awards of $2.6 billion year-to-date 2024. With a MEA/U.S.A. split of new awards of 53% to 47%. Quality backlog and operational excellence, allowing margin enhancement across the group with an adjusted EBITDA margin for nine months of 2024 of 5.1% compared to 3.8% same period last year. On net income margin as well, for the first nine months of 2024, margin recorded 3.7% compared to 3.1% same period last year as well. Lastly, cash flow from operations for year-to-date 2024 marked $245 million of positive cash inflow compared to a negative of $90.7 million for the first nine months of 2023. Now focusing on our Q3 results for 2024. Revenue reported a 5.1% increase year-on-year to $842.5 million in quarter three. Excluding the devaluation effect, the revenue would have witnessed 17.2% increase year-on-year to USD 939 million, driven by stronger operational improvement in both MEA and U.S.A. Excluding devaluation effect, MEA revenue increased 11% year-on-year for quarter three of this year on the back of contribution from newly awarded projects. U.S. operations also attained a stable growth of 24.8% year-on-year, driven by higher contribution for newly awarded projects, mainly data centers, industrial, and aviation. Adjusted EBITDA of the group recorded 34.7% year-on-year to $44.6 million in quarter three of 2024, and 31.4% year-on-year for $119 million for nine months of 2024. Adjusted EBITDA margins for MEA operations increased to 7.2% in quarter three of this year and 7.4% for nine months of this year. The group's performance in the U.S. continued to improve, reflecting EBITDA growth of approximately 80% year-on-year in quarter three of 2024 and 81.7% year-on-year for the nine months of 2024. EBITDA margin growth to 3.6% and 3.2% in Q3 and nine months of 2024 respective. The group's net income attributable to shareholders increased 34.2% year-on-year to $21.6 million in quarter three, and 18.2% year-on-year to $86.3 million in nine months of 2024 at 3.7% margin compared to 3.1% margin for the nine months of 2023. Net income contribution from BESIX increased to $5 million compared to $1 million in quarter three 2023. Nine months 2024 contribution from BESIX totaled $13.3 million compared to $7.4 million for same period last year. Our investments and subsidiaries in building material, equipment services, facility management, and concessions account to close to 32% of group's net income in the first nine months of 2024. Net income for this segment was driven by equipment services and steel fabrication subsidiaries. Our steel fabrication subsidiary continues to grow its export position and is supplying projects in U.S.A., Europe, Africa, and UAE. Looking on our balance sheet, equity accounted entities amounts to $462.8 million, majority of which for $430 million is BESIX. The group's total equity decreased to $657.6 million as of 30th of September 2024, still at a healthy level, but primarily impacted by further reduction of reserves as a result of currency translation differences at the group subsidiary operating in Egypt, and by the dividend distributed to shareholders earlier of $42.9 million. This was partially absorbed by our profitability for the period. On a working capital level, our nine-month 2024 cash flow from operating activities recorded $254 million, as alluded to earlier, due to strong collections and advances received in quarter one of this year, as well as gradual improvement in our collection, leading to cash inflows from operations in quarter three of 2024 for an amount of $6.3 million. Trade and other receivables increased to USD 1.6 billion compared to December level of USD 1.3 billion, generated from strong progress on projects and billings in MEA and U.S.A. Trade and other payables balance and advances remains at par and close to December 2023 level of USD 1.4 billion as a result of Egypt's devaluation, compensated by advances received for the newly awarded project. Our gross debt stood at $299 million closing September 2024, ahead of December level of $249.8 million. The group is preserving a healthy net cash position of $419 million compared to $446 million in December of 2023. We are now open for the Q&A session. Thanks, everyone. Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. There are no phone questions at this time. We'll start receiving questions on the webcast. Our first question, any update on the Qatar Foundation legal case? Well, so far, no. As we have indicated before, the expectations that we'll get feedback in Q1 next year. Our next question, could you please share the outlook for backlog additions in 2025, plus guidance on top and bottom lines for full year 2024 and 2025? We are expected to replenish, let's say, the backlog that we are eroding every quarter. We think we will be, give or take, at the same level by end of the year. We'll maintain that, give or take, 10% in 2025. On the top line, I think we believe we'll have the same level or maybe even grow somewhere between 5%-10%. On the bottom line, I think we are working diligently to continue to improve the levels of EBITDA and net profit, and I think we are getting in that direction. Obviously, there are a lot of considerations to whether there will be another devaluation in Egypt or not. So it's very difficult to pinpoint something very specific, but I think we're confident that our bottom line will continue to improve. Our next question. Congratulations on the results. Can you please explain where the FX loss and the comprehensive income is coming from? Is this expected to reoccur again in Q4? Well, this is a function of the cash balances that we foreign currency that are related to our off-balance sheet. And basically, this is the foreign currency translation differences that pass into our reserves. Our next question. Sorry, Hisham. As a follow-up, it will depend on the movement between EGP versus dollar and euro, which is substantially the currencies of our foreign currency cash at operations level. Our next question. Congratulations on the results. Can you shed some light on the proposed dividends? We are maintaining the same level of dividends that we have processed in 2024. It will be, again, our expectations is to have an interim dividend in January and another one summer next year. Can you please elaborate on your comments that you are looking to diversify the backlog? Our strategy has been over the last couple of years, is to continue to grow, but also diversify geographical dependency of the group to be not only, particularly on the MEA region, to be not only on Egypt alone. We believe we are on the right track, that we will probably have, by end of 2025, an increased backlog in the MEA, including Egypt, and will have a better split between Egypt, the U.S., and let's say, the GCC cup. Our next question. Can you shed some light on the outlook for new awards in the U.S. and Ras El Hekma? On the U.S., we are maintaining organic growth as far as potential awards. We will probably end this year at a level of $1.8 billion-$1.9 billion. That will have two major components, which is data centers and aviation, plus other works scattered around the States. We believe that backlog will grow slightly more by end of 2025. As far as Ras El Hekma is concerned, we are working closely with the developer. The current contract or agreement that we have with them focuses on fast track immediate needs as a developer. I think once they have concluded their master plan, we will be seeing more defined projects. They have indicated in that event in October that they want to develop 30%-40% of the project in the next four years, which I would assume there will be much more projects available for us and other contractors. Our next question: how far is the group, particularly BESIX, exposed to the economic and political turmoil in Germany? Well, actually, we are subject to the supply chain pressure that could happen, whether in Europe or East Europe or even in China or Asia. I think that we will have to assess at that time what will affect that. Obviously, I think there is a hint on the high-speed train. But I know for a fact that Siemens is well ahead on the manufacturing of the trains. Actually, the first train that will be shipped to Egypt was displayed in the transport conference in Berlin in September. We have prepared what they call in the railway business a stabling yard ready for Siemens to start shipping by the end of the year. I think that Siemens has secured a lot of their material needed for the manufacturing. I would not think that there will be a major impact unless something dramatic happens. As far as our construction work, not only on the high-speed train and in general, we are monitoring that. We are even operating in spite of the fact that there are challenges in the Red Sea. Obviously, like any operator, we try to anticipate the issues and try to mitigate them. Our next question: shall we use the current margins in MEA and the U.S. as guidance for 2025 and thereafter? I would say yes. Obviously, we hope we can improve on that, but definitely for guidance, totally agree. Our next question: congratulations on the results. Can you shed some light on BESIX operations in Australia and the scope of its expansion? Well, the operation in Australia is still ongoing. I think that for 2024, they have made great progress as far as discipline and controls on the operation, and it starts to slightly contribute to the bottom line. We believe that we will even have a better contribution in 2025 and 2026. Our next question: in Q3 2024, we witnessed one of the highest EBITDA margin for U.S. business at 3.6%. Could we expect that level to be maintained going forward or as guidance for 2025? I think we can do that. Obviously, one thing that we need to be aware in the U.S., that there is also the cyclicality of weather in the U.S. You will see that during the first quarter of any year, because of the winter and snow, there are areas where there is lack of progress and obviously lack of EBITDA numbers. But I would say that our average for 2024 could be a floor for what we expect in 2025. Our next question: what are the current project lifetimes for our work in the Middle East and Africa and the U.S.? I think our backlog in the Middle East and on the MEA region takes us easily somewhere between 18 to 24 months, fully utilized. The way the business is managed in the U.S. is slightly different. We are always looking at somewhere between 9 and 12 to 12, maybe a little bit more than 14 months due to the nature of the market in the U.S., where clients are, once they commit a project, it goes and moves forward. This is where we have as a cutoff. But if we look numerically, with an $8 billion backlog, we are pretty much easily, we have a 24 months ahead of us, fully utilized. We got asked to clarify. Could you repeat the part on the high-speed electric trains? The latter? The backlog today, the contribution of the high-speed train and the backlog is as follows. On the first phase, with what we call the green line, probably the current backlog is somewhere between EUR 350 million, EUR 400 million, give or take. As far as the blue line, which is the second phase, which takes us from Cairo up to the borders and to the Red Sea, we have not utilized any of that. Our share of current backlog is around EUR 850 million, excluding operation and maintenance. We haven't received any further questions. Have we received any by phone? There are no phone questions at this time. Well, thank you very much. Appreciate your attendance. We're looking forward to meeting you again to share with you our end year results sometime in March next year. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.