Earnings Call: H1 2024

Aug 28, 2024

Summary

H1 adjusted EBITDA rose 29.4% to $74.8m, while adjusted net income increased 13.7% to $64.7m. A $7.7bn backlog and stronger U.S. operations support continued execution, though Egypt FX and inflation remain key uncertainties.

Good day, everyone, and welcome to the Orascom Construction first half 2024 results conference call. Please note that everyone is joined on mute to avoid any background noise. You will have the opportunity to ask questions to our speakers later in the Q&A session. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. Thank you. I would now like to hand the call over to Osama Bishai, CEO. Please go ahead. Good afternoon. Good morning, everyone. I hope everybody had a good summer. For the H1 results for 2024, we have been progressing in a steady manner on all our fronts. On the construction side, we have achieved a revenue of $1.477 billion on both the MEA and the U.S. side. We have improved our EBITDA and bottom line as a KPI to our business. On the concession side, we are going to complete the first phase of our 500 MW wind farm ahead of schedule, and it should be operational in Q4 this year, which is between 2 to 3 months ahead of schedule. The second phase will be done by early summer next year, which is again, 2 to 3 months ahead of schedule. On our other concession, which is Project Wave, the EPC work has been progressing satisfactorily to ourselves, and we are progressing well, and we believe that we are on the right track there. On the U.S. side, we are quite happy with the current backlog achieved by the U.S. business and the results of the U.S. business. We are still expanding in the data center space and also in the aviation space, and we are improving our bottom line figures. On the BESIX side, BESIX maintained a positive outlook, and we are quite happy with the progress on BESIX so far and also their current backlog. Last but not least, we have made a dividend last week as promised, and we will continue our policy of 2 dividends per year based on our results. So that we do not waste a lot of time, I will hand over to Reham to give you a flavor of the numbers, and then we open the floor for Q&A. Thank you, Ossama. Good morning. Good afternoon, everyone. Going through our second quarter results for 2024. As Ossama mentioned, our consolidated backlog is sustained at $7.7 billion. This is on the back of new awards for quarter two for a total of $1 billion that is split 72% roughly in the U.S. and the delta in MEA. Revenue for the group decreased 6.3% year-on-year to $711 million in quarter two of 2024. Excluding the devaluation effect, revenue would have reported a slight increase of around 4.4% year-on-year. MEA revenue decreased by 29% year-on-year, mainly due to the Egypt devaluation, the completion of existing projects. As we ramp up our large infrastructure projects in Egypt, already secured in our backlog. USA operations witnessed a consistent growth of 27.8% year-on-year, driven by a higher contribution from newly awarded data center projects and other industrial and aviation projects. Adjusted EBITDA increased 65.3% year-on-year to $37 million in quarter two of 2024 and 29.4% year-on-year to $74.8 million in first half of 2024. Adjusted EBITDA in H1 2024 excludes one-off expenses of $17.5 million in Q1 and $4.7 million gain in Q2 2024 related to the divestment of building material subsidiary. Similarly, adjusted EBITDA in H1 of 2024 includes $92.9 million of net gains related to one-off expenses and divestments that occurred within the building material subsidiary. Adjusted EBITDA margin for MEA operations improved to 8% in quarter two of this year and 7.5% in H1 2024. The group's performance in the U.S. continued to improve, reflecting EBITDA growth of 83.9% year-on-year for quarter two and 83% year-on-year for H1 of this year, and an EBITDA margin growth of 2.9% in quarter two and H1 of 2024. Adjusted net income attributable to shareholders decreased 10.7% year-on-year to $18.6 million in quarter two of 2024, while increasing 13.7% year-on-year to $64.7 million for H1 2024 at a 4.4% margin compared to 3.6% margin in H1 last year. Consistent with adjusted EBITDA, adjusted net income in H1 2024 excludes a $7 million gain in Q2 2024 related to the divestment of building materials subsidies. Adjusted net income in H1 excludes $31.8 million net gain in quarter two of 2023, related to one-off expense and divestment of the building materials subsidiaries. In quarter two of 2024, BESIX contributed positively to the group's profitability with an amount of $7.8 million, 20% higher compared to Q2 of 2023. H1 2024 contributions from BESIX amounted to $8.3 million compared to $6.4 million in Q2 last year. Our investments and subsidiaries in building materials, equipment services, facility management, and concessions accounted for 51% of the group's net income for H1 of 2024. Net income for this segment was driven by equipment services as well as our steel fabrication subsidiaries. On the balance sheet side, equity accounted investments amounted to $450 million, majority of which is BESIX investment of $415.6 million. The group's total equity decreased to $674 million as of June 2024, primarily impacted by further reduction of reserves as a result of the currency translation differences of the group subsidiaries operating in Egypt, and by the dividend declared and distributed to shareholders of $20.9 million. These were partially absorbed by net profits for the group. In May 2024, the board of directors and shareholders approved a dividend of EGP 2 a share, totaling $22 million, which has been already paid on August 21st of 2024, post quarter two closing. For the group working capital, first half 2024 cash flow from operations reached $237.9 million due to strong collection and level of advances received in quarter one of this year. Quarter two 2024 reported cash outflow of $54.3 million from operations, mainly related to high progress on new projects. Trade and other receivables slightly declined to $1.29 billion compared to December level of $1.3 billion, impacted by the EGP devaluation and backed by strong progress and billing in both MEA and GCC. Trade and other payables balance reached $1.14 billion, down from $1.44 billion at December 2023 as a result of the EGP devaluation, compensated by the advances received for newly awarded spots. Our gross debt stood at $238.7 million as of June closing, lower than December closing level of $239.8 million. The group is preserving a healthy net cash position of $434.5 million compared to $446.8 million as of closing December 2023. Thank you, and we now open the Q&A session. Thank you. We are now opening the floor for question and answer session. If you would like to ask a question, please press star one on your telephone keypad. That is star one on your telephone keypad. We will pause for a brief moment to wait for the questions to come in. We have received our first question. How much will the new 500-megawatt wind farm add to EBITDA once online? The 500 megawatt, our ownership there is 25%. We don't consolidate the numbers, so it will appear on our balance sheet as a net profit or a dividend. Obviously, since we are operating 50%, which is the phase one, 250 this year and the other 250 next year. So the numbers are not clear, because also it depends on how strong is the wind and the seasons and all that. But it won't be affecting our EBITDA number, it will be affecting our net income number. Our next question, any new awards or sign of new awards from Ras El Hekma, or is this too early? I think Ras El Hekma, this is too early to be discussed. The fact of the matter is, like any developer, they have to develop a master plan, get it approved, go through the process, designate a first phase. So I think it's too early. I would say that real activities on Ras El Hekma will be first half of next year or even beyond that. Our next question: are there plans to sell BESIX soon? To answer that, I think anything is for sale for the right price, but we believe BESIX has a lot of upside potential at this moment. I think it is too early to discuss that. A similar question. Is there any update on material divestments which could further unlock shareholder value? We are obviously looking all over the place within our portfolio to see how can we unlock shareholder value. Like what we have done last year, obviously, once we have something that is concrete, we will definitely share with our shareholders and the market. Is there any guidance on second half of 2024 earnings and EBITDA margin? I think we will continue our trajectory as we have done for the first half. We might even do better. What I think is important to realize, number one, the trajectory of the U.S. is very clear. Number two, on the MEA, particularly in Egypt, there is also a timing issue because most of our contracts has an adjustment formula where timing becomes, when is this recorded, when is this paid? Timing becomes a factor there. But generally speaking, we are continuing the same trajectory like we had, and we believe that we can do that. The next comment: very strong results from the U.S. Is there any consideration to sell this business? Again, anything is for sale for the right price. But I think the U.S. has been progressing well. They have been able to consider risk management in the right manner. They focused on the right market segments, which has been able to give us the results we are seeing. I think the most important thing that we are focusing on is to have this as a sustainable model for a few quarters ahead of us. Our next question, is there any update on the legal case with Qatar Foundation on the construction of Sidra Medical Research Center? Unfortunately, there is no additional feedback from last quarter. Our next question, can you provide more color on the improvement in EBITDA margins in the MEA segments, and where you expect them in the second half of 2024? As we mentioned, we believe that we have continued to improve, particularly on the EBITDA. But again, we have to move from a quarter to the other due to the price adjustments that we have due to the inflation. So I think once this stabilize, maybe we can reach the previous numbers, that we can increase our numbers even to the double digit level. But so far, I think our guidance will maintain the current numbers, and we will improve on it. Our next question asks specifically on the top line guidance and where we expect that to go in 2025. We are not as much focused on the top line because basically, I think what we would like to do is improve the bottom line. But having said that, we have a lot of new contracts in hand that has started in the last six months or even before. I believe that our focus is to continue cranking execution and billing as much as we can to start eroding our backlog. We can see maybe an improvement on the MEA region, but the improvement could be affected if the Egyptian pound against the foreign currency is affected, whether slightly or in a different way. On the U.S., I think we are continuing our growth as we are. We are, again, very cautious about unnecessary growth because we would like to maintain management of risk there so that we protect and preserve the current results that we have. The next question is somewhat related. Could we see improvement in the execution rate in Egypt? Absolutely. We have several large size projects that are taking more time to reach, let's say, the execution level that we would like to see that. I think the second half will see an improvement, and definitely the first half of 2025 will be at our peak execution. Our next question, any guidance on CapEx for 2024 and 2025? Well, we've already bid a bit of CapEx for around $30 million for the first half of 2024. We expect a similar or a little bit under this amount for the second half of the year. This is mainly to support our new projects secured in our backlog, and we expect a similar funding in 2025. Our next question, which areas of your business are you most optimistic about? Where do you see the most uncertainty in projecting forward? Well, actually, we are optimistic about the majority of the new contracts that we currently sign. Even in Egypt, we have focused on creditworthy clients on the private sector, such as Maersk, the real estate developers like Emaar and the others. We are also looking at projects where it was funded through international loans and funding institutions like EBRD, the European Investment Bank. We are quite optimistic there because, again, we have participated in tendering on those projects with a mindset that in addition to performance, we are focused on our returns. We are very also optimistic from a geographical point of view about the UAE, the current project that we currently have, and we have a couple of opportunities in the pipeline that, if successful, we will be announcing those. Where do you see- The uncertainty really, quite honestly, is in the forecast of the Egyptian pound against the dollar and the impact of inflation there. That's an uncertainty, but I think we are well-hedged there because if we look globally at our business, more than 80% of our backlog is US dollar or euro-denominated in Egypt and outside Egypt. Our next question, how much runway do you see for the data center business in the U.S.? Are you looking at taking an equity interest in any data center projects? Okay. We believe the data center story is still continuing, and we see an uptick due to the AI impact on data centers. Because data centers that are designated for AI have slightly different component, which is higher energy consumption, higher air conditioning and ventilation. We haven't seen a slowdown on the data centers in the U.S. On the contrary, we've seen this uptick. Obviously, we are open to look at investments in data center. We take equity similar to what we take in the wind farms in Egypt, but obviously, we need to better understand the model and the returns so that we can look at that and make sense to OC and to our shareholders. Having said that, there is also another opportunity that's coming up on the data centers, which is the power generation behind a data center. Now we're seeing that power generation is becoming a bottleneck for data center expansion, and we are looking into this very closely because that could construe an opportunity for us, not only from a construction point of view, but also from an equity point of view. Any update on opportunities in Libya and Iraq? Thoughts on those two market spaces. Well, Libya and Iraq will definitely create an opportunity for us. I think at this moment, we are extremely cautious and extremely selective of what we look at in Iraq or Libya due to the fact that, number one, we have a decent backlog and we are improving our returns on the current projects that we have. So we will look at that if it creates either an opportunity or a sustainable strategic pipeline that goes beyond, let's say, the next two years. Have we received any questions by phone? As of right now, we don't have any other pending questions or raised hands from the conference line. We have another question. When will the company start receiving cash disbursements for its equity investments? We are actually receiving cash disbursement from the first wind farm that we currently have, the 250 MW. Because it is a 250 MW and our share is 20%, the numbers are not that big. I think we will be receiving towards next year for the first phase of the 500, and maybe on the second half of next year, probably Q4, we will start receiving for the second 250. For the Project Wave in UAE, I think we are looking maybe at Q4 2026, we can start receiving dividends from our concession there. By end of 2026, we will see a dividend from our full. Yes That we hold. Q4 2026 should be a milestone for us to have the accumulation of all three investments. The next question is related to these. When are the cash disbursements from the company to these infrastructure investments expected? The first 250, we have already committed our equity. We believe that on the 500, it should be sometime end of next year. On the WAVE project, it should be the second half of 2026. We are quite comfortable. We are seeing with our cash flow from operation, we feel that we are well prepared to support these. There are no more questions online. Are there any by phone? No questions by your phone. Well, thank you very much. We appreciate everybody coming in in August. Enjoy the last weekend of the summer, and I am sure we will be seeing you in November, in Q4 for the Q3 numbers. Thank you so much. Thank you. Thank you for attending today's call. You may now disconnect. Have a wonderful day.