Earnings Call: Q1 2024

May 21, 2024

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. 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'd like to ask a question, please simply press star followed by the number on your telephone keypad. If you'd like to withdraw your question, press the star key again. Thank you. 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 our 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 would 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 devaluation that took place on March 6th of this year is $7.3 billion. If we add our share in BESIX, the pro forma backlog is $9.9 billion as of March 31st, 2024. We have secured at the OC level, slightly more than $600 million worth of additional awards, split 60/40 between the MEA and the U.S. BESIX also added, for our share, slightly shy of $900 million in Q1. BESIX as a standalone, their backlog is $4.8 billion and the new awards of €530. We have also gotten approval yesterday from the board and shareholders to make our second dividend for this year, which is $0.20 per share. We feel that we have been progressing in a steady manner. We have worked 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. We are trying to convert our U.S. business to become a niche contractor where they have specialty capability, particularly in data centers and the aviation sector. On the concession side, there is considerable positive progress on our wind farm, the 500 MW. 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. The construction is progressing on our water treatment project in the Emirates with ADNOC also on 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, in the Emirates, and the States. We are also very much focused, in 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. While we have provided over the last, maybe 18 months, almost three dividends and a share buyback, we're continuing our commitment, and we are offering a dividend of $0.20 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. At a high level for our Q1 2024 results, our consolidated backlog has maintained 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% 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 investment and 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 negative of $0.1 million in Q1 last year. Now moving on to a closer look at our Q1 financials. Near revenue decreased 19.7% year-on-year, mainly due to Egypt devaluation. We are ramping up for several large projects that will start contributing in H2 of 2024, most of which are foreign currency denominated projects. U.S.A. operations witnessed a consistent growth of 13.9% year-on-year on higher contribution 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 Q1 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 industries amounts to $449.7 million, the majority of which is BESIX 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 subsidiaries operating in Egypt and by the dividend declared and distributed to shareholders of $20.9 million. These were partially absorbed by the net profit for the period. Concerning our working capital, trade and other receivables slightly declined to $1.2 billion in March, compared to December 2023 levels. Impacted by the EGP deval and backed by strong billing and collection in MEA and U.S. Trade and other payables balance reached $1.17 billion, down from $1.44 billion at December as a result of the EGP deval, compensated by advances received for newly awarded projects. Our gross debt stood at $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. We are now opening the floor for question and answer session. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. We will wait for the questions to arrive right now. Thank you. 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? If so, by how much? What are your plans for the U.S. business if the market will not recognize its value? Well, thank you for the kind words. We have upstreamed $23 million last year from our U.S. operations, and we are working on upstreaming the same amount or maybe $1 million more this year. We have already upstreamed a quarter of that in Q1. That is 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 MEA and U.S. margins going forward and the nature of the one-off expense? You are also currently having a hefty net cash balance. Are there any new investments you are looking at? Okay. On the margins, we have indicated last year that we are having the right trajectory as far as the margins are increased. This quarter shows our EBITDA levels are going in the right direction. I think we will continue 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 employees. That has to be costed, and it is a one-time because we have adjusted that moving forward, so you will not see that again. Unless the share comes to be at $10 per share, so that is something nice to have. The cash balance, there are two things. Number one, we have been receiving some advances for projects that just have started. Some of that cash will be used to start the project, spend money on the projects until the projects start to provide revenue and positive cash flow. On the other hand, I am sure you are aware, we are also building up ourselves. Next year, our bridge loan for the 500 MW wind farm will be due sometime in summer. The year after, our equity also due for the project in the Emirates will be due. We are building up cash gradually for those investments. 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 Ebadh. On the buyback, we have done some last May. Obviously, if we find the right, let us say, tranche or opportunity, we will do that. Also, we will weigh whether it is a buyback or an additional dividend. We are yet to see. What we are 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 in income taxes? Well, the income tax went up because we have more profits. That goes without saying. I kind of don't understand really what's the question. Can you elaborate on this question in terms of where do you see this hike? Yeah. Okay. It's on the web, so we might receive a follow-up email. Our next question, are you involved in discussions around Ras Al Khaimah? You are an ideal candidate, given your work and reputation in both Egypt and UAE. How big can your share be? Any details you can share? Well, actually, Ras Al Khaimah, we are all aware that the 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. I think it is a little bit too early, but we feel very confident that we will take our fair share. We have been very successful with Emaar 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 Ras Al Khaimah developer 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 do not know the size of their investment, let us say in the first one or 2 years, but I think we will have a reasonable share there. So far, we have not received any more questions. We will give it just a few moments. Well, unless we have something that we have overlooked, we are not receiving any questions. We say in Arabic that silence is satisfaction, so I am sure we are all happy today. We have a question. Our next question is, what is the potential for unlocking value from your investment 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 for 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, 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 are seeing with management is that 2025 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? Well, it is very difficult to do that because some of this information is confidential, but I think we have a healthy pipeline. We feel confident with our current backlog. We feel that we are not under any pressure to sign, except quality contracts, whether it is in Egypt or in the region or in the U.S. Our next question, could you give us guidance for EBITDA margin for Middle East and Africa operations in second quarter after the devaluation? I think we will maintain the current EBITDA levels, the adjusted EBITDA that we have indicated. Even we might improve on that. Abid, we have a question through the phone. Yes, we have a question from Nour Eldin Sherif from Arqaam Capital. Your line is now open. Yes. Thank you for the call and for the opportunity to ask questions. Just one question for me. We are seeing a strong pipeline for projects in GCC, especially Saudi and UAE. Do you expect to have some sizable awards in this year and into next year? We are pursuing both UAE and Saudi. We are trying as much as we can to get awarded or secure projects that have balanced terms and conditions. The challenge that we are seeing in Saudi is that terms and conditions are not really balanced and are more in favor of the client rather than the contract. If we want to get any contract in Saudi, I think we can do that very quickly. But we would like to get something that does not burden us from as far as funding or cash flow, or we take unacceptable technical risks. But you are correct, there is quite a pipeline, and we feel confident that before year-end, we will be able to secure some. I want to reiterate, we are adamant on having a quality contract. We are prudent on that, and we feel blessed that we have a healthy backlog that does not put us under pressure to secure that. Clear. Thank you. Just as a follow-up on the tax rate question. Basically, in this quarter, out of the tax expense hitting our income statement, a total substantial part, which is 14.3 million of it, is deferred tax, and this is basically due to FX gains that are still unrealized. Okay. We have a couple more questions through the web. The first is, how do you see the cash dividend policy of the company evolving over the next year? We will continue making, targeting two tranche dividends annually. We believe that when we have, let's say, the numbers and the cash, we are able to increase that like we did last year. Once we did the divestment of the building materials, we made an October dividend that was not scheduled. That is our standard policy, and we hope we can continue not only the levels, but increasing the levels per tranche. Our next question, any intention to sell some unutilized assets? Obviously, any utilized assets that we have the right value for, we will do that. Because number one, we want to bring back money to our shareholders. Number two, we would like to use any cash unutilized for something that will bring value to the company. Our next question, what is the timeline for redeeming your high-yield Egyptian pound debt? That is overdraft. The majority of that, almost more than 92% or 95% of that is overdraft. Our target this year is more cleanup on our balance sheet, recollection, bringing the overdraft down. Our target is to have that as low as possible by year-end. Do we have any questions by phone? We do not have any pending questions from the conference line. We have another question back to the taxes. The FX taxes surged to $14 million, up from only $1.6 million. What is the reason behind that? Again, the reason is mainly the FX gains happening in the quarter. It seems I got ahead of myself about no questions. Thank you very much. We are delighted to have you. We are looking forward to meet again towards the end of August when we announce our Q2 results. Thank you so much. Thank you for attending today's call. We hope you have a wonderful day. You may now disconnect.