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Edited Transcript of OC.DI earnings conference call or presentation 27-Aug-19 12:30pm GMT

Half Year 2019 Orascom Construction PLC Earnings Call

DUBAI Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Orascom Construction PLC earnings conference call or presentation Tuesday, August 27, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Littel

Orascom Construction PLC - CFO

* Osama Anwa Bishai

Orascom Construction PLC - CEO & Executive Director

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Conference Call Participants

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* Jake Ward

Ashmore Group PLC - Junior Frontier Equity Analyst

* Jonathan Milan

Arqaam Capital Research Offshore S.A.L. - Former Associate Director

* Michel Said

CI Capital Research - Junior Analyst

* Nour Eldin Sherif

Arqaam Capital Research Offshore S.A.L. - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you all for standing by. Welcome to today's Orascom Construction H1 2019 Results Conference Call. (Operator Instructions) I must advise also that this call is being recorded today, Tuesday, the 27th of August 2019. And without any further delay, I would now like to hand over the call to your speaker today, Osama Bishai. Thank you. Please go ahead.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [2]

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Good afternoon, and good morning, ladies and gentlemen. Thank you for joining us on today's results call. Just to go straight to the point, we believe we had a very good quarter, Q2 2019, and it reflects actually our steady progress on focusing on performance and obtaining quality work and controlling our costs and focusing on project controls.

We have achieved almost $1.5 billion for the revenue for the first half of this year, and we have improved our EBITDA by a little bit more than 25%. And actually, we have converted our position from -- to become positive cash -- net cash from Q1 to Q2. There has been a major focus on putting the paperwork in order and focus on collection. And that has achieved good fruits for the Q2, and we will continue to do so moving forward.

As far as our backlog, we are at $4.6 billion of backlog, excluding our share in BESIX, which will take us a little bit more than $7 billion. But the fact of the matter is that we have been successful in acquiring good business, focusing on our core competence, infrastructure, water, wastewater, high-end commercial buildings like banking headquarters and the New Administrative Capital; and the same in the U.S., focusing on commercial buildings, where this is the strength of our business there; and expanding our business in the data center area, where we are continuing to get more business in that and continue to perform reasonably well.

Also, from an operational stand, BESIX has performed to our expectations. We believe that it will continue to do that. End of June also marked the fact that BESIX continued to provide dividend, adding to our cash flow income.

I think also what's quite significant really is the fact the announcement that was made in -- a couple of weeks ago, where we have successfully concluded the monorail project in partnership with Bombardier from Canada and the Arab contractors. That was a major success for our team. This underscores our ability to continue to provide competitive proposals that associates funding from ECAs and also attacking or getting into new areas in the transportation business that is strategic for us. We believe this is a major step for us as we believe that this could be -- mass transit is something that could be looked at, not only in Egypt, but also in the region, whether in the Middle East or Africa.

Last, but not least, we were happy to finally conclude the settlement with MEI. And due to the arbitration rules, the details of the settlement are confidential. But what we are confident is that we assure our shareholders that there will be very little impact on our consolidated balance sheet.

I would like Mark to step in and just go through the financials, and we'll be happy to answer your Q&A.

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Mark Littel, Orascom Construction PLC - CFO [3]

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Thank you, Osama. If I may take you to Page 10 of the presentation. As Osama mentioned, we're at a revenue level of $1.5 billion with good margins, a gross margin of 12.7% and an EBITDA of 9.5%. Unfortunately, that has been -- these results have been a bit neutralized by our finance costs. And as you remember in Q1, our gross debt was at a high level because of the peak of certain projects and still the big work to be done. So finance costs were high for the half year, about $30 million of the $50 million -- of the $46 million relates to real interest. There's about -- around $20 million related to FX, which is related to the EGP improving to the dollar, which is a loss, but not cash. So that's noteworthy.

Then the profit before income tax arise at $89 million for the half year, and our net profit stands at $67 million. And basically the income tax in the Middle East is in between because the U.S., we'll have tax losses going forward. So that brings the total at $67 million.

If you look at income from associates, that's a bit lower than last year. But I want to remind everyone that in last year, the half year, BESIX had some one-off results in the half year, which boosted their overall results.

If we go to the balance sheet, I won't stick there for long. As mentioned in Q1, the IFRS 16 increased our PPE. On the flip side, that's reported in liabilities. So that's a neutral impact, but on -- but it shows. Equity accounted investees, it's still -- the majority is the BESIX value, which is around $400 million. We still carry certain deferred tax assets in relation to our losses in the U.S., but those can be carried forward for around 20 years going forward, and we are now 2 years. We pass on those 20 years, so we still have a long time to go on those.

In the working capital, you see an increase in the works in progress. But on the credit side, we see a similar increase in the advances.

If we go to the liability side, especially on cash collection shown in our development of the gross debt. In this sheet, we compare it to the gross value of the debt to year-end '18. That's total debt filed at $375 million. If you look at Q1, our gross debt went up to above $500 million. And then in Q2, our efforts led to a gross debt of $328 million, which is a decrease of almost $200 million in one quarter. And it also reflects on our collection -- our operating cash flow, which was for the Q2 (sic) [H1], of $40 million positive. For the Q1, it was minus $100 million. So our operational cash flow in the Q2 stood at around $150 million (sic) [$140 million], reflecting the efforts Osama mentioned in his introduction.

I think that concludes what I want to say. Thank you.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [4]

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Thank you, Mark. I think it's better we go ahead and directly address your questions. Please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Michel Said.

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Michel Said, CI Capital Research - Junior Analyst [2]

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I had a couple of questions regarding receivables, payable and the Saudi market. So starting with the receivables. You've been saying that receivables peaked in the first -- during the first quarter. And as you highlighted before, it was mainly related to a couple of projects in Egypt, and so this corrected more or less during the quarter. So given that you still have the same kind of project in Egypt with the government, how do you see this -- you see the level of sustainability going forward for the receivables days on hand or impact on cash flow from operations? So this is the first, on receivables.

On payables, this quarter, actually, we saw payables days on hand peaking and small -- and my numbers are indicating it's the highest level at $1.1 billion. And for days on hand, if we sum up all the payables, 315 days are steadily increasing since early 2018. So I would just want to understand, what's going on with the payables? It's more Egyptian -- with the Egyptian subcontractor? And how are you managing the payables and how should be this reversed going forward?

And last question to conclude is beyond the Saudi market. We've been seeing that you've been awarded good ticket on wastewater with the treatment plant from West Dammam early this year, and there is a lot of hope on Saudi market pickup. So if you can give us a bit of -- some colors on the market, and what sort of margins we can be taking from the Saudi margin. It will be -- is this -- is the margin going to be more or less in line with the MENA -- your MENA guiding of 10% or 12%? Or how are you seeing the margin there?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [3]

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Okay, thank you very much. Let me first address your second question. On the Saudi market, our involvement on the Dammam treatment plant, this is a concession where we have a minority shareholding, and we are the EPC contractor in joint venture with another partner. We are still waiting the financial close. And once financial close takes place, the project will start. We have a reasonable return on that project because, obviously, this -- the nature of that business of concessions allows the contractor to have reasonable expectations and in order to meet the requirements of a bankable EPC contract.

As far as the Saudi market is concerned, there are hopes and expectations of the Saudi market, but, quite honestly, we don't see the number or, let's say, a big flow of opportunities coming in the pipeline. It's basically a handful of opportunities every period of time, which we hope that next year will change. And obviously, under the current situation, under straightforward direct bidding, when there is no big opportunity, they want to put pressure on the margins because, obviously, contractors are not busy, and it will affect -- and they will just go a little bit more on the aggressive side. That's why we are still extremely selective on what we pursue in Saudi at the moment to assure reasonable margins and also security of payment. I think that we are all hopeful that this will improve over the next year as we are all reading about the plans of infrastructure development in the Kingdom.

Going back to the issue of receivables and payables, number one, we had some issues as far as the few contracts with the Egyptian government in order to close the paperwork, have everything in the proper order in order to provide proper invoicing and also make an exerted effort on collection. And that has paid its fruits between Q2 and Q1. And it's not a matter of whether this is sustainable or not, this is our job. We will continue doing that, and we will continue making sure that everything is in order that would not derail any payment or any cash flow issues.

As far as the ability of the Egyptian government to meet its obligations, I think we haven't seen any default in the past 35 years. I don't see there's any reason to see any in the future. There may be some delays, and that is also mitigated by the fact that we are quite selective of the projects that we pursue, and that reflects the contracts that we are announcing.

As far as the payables is concerned, over the last few months, we have worked very closely with our subcontractors and suppliers. They need to understand that they are our partners, and our partners also have to, let's say, comply with the back-to-back relationship that we have with the government, and because basically we cannot see cash flow go into our vendors and we're not getting the same from the client. So we have been working very closely to provide -- to improve a neutral situation and to provide that our subcontractors, who are getting repeated business from us, they also go on to the same boat like we are. I mean, as you said before, our payables were extremely low compared to our receivables. And now we have kind of -- trying to have a reasonable balance between both in order to maintain this partnership and back-to-back relationship.

On a -- from a technical point of view, I think Mark is more qualified to respond to that. Is there something you need to add, Mark?

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Mark Littel, Orascom Construction PLC - CFO [4]

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Yes. Well, I think -- and to add to Osama's comments, we, as a group, manage this working capital depending on the terms of the elements in working capital. So what we do is we compare trade receivables, which is short term versus trade payables, which is the approved obligated to our subs. That's all very short term. So in all cases, we have achieved and we're still focusing on having more accounts receivables now and receipts than accounts payables.

In our liability side, we also have some other buckets which are not short-term liabilities like the advances and the overbidding. So although they show as liabilities, it's not a short-term cash. So if you make that carve-out, I think you will be more comfortable with our working capital position as it was at year-end and as it was -- as it is through the end of June.

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Operator [5]

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(Operator Instructions) Our next question is from the line of Nour Eldin.

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Nour Eldin Sherif, Arqaam Capital Research Offshore S.A.L. - Research Analyst [6]

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A couple of questions for me. The first one on MEI. So given that the settlement has concluded already, should we see the impact in Q3 '19? My second question is, give us please some color on lower contribution from BESIX this year versus last year.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [7]

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On the MEI, you are correct. The impact of MEI will be appearing on Q3. But as we said, it will have a minor impact on the overall consolidated results, as we have mentioned in our introduction statement. And it will be quite obvious how we are managing that. I mean we have been working very diligently on our finance and accounting in order for the time when we have achieved this.

The second on the BESIX, the decrease reflects that last year, at the same time, BESIX has divested some of their assets in the Middle East, and that created a windfall. And that shows the upside. But obviously, we believe that for the full year, we'll be at the same levels as far as the overall results and obviously even on the dividend side.

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Operator [8]

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Our next question is from the line of Jake Ward.

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Jake Ward, Ashmore Group PLC - Junior Frontier Equity Analyst [9]

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Just the one question. On the finance expenses that you mentioned, if we exclude the $22 million FX loss, you commented on the Q1 results and that what happened in Q1 was just the higher interest rate overdraft taken out. Has this been the same for Q2? Because it appears that the $15 million excluding the FX loss is quite a big jump year-on-year as well.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [10]

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Mark, do you want to take that one?

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Mark Littel, Orascom Construction PLC - CFO [11]

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Yes. I think, Jake, the FX jump reflects basically what happens to the EGP compared to the dollar, and that impacted that amount. So that has -- that's partly hit in the Q2 on that because the EGP moves significantly. To add to that, and that's how the accounting works, we show this loss in the P&L. But if you look at our equity, you see a bigger profit reported in the equity line also as a result of the movement of EGP. Because our investments or our entities in Egypt, they increased in value because of this movement of the EGP. And that impact is recorded in equity. So overall, the impact of the EGP was even positive if you combine the loss in P&L with the direct appreciation in equity.

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Jake Ward, Ashmore Group PLC - Junior Frontier Equity Analyst [12]

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Okay, that's great. If we -- if you exclude that $11 million foreign exchange loss line, I'm just looking at the 3 months of Q2, the $15.7 million that remains, just concentrating on that number, that also feels a little bit higher considering you've obviously paid down a substantial portion of gross debt in the last 3 months.

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Mark Littel, Orascom Construction PLC - CFO [13]

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Yes, but that's also about timing of when we collected and when we repaid those gross debts, and that's more in the second part of the quarter than at the beginning of the quarter.

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Operator [14]

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Our next question is from the line of Jonathan Milan.

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Jonathan Milan, Arqaam Capital Research Offshore S.A.L. - Former Associate Director [15]

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Congratulations on a very good set of results. I just have a few questions though. One, on the monorail contract with Bombardier, can you give a bit of detail on this? When can you see it commence? And what kind of margins do you expect to get there? Is it still to other MENA-based projects? Because I would assume that there'd be a lot of competition on this project.

And another question, I mean, I know what's fundamentally your stand, but I was just -- but any possible corporate action on BESIX? And given that now everything that has to do with the U.S. downside, you're done with that, you're done with the lawsuits, you're done with all of these settlements, EBITDA is up quite a significant amount. The free cash flow generation is extremely healthy. Working capital, net -- you're back to net cash, then shouldn't we expect a decent hike in, say, the dividend payout or corporate action with regards to BESIX? Anything that can help trigger a rerating of the stock price, which I'm sure you agree is quite low? And given the low liquidity, it probably needs some sort of a large event to trigger any rerating.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [16]

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Okay. Let's start with the easy one, the monorail. Okay, you're absolutely right. This has been a competitive build, but I have to tell you that we believe that a big portion of our competitiveness is derived from our partners, Bombardier. They felt that this is an entry level to the Egyptian market. This is also closing the market to the Chinese competition. So we feel that they have done a big effort, so that our overall bid is quite competitive. We believe that we will have reasonable similar margins to what we have in our normal business. And on the monorail, depending, obviously, on the -- I mean, there are lots of challenges that we have to face, which is basically this is an EPC, so we have to work on optimizing design. We have to work on our procurement, but we're quite confident that we would be able to handle that in a good way.

The beauty of this contract is that it's quite fast. And this is something that we like because the longer you stay on a project, the more you spend. So basically, this is technically a fast track. Originally, it was -- the 2 projects were not working in parallel. Now they are working almost in parallel. New capital starts now, and it is less than -- so it's 40 months to finish. And 6 October starts January 1, and it is, again, 40 months from the start. That was not the original plan. The original plan was much longer than that, and I think this will create some opportunity for us to make some savings in order to get the project done on time.

This is an EPC plus finance project. So this is -- we are working very closely with the Ministry of Transport and the Ministry of International Cooperation (sic) [Ministry of Investment and International Cooperation] on the funding. Because it's competitive bidding, EPRD and the European Investment Bank are interested to participate in the funding, but that's for portions. We have UKEF and SACE from Italy to work on ECA guarantees for the funding. Our excitement about this project is that we believe this could be the first of a few to come. And not necessarily in Egypt, it could be in the region or in Africa. We have created a very good relationship with our partner, Bombardier. They have realized the value that we bring as their construction partners. That's on one side.

The other important factor in that is the 30 years operation and maintenance that we have. We don't have any liability as far as the spare parts and the technical side of the train, but we have the business to do the maintenance and the facility management to everything else but the train. And this also sets a good start for -- I mean, we're trying to expand our OEM business. We have that in our wastewater treatment plants. We have that here, and we would like to expand that because, obviously, there has been emphasis in the Egyptian government about operating and maintaining the assets that they built. And we believe that gives us a great advantage in that market. I hope I addressed most of the monorail.

If we go back to BESIX, the U.S. [development], what we're seeing in the U.S. is, again, what we have indicated a few months back, in the beginning of the year and last year, that there is a focus on execution and project controls and selection of projects and also our ability to close subjects. I mean, there has been tremendous management concentration on closing files that are creating either write-downs or losses. And we are continuously doing that. We believe the U.S. is turning a new page, and we hope that continues. And this is number one. And obviously, they are creating cash. And obviously, that's within the group, and it's for us to utilize whether for expansion or for the shareholders' benefit.

As far as BESIX is concerned, I will repeat again what I've said before. We are very much focused on any opportunities that will create value to our shareholders. We don't want to hastily jump into any action. We are working very closely with BESIX as far as growing the business, creating additional synergies, but, obviously, we are very focused on seeing what would be the next step as far as value creation. A lot of ideas around the table, but I think, again, it's a matter of finding the right time and the right opportunity to do that. I know that's not the right answer you want. But a lack of something concrete, this is the best I have to tell you. This is something that we worry about every day. We had -- we were having [the goal] yesterday. That also occupies a big portion of our discussion. That occupies a portion of our discussions with BESIX, but we need to find the right actions, so that it creates value, not destructs value.

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Jonathan Milan, Arqaam Capital Research Offshore S.A.L. - Former Associate Director [17]

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And when it comes to dividends, I mean, again, you're in a much, much better position today than you were a year ago or 2 years ago. You're still net cash on like Q1. There are no major liabilities coming from the U.S., and you have a very strong cash flow generation. I think your EBITDA is set to be well above $200 million this year. And again, you're net cash. Would you consider paying a much higher dividend than the $0.30? I mean, you could easily increase the dividends to $0.40 or $0.45 easily.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [18]

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I think we'll look at our payout ratio and our yield on the share, and that would be a driver for our selection of returns to the shareholders. Obviously, we are focused on that. Second is that we would like to continue focusing on making a positive cash flow for the business in order to have, let's say, a chest of cash, not only to look at dividends, but also to look at other investments. I mean, we have invested in wind farms. We would like to continue to do that. We hope we can find other concessions that we can look at, where it creates good returns to the shareholders. So you're obviously right. I mean, this is what we're driving at. I mean, obviously, we're working very hard to continue to same trend. We just -- I mean, obviously, construction is always -- has its -- the success in construction is to beat the unforeseen. So definitely, if we -- if there's no -- if we have the cash and there is no investment opportunity to create value, we will definitely consider a higher yield on the share.

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Operator [19]

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No further questions at this moment. Please continue.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [20]

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Well, thank you for attending the call. So meaning no news, good news. So no questions, good news. So I'd like to thank you again, and I hope everybody had a good summer, and I'm sure we'll be talking again in November. Thank you very much.

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Operator [21]

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So that does conclude our conference for today. Thank you all for participating. You may all disconnect.