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Edited Transcript of OC.DI earnings conference call or presentation 26-Mar-20 12:30pm GMT

Full Year 2019 Orascom Construction PLC Earnings Call

DUBAI Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Orascom Construction PLC earnings conference call or presentation Thursday, March 26, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hesham El Halaby

Orascom Construction PLC - Head of IR

* Mark Littel

Orascom Construction PLC - Advisor

* Osama Anwa Bishai

Orascom Construction PLC - CEO & Executive Director

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Conference Call Participants

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* Mark Adeeb

Pharos Research - Research Analyst

* Michel Said

CI Capital Research - Junior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Orascom Construction Full Year 2019 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 26th of March 2020.

And now I'd like to turn the conference over to your speaker today, Osama Bishai. Please go ahead, sir.

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

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Good morning, and good afternoon, everybody. First, I hope everybody is safe and sound and taking care of their families. These are quite challenging times, I assume, for everybody without exception. Considering today, I mean, I don't want to dwell a lot about the numbers to allow you to ask whatever questions you need, but it's obvious we need to address the current events. We are currently in communication with all our clients, whether in the MENA region, particularly in Egypt or in the U.S. We are closely coordinating with them our action plan. Our priority is, number one, the safety and the health of our people and the safety and the health of our communities. So we need to make sure that we are not a source where this virus could spread. So we are communicating with our clients to create a plan whether to slow down activities or tell clients that are feeling more comfortable to shut down, depending obviously on the geographical locations and depending on our ability to move and mobilize and transfer people and goods.

The other issue is that we are also communicating with our clients to discuss contractual measures in order to have a coordinated approach towards the current events in order to mitigate and protect the construction group vis-à-vis any exposure or additional expenses that may occur during this part.

The other issue that we are looking at, too, is that we are looking at our subcontractors, our supply chain, in order to maintain the lifeline for the projects that are progressing and, at the same time, safeguard our relationships in order that when things come back to normal, we are ready to go.

Last but not least, the best tool for us to weather this storm is, obviously, the availability of cash. We are working hard with our clients for cash collection. It's a difficult time, I think, for everybody. And at the same time, we are also almost secured with most of the banks' additional facilities and secured our facilities that we currently have that are not utilized to be available for us in order to address any emergencies or any requests that may come in the next period of time.

So this is what we're currently doing. This is a fluid situation. It's on a day-by-day. So obviously, every day is different than the day before. For example, in Egypt, just 24 hours ago, there has been a curfew imposed from 7:00 in the evening to 6:00 in the morning, which changes some of the dynamics of how we operate and the logistics we're addressing. At the same time, in the States, different states are dealing in a different way. So we're actually looking on a day-by-day with every project and every project manager and every region to constantly address that. We are, as management, in constant communication internally. We have a dedicated team to address HS&E on both sides of the Atlantic. We are -- we have a management team in the Middle East that is talking almost every day, and they have by -- I mean, twice-a-week meetings or phone calls to discuss action plans and addressing events. We are communicating with our team in the States, again, twice a week to address that. So we are working actually around the clock in order to the best of our ability to be -- to address our issues and to be ahead of the curve whenever it's possible.

Going back to 2019, which seems like history now with whatever happened in the last few weeks. We were -- we are very proud of our results. We have achieved almost $3.2 billion worth of revenue. We have secured additional work during 2019 to end up with a healthy backlog of $5.4 billion at the 31st of December. And we have also worked very hard to improve dramatically the cash situation from March 31, 2019 to December 31, 2019.

I mean we're -- it reflects -- actually, a lot of credit goes to the management on both the U.S. side and the MENA region. On the U.S. also, the integration effort has been very successful. And also, the results of the U.S. operation, notwithstanding the settlement of MEI, has started showing positive results, which shows that our efforts and the plan of the management in the U.S. has been going on the right track and towards the right direction.

2019 also marked quite interesting events for us. There has been completion of very important projects such as the tunnel under the Suez Canal, the wind farm and the successful operation and getting into a commercial operation by November last year, almost 1.5 months ahead of schedule. We are also -- it also marked our ability to receive additional business. In Egypt, very exciting work, such as the monorail. We got also some railway jobs. We got the extension of the Burj Al Arab, which is the Mediterranean coast airport extension. So we felt that we have our plans to focus on quality. Secure funded projects has been very successful.

The same for our U.S. business. They have secured much higher backlog than what they have achieved end of 2018, also made very big steps in the data center business and the student housing market. We are also closing a lot of the issues that we are -- we have seen before. So we are -- I mean, the focus on operational excellence and costs and project controls has been paying back for the whole group during 2019.

Last but not least, before I go to the numbers, we are -- we have our commitment to the shareholders to maintain a consistent dividend policy. Our balance sheet allows us to do more than what we have announced, which is the $0.21 to the dollar for every share. But we felt it's prudent to be conservative with cash distribution and for us to see the way things are going to evolve in the next few weeks and months regarding the COVID-19 situation. So that's the -- our decision, and it was supported by the Board and to be submitted for approval by the shareholders.

Mark, you want to go ahead? No, before I go to that, I think we have announced to the market that Mrs. Reham ElBeltagy will be promoted as the company's CFO. And Mark, for his -- for personal reasons, he has elected to move or leave the group.

First, I would like to welcome Mrs. Reham. She has been with us for quite a while, and she has been involved in a lot of the successful projects that have been achieved in the last few years and before that. And also, I would like to support and, I mean, thank mark for his extreme efforts to provide controls and provide data and information that would allow us to make the right decisions during his period. Mark will continue to be an adviser to the group for another year to go. So I would like to thank him again with our -- let's say, with you guys present.

Mark, you would like to go ahead and go through the numbers?

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Mark Littel, Orascom Construction PLC - Advisor [3]

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Thank you, Osama. Yes. If I may take you to Page 10 of the presentation, which was distributed this morning. As Osama mentioned, revenue reached $3.2 billion with the consolidated EBITDA of $270 million, which brought a net profit of $130 million.

One of the things in the P&L, which is showing is that BESIX had a modest contribution compared to last year, and especially the Q4 was very modest and showed a small loss. But as mentioned, our backlog and also the backlog of BESIX is strong, so we hope that, that trend will reverse next year. But given the current situation, that's, of course, also impacting the future.

If we look to our balance sheet, if I'm -- I'll only touch on it briefly because it didn't change a lot. PPE is a bit up, but as mentioned before, that is because of the new accounting standard with IFRS 16 right-of-use assets. Our trade and other receivables picked up a bit, but that's a reclass from the current to noncurrent. So it's not a new financial position, it's just a reclass between the current and noncurrent positions. The equity interest fees, that's obvious, that's -- for the most extent that BESIX, and the deferred tax asset still has the $30 million deferred tax assets related to the U.S. We still have a maturity of 15 years, so there's plenty of time to compensate the deferred tax assets against future profits.

In the working capital, the one thing that is really showing is the pickup in contracts work in progress, that's $300 million to $400 million, but you really have to see that in combination with also the pickup in advances. In those advances pickup, there are also quite some substantial amounts related to projects we are executing. But given certain contractual situations, especially in the MENA, we are not able to build. But instead of the building, we take advances, and that cash of the advance is used in operations to execute the project. So that's just a technical accounting aspect of -- that the billing cycle is not fully up to speed, and we compensate that in advance. Once the billing is done, the advances will drop to similar amounts.

If you look to the equity side, equity is, of course, up because of our profits. It's a bit down because of the dividends paid. And the reserves, there's a profit of $30 million that primarily has to do with the EGP against the dollar as we have quite some investments in Egypt in EGP, and that impacts equity.

Then if we go to the loans and borrowing expense, we're showing, as Osama already mentioned, a very strong cash collection into Q4. And we used most of the cash to reduce our debt, especially in Egypt, which has the highest interest. The advance, I touched upon. The provisions all went down, and that was already explained in the Q3 because of the MEI settlement. So with this settlement, everything in the U.S. on the IFCo project has been closed. And if we look to the cash flow, on Page 13, yes, it's a remarkable amount, $300 million in operational cash flow, which reflects the absence of the group of the group in the Q4.

Osama, I want to give it back to you.

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

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Okay. So that we don't waste everybody's time, I think we can open up the forum for any questions that we may need to answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mark Adeeb from Pharos Holding.

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Mark Adeeb, Pharos Research - Research Analyst [2]

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I just have a question on BESIX. Can you give us some color on what happened during the quarter and why did the company report a negative bottom line?

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

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Sorry, can you repeat again? The -- I couldn't hear that well.

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Mark Adeeb, Pharos Research - Research Analyst [4]

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Yes. Can you just give us some color on what happened on BESIX front? Why did the company record a negative bottom line in the fourth quarter 2019?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [5]

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Okay. BESIX changes in 20 -- in Q4 are basically a reversal of some profitability on some projects and the reversal of some settlement on claims that they have realized have not been concluded in a proper fashion, so they had to reverse that. Unfortunately, BESIX numbers in 2019 are not as impressive as the year before. They have to address some problematic projects, particularly in 2 specific areas, 1 in the Netherlands and 1 in the Emirates. And they had some reversal of -- or review -- or some profitability on some project levels, which reflected that. Usually, we have mentioned that before over the last few years, BESIX are extremely conservative in their accounting methods. So they would rather be on the more prudent or even on the more conservative side in their provisions and their reversals. So they have done a lot of that actually in Q4, and this is why it created this negative impact.

On the bright side, they're still having impressive backlog, which is -- which I think is something that it's worth mentioning for both BESIX and Orascom Construction is that the current backlog is one of the mitigation levels we have for the current events. Because at the end of the day, once this situation disappears, most of these projects will just continue as they are.

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Mark Adeeb, Pharos Research - Research Analyst [6]

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All right. I just have another couple of questions on the water sector. I understand the circumstances -- current circumstance are like it's difficult to expect anything at the moment. But in terms of the work related to that, like, how big do you expect that works to be like, let's say, in the coming 2 years with regards to water sector?

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

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Look, it is extremely difficult to kind of forecast what will happen, not only in Egypt, but I think for the whole world. I mean it's an unprecedented event that it's very hard for anybody to predict. But let me tell you something that is very important, and it's fundamental and it doesn't change. I always say that Egypt has 100 million people, with 65 million under 29. The needs for infrastructure is technically endless. That number actually with the curfew might go up fine enough. But it's a need here. I think actually, and maybe I'm an optimist, I think the current situation will create the -- an event where the government would allow more public sector partnerships, project finance arrangements in order to address the infrastructure needs and, at the same time, address the funding issues.

So I believe that fast forward a few months or a few weeks from now, there will be a look at what is required. Plus the fact that there are programs that are there in place that has to continue, like the line 4 metro, Japanese funded. The fund is secure. The agreements are signed. The projects that we have just started, like the monorail, like that, these things will continue. Water treatment projects and water-related projects, it is becoming not only a necessity, it's also a political issue to address the water and water management. In Egypt, that's something -- is high on the government agenda, and they will need the private sector to step in and do that.

So we are quite optimistic that fast forward after this event, there will be an interesting pipeline. I believe also the stimulus and the package that was approved in the U.S. will definitely reflect additional work in the infrastructure and additional stimulus in a lot of these states that we are working in. Plus the fact that I think from an economic point of view, there will be a change in the dynamic of how things are being looked at. There will be a need for additional storage capacity, additional logistics centers across the U.S., across Egypt. Egypt might be in a better position to act as one of the additional sources of support and becoming the -- like the workshop and the back office for Europe. There will be a lot of dynamics that will change, and I think we are hopeful that it could be positive on our business.

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Operator [8]

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Your next question comes from the line of [Evan Kula] from [Mean Capital].

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Unidentified Analyst, [9]

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Two on my end. One is with all these global quarantines that are starting to be put in place, is that impacting your ability at all to execute on projects right now? I'm just trying to think about what -- how that might push out some of the execution going forward.

And then also, are you having to extend -- I know that this could cause -- these events could cause some economic stress for some of your customers. So are you having to extend payment terms at all?

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

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Look, excellent question. The first one, we have been working on that as we speak. We have seen maybe some delays on some of the vendors due to the shipping, logistics and stuff like that. Obviously, we might think that things that are not yet ordered or being ordered that will see delays. I mean that's a fact of life. I think the real impact will not be clear to anybody in the construction business, not before 6 to 12 weeks. And obviously, if this thing extends, the impact will be much bigger.

One of the things that we are...

(technical difficulty)

Hello? Mark, are you there?

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Mark Littel, Orascom Construction PLC - Advisor [11]

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Yes. I'm back.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [12]

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Okay. We got disconnected. Joanne, are we back on?

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Mark Littel, Orascom Construction PLC - Advisor [13]

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We are on.

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Operator [14]

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Yes. Both of the clients are now connected again.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [15]

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Okay.

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Hesham El Halaby, Orascom Construction PLC - Head of IR [16]

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So Osama, you got cut of right after 6 to 12 weeks of...

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [17]

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I remember. Okay. Thank you, Hesham. So I was just saying that -- sorry, we got disconnected. It seems there's a lot of load on phone lines all over the world.

I was saying that the real impact wouldn't be clear to us before 6 to 12 weeks from now, depending on how long this will take. But nevertheless, we are working on a lot of projects, working on design effort because that's easy being done from home. With our -- with the engineering firms we're cooperating with, we are working a lot on the technical issues, sending submitted -- sending technical details to our clients. I mean we're trying as much as we can to utilize this slow/downtime. But obviously, there will be an impact on how things are progressing on most of our projects. We are actually discussing closely with our clients the impact from a contractual and legal matter. Because quite honestly, I think in the current situation, we have to take this in a partnership spirit with our clients because, obviously, this is not anybody's fault. And it's probably healthier not to hide behind the contracts but to work as partners so that nobody is being hurt due to the situation. And so far, we are receiving so -- very positive feedback from, I would say -- if not most, I would say, all of our clients.

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Operator [18]

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(Operator Instructions) We have a question from the line of Michel Said from CI Capital.

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Michel Said, CI Capital Research - Junior Analyst [19]

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I had a sort of question on the coronavirus impact. So I would like to understand, in Egypt, what are the biggest project in terms of contribution to your top line. I recall -- I read somewhere in news regarding that the Metro Line work will stop for, like, a while. So I was thinking more about the monorail and other projects that you have. So did you start already? Or you just will stop and wait to assess the impact now and then work during the third quarter or once this is over?

Also, I was thinking about BESIX. Is BESIX more vulnerable to the situation right now, given it's working in Europe?

And lastly, I had a question regarding the new awards. So do you think, assuming this will end in like 2, 3 months, so do you think, like, we'll still be having the same number in terms of order intake, or we should see a lot of governments thinking about Egypt and other -- you should see governments like more -- after spending a lot on the health care and other or having the oil prices that low, so they don't have enough buffer to fund their infrastructure plan that they had before?

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

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Okay. First of all, we have a lot of large-sized projects. There's not a single project that will be contributing on the top line or the bottom line because we have Bahr al-Baqar water treatment plant, we have the monorail, we have the Metro jobs, we have all our work in the road sector, a lot of the work related to the buildings for the Ministry of Defense. I mean we cannot just locate one single element there.

Having said that, if you are specifically asking about the monorail, we are currently doing 2 things in the monorail. We are working on the design, and we're working on the project finance. So basically, the design is being done as we speak, although we have -- I mean, we have a U.S. engineering firm working with us and we have also an Italian engineering firm working with us, and they're both working from home. We are receiving technical information, and we're corresponding with them efficiently. The only thing that we're unable to do is to have physical meetings together, which, I would say, under the current situation is not affecting the quality of effort that will be done.

The second thing is the documentation for the funding. Actually, it has been going even better since the since the slowdown because of the fact that lawyers are sending -- are working on that and e-mails are being exchanged. So that is ongoing. I wouldn't say that we are going perfectly on track, but I would say that this is an activity that's ongoing and we're seeing real progress. So this project anyways wouldn't have contributed so much into the bottom line or the top line during this year, except maybe in the part in the second -- the third quarter and the fourth quarter.

As far as new awards, there are -- my expectations are 2 things. The projects that are having secured funding, like Metro Line 4, as an example, there are projects that are funded by EBRD and the European Investment Bank that is already in the pipeline for -- to be released as tenders. I believe these projects will go because the funding will come from outside. And I believe that there has been -- even on the macro thing, there has been discussions, let's say, between the European Commission and the oil countries about looking at how to maintain global progress. So I will not be surprised that these projects will continue as planned.

The other -- I mean, there's always a downside and an upside in things. I mean there might be a slow in government release projects, but I think there will be an uptick in private initiatives as far as 3PP fund -- opportunities for the waters program, for railways, for roads, because the cycle of development of infrastructure cannot stop, and the needs cannot stop. And there has been a creation of projects and infrastructure over the last 4 years, so this will need to continue. And I believe that the private sector will be -- will have the right opportunity to do so. I mean that's my expectations. But as a minimum, all the projects that has secured funding that were in the pipeline, I believe, will continue.

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Michel Said, CI Capital Research - Junior Analyst [21]

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And BESIX, Osama, please. The things...

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [22]

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Look, BESIX, definitely, probably on the revenue side, we'll -- probably we'll have -- there will be an impact due to the European presence. I am -- we are in close contacts with the management team and the Board. They are -- they were telling us yesterday that in Belgium, it's not -- during the week, there is some allowance for projects to continue, but obviously, with less efficiency on that. I would say that the -- from a volume or a turnover in 2020, obviously, there would be some impact. But again, the amount of that impact and how the government will also create some stimulus or compensation, I mean, all the governments are putting some money to -- say, to compensate businesses and support businesses during this. So I think that in Belgium, that will happen probably much quicker and much faster than our part of the world. So the real impact will be there, but I think there's nobody we could say that will be more affected than the other. I mean this is a very fluid situation, and it could get better or it could get worse at any time.

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Michel Said, CI Capital Research - Junior Analyst [23]

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Last question, if I may. Because we've seen you working on a lot of projects on a fast track basis. So we know you have the capability to work on a fast track. So do you think that if you have like postponement of 2 months on any project you can work on a fast track basis in 3Q and get back what you have lost in terms of revenue during the second quarter, if anything happened?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [24]

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Well, we cannot -- I cannot put a blanket answer on that because there are projects where we are at a stage where recovery of those 2 months is possible, and there are projects where this was a critical time, so the delay will not be positive. I mean let me give you a simple example. If you are in the last 6 months of a project, then you have to hand over. If you lose 2 months, that's impossible. If we are at the beginning of a project or in the middle of a project and you are not on the critical path, and we are -- when we lost 2 months, I think we can recover. Obviously, we will work very hard to recover any delay because that's cheaper for us because that will save a lot of our indirect and our overhead costs. Obviously, we'll see which clients are interested in such manner because we will obviously have -- there will be a commercial aspect to that. So again, I think we're ready to do that, depending on what is the best interest for the project and Orascom and our shareholders.

Having said that, I mean, we feel that this is some of the edge that we have as a contractor that probably after this pause or slowdown, whether in Egypt or in the U.S., our ability to accelerate and do things in a faster manner will be definitely in high demand after that.

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Operator [25]

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There are no further questions at this time. Please continue.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [26]

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Well, I would like to thank everybody for joining today. Obviously, it is an interesting and challenging time for everybody. We will keep the market and our shareholders informed with any material events that could affect our business, whether positively or negatively, in the coming few weeks or months. And we're looking forward to be in a meeting with you again probably in May at our AGM. Thank you so much.

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Operator [27]

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That does conclude our conference for today. Thank you for participating. You can now disconnect. Speakers, please stand by.