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Edited Transcript of OC.DI earnings conference call or presentation 21-Nov-19 12:00pm GMT

Nine Months 2019 Orascom Construction PLC Earnings Call

DUBAI Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Orascom Construction PLC earnings conference call or presentation Thursday, November 21, 2019 at 12:00:00pm 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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* Ahmed Hafez

Renaissance Capital, Research Division - Head of Research of MENA

* Karim Sawabini

* Michel Said

CI Capital Research - Junior Analyst

* Taher Safieddine

Citigroup Inc, Research Division - VP

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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 9 Months 2019 Results Conference Call.

(Operator Instructions) I must advise you this conference is being recorded today, on the 21st of November 2019.

I'd now like to hand 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. We're back again for our 9 months results.

As you can see from our announcements, we are still providing steady results every quarter. We're showing consistent performance on both our areas of focus, the MENA and the U.S. Obviously, the last quarter marked some achievements, particularly on the acquisition of additional work. We have been able that -- to add $1.3 billion of additional contracts in Egypt and in the U.S., particularly the monorail contract that we have been successfully -- we signed successfully in August. And also the U.S. continued to provide healthy backlog in -- particularly in -- again in areas of expertise on the data centers and commercial buildings. The other issue that we have successfully achieved in that quarter, we have indicated that in the last call because it was August, was the closure of the MEI arbitration case, which marks the end of the IFCo story. Additionally, we just released -- we have indicated or alluded to that, but we've just released that we have entered into a commercial operation for the wind farm that we are -- where we are -- were the EPC contractor and we have an investment there.

Our EBITDA numbers. I mean Mark would be indicating the details in a few seconds, but I mean we have a healthy EBITDA of close to $200 million. That's standalone, and obviously it is $250 million with the additional of the BESIX numbers on a pro forma arrangement. Second is the -- again we are net cash positive, which is a good progress. We haven't decreased the -- our gross debt like we wanted to, but basically we have been consistently making our efforts on collection, and we will continue to do so to maintain our positive cash position.

Again, I think we are very happy and very pleased of our progress the last quarter, as it shows the consistency of the outperformance. And what I would like to do is have Mark go ahead and like go through the numbers so that we can go ahead and turn to the Q&A.

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Mark Littel, Orascom Construction PLC - CFO [3]

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Yes. I would like to take you to Page 10 of our presentation, which has the financials. And I'll focus on the 9 months total.

Revenue stood at a level of $2.3 billion, with an EBITDA of $200 million, representing 8.7%.

And if you look compared to 9 months '18, the G&A -- SG&A is about $20 million lower than '18, but that's mainly because '18 had an amount of $20 million in incidentals, in the $141 million. So on a like-for-like, the SG&A is on similar levels as last year. The finance costs, we discussed that extensively in the Q2. They are high, but that's originating from the Q1 and the Q2, when we had this peak of construction in the Egypt projects.

Overall, it brings us a net profit of $100 million, of which $33 million was contributed in the Q3, including the MEI.

If we go to the balance sheet, not much new items compared to Q2 or basically also '18. Our PPE went up a bit, but that's more -- that's a change in the IFRS standards. We apply this right-of-use assets standard now, which brings up the PPE with $15 million to $20 million. Our equity-accounted investees, that's for -- to the majority it's BESIX. And we still carry the deferred tax assets in the U.S., which has to be recouped or realized against future profits.

In the working capital, the contracts work in progress jumped a bit, if you compare it to last year, but on the liability sides we have a similar implication on the advances. So both go up in the range of $300 million, $350 million, so you have to judge those in combination.

As Osama mentioned, cash and debt both were at similar levels, so our net debt -- or net cash positive situation remained also in the Q3. Equity picked up because of the income realized. And we paid dividends, so that had a minus $35 million implication on the equity. The decrease in the provision, that's mainly related to MEI, of course, which was recorded and settled in August.

If we look on Page 13, our operational cash flow. Till the half year, we stood at $40 million. In the Q3, we are showing $79 million, so representing basically $40 million positive cash flow operationally in the Q3.

And I'd like to hand over back to you, Osama.

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

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Thanks, Mark.

I think, without any delay, it's probably much more beneficial if we can start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question today is from the line of Taher Safo (sic) [Taher Safieddine] from Citi.

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Taher Safieddine, Citigroup Inc, Research Division - VP [2]

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It's Taher from Citi. 2 questions from my side. First one is on the Q3 numbers, Osama. If I look at the EBITDA margin in the U.S., it's negative $7.4 million, losses of around $21 million. Clearly, this is due to the settlement of MEI. Can we just get some color on the magnitude of the settlement with MEI? On a clean basis, excluding this would assume U.S. is still EBITDA positive. And are we over with these settlements in terms of MEI for real? Is the U.S. on a clean slate moving forward? So just some color on that would be beneficial. And second question is just in general -- in terms of backlog trends. Can you give us just some update on what's happening outside Egypt and the MENA region? And how satisfied are you with the U.S. operations overall?

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

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Okay. The first question, we said -- we mentioned that last August. This is the end of MEI. And I hope it's very clear about that because also you can go -- and the public records in Iowa, there will not be any -- there won't be any record of any liens on the IFCo plant, which is basically indicates that there is nothing MEI is claiming against the construction group. Since the settlement was purely confidential, I cannot, quite honestly, indicate active -- exact numbers for the MEI impact, but I have to say that there was -- I mean the EBITDA was positive in the U.S., and let's leave it at that. I mean we have a very strong confidentiality clause in the settlement and I don't want to violate that. So the -- because I said this is the end of MEI. I mean we don't want them to come back on us again.

Going back, on the backlog. That's a very good question. Currently, the backlog that we have is mainly divided between Egypt and the U.S. I mean there are pockets of work in the Emirates, in Africa, but that's not really that significant. We are focusing very hard on trying to had -- have more diversification in that level, but we keep having interesting opportunities in Egypt that gives us the right portfolio, as far as the quality of projects and the quality of the expected returns. Having said that, this effort is still ongoing. So I believe there has been some -- I mean there has been a release on potential power work in Iraq. We're still waiting for certain approvals. There was a release on that, but that's -- we need to get the -- all the final approvals for that. We see Iraq as a good potential market for us. We're seeing some project finance-related opportunities in Saudi where we'll be working for the -- for private developers on water and wastewater. So there is a good and interesting pipeline we're seeing outside of Egypt. On the U.S. side, we're very pleased with the progress on the backlog. Number one, we're -- we have increased our backlog in the U.S. to become close to $1.4 billion. And number two, we are still maintaining our position to try and get quality work where we have clear returns, plus the fact that we are mitigating any risks associated with the U.S. I mean some of this work is cost reimbursable until we achieve final design and reach a guaranteed maximum with the client, which gives us a good visibility on the cost and the project as a whole. We are quite pleased again with the progress of the U.S. We would like to see more specialized work such as the data centers and similar work rather than just commercial buildings, and this is the current focus as we speak. I think the U.S. will continue to improve, and we're quite excited that 2020 would be a good year for the U.S.

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Taher Safieddine, Citigroup Inc, Research Division - VP [4]

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Perfect. Just a follow-up. In terms of looking into FY '20, I mean, what kind of awards -- clearly this year was boosted by very solid almost $900 million in terms of monorail. On a sustainable basis, I mean, what kind of awards would keep you happy in terms of sustainability of the backlog? This is my first follow-up. And the second follow-up, on the U.S. Are we still talking about a 2%, 3% EBITDA margin moving forward assuming everything normalizes and goes back to normal without any legacy issues which you just highlighted are fully behind us?

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Mark Littel, Orascom Construction PLC - CFO [5]

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Yes.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [6]

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Well, as far as new awards, I mean, the power work is always quite exciting for us. We feel that this is a -- became one of our core competencies, as far as EPC in consortium or in partnership with one of the OEMs. We're seeing also transportation work in Egypt on the metro, and other rail work is quite exciting. So this is what we are looking at. As far as the U.S. is concerned, we still believe that the target of 2% EBITDA or, let's say, 2%-plus EBITDA is achievable. And we will continue to focus on achieving it or even doing better than that, and again it's very much dependent on the nature of projects. As I said, if we continue to focus on special projects that has either demands or demanding clients such as data centers or that has a technical expertise, we will be able to deliver better than that.

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Operator [7]

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The next question is from the line of Karim Sawabini from Moon Capital.

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Karim Sawabini, [8]

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First question, regarding the PPP projects (inaudible) and what you're seeing in terms of opportunities to go into direct investments in some of those projects or others related to renewable or water desalination plants.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [9]

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Well, actually, we are the first or the pioneer company in Egypt. We have the first PPP in wastewater that was signed in 2010, and it's actually been operational now for more than 5 to 6 years. And it's a fantastic program. We -- and again, the wind is -- could be considered as either a PPP or a concession or BOT. We are pursuing all these projects. We believe that there are opportunities not only in Egypt but in other places, but we don't see that the -- let's say, the number of opportunities are happening with the speed that we like it to happen. I mean we like to see at least 1 or 2 projects every quarter. This is not the frequency that we're seeing in the market. But in -- but having said that, there has been quite an uptick in comments by the -- particularly by the Egyptian government looking at private sector participation and maybe participation with the sovereign fund that was just created. Whether they are going into disposal of some of the assets such as power work or getting into greenfield stuff, we are still looking into that. We have the appetite. We have the capability to do that, and we have also the experience because we are one of the very few in the country that has this experience today.

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Operator [10]

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The next question is from the line of Michel Said from CI Capital.

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Michel Said, CI Capital Research - Junior Analyst [11]

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I have a couple of questions. So one of -- one on IFCo, other on margins, and last one on receivables and payables. So starting with IFCo. I just want to make sure that when you say settled, you mean that the total amount have been cashed out from your cash flow. I can see the movement in provisions. However, I just want to make sure that MEI have fully received the amount of the lien. This is my first one. Second will be on margins. We've seen the same movement, upward trend of EBITDA margin from MENA in 3Q and then dropping in 4Q. So can you give us more color on why the margin have been that high, 15%, during the quarter, if there were specific project closures or margin recognitions? And if we can expect the same drop, without giving that guidance during 4Q. And the last question's -- the last question, regarding your receivables and payables. I understand that we've talked about this before in one of the calls, highlighting that one of your strategy is that you are -- that you request from your suppliers to wait more period of time before they get their cash. However, the level we are seeing right now in terms of payables, and it's super high. I am talking about 344 days or almost a year and receivables days on hand as well going higher and higher. So is this the new norm of Egypt to see such high level of cash conversion cycle? Or is this -- can be a period and then you will seek a downward correction?

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

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Okay. Let me go back to IFCo. I don't know, maybe my English is not that good. IFCo is over and done with. With a little bit of research, nobody can release a lien without the money being placed and paid 100%. Because if they do that, they lose their entitlement and they lose their rights. So let me repeat that again: IFCo is over. We have paid the money. And I hope that this conference call could also be the end of IFCo discussions. So that's as far as we're concerned. And we have paid this amount from our cash and our revenues. We had some of the monies yet that was pending. And we mentioned that before, I think maybe last year, that we have a certain amount of payable from IFCo to us that was tied to the release of lien. So that was also part of the payments that we had to pay MEI. So that's the first question.

The second question. There has been an improvement in the EBITDA in the MENA region for Q3. Let me be extremely transparent with everybody. We have indicated before. When we had the MEI case and we had the -- we had provisioned $40 million only, we said that we have -- that if a settlement happens, it will not affect the entire balance sheet of the group. And the reason why is that we had improvements over the 9 months or even over a year of certain projects that have closed, and we kind of kept this as a cushion in order to be released with the MEI settlement. Nevertheless, we are still maintaining our guidance on MENA. I don't believe that there will be any further reductions. We need also to -- to also understand that we had residuals of the power business and the wind projects -- or some of our power projects are pretty much closed for 2019, so -- and we have a big portion of our business in Egypt, our commercial buildings, which do not provide the same levels of returns that we have seen in '17 and '18, but nevertheless, we are going to -- we are maintaining the low-end EBITDA 2 digits for the MENA region as a general guidance. And we don't believe that we would see a similar drop after that.

Going back to the third point, I think I would like Mark to mention that because I don't believe that the suppliers have more than a year of pending. And he will speak about the numbers, but let me also indicate about the principle. We are one of the major players in the market. We need our partners. And I would like always to refer to our suppliers and subcontractors as partners, that we have to enjoy a back-to-back relationship. We provide the people with very good-quality contracts as their client. They have our organization behind our commitments to them, which has a big value. But having said that, we're not here to fund our subcontractors. The costs of doing business, they have -- they'll always forecast in their money, so they need to coexist with us considering the payment cycle. And actually, on projects where the funding is available, which are EPC plus F or are funded through international institutions, we don't see that issue at all. I mean this is pretty much related to particular projects in the -- within the government. That is quite baked as we speak now. And I leave the floor to Mark to maybe comment on that issue.

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Mark Littel, Orascom Construction PLC - CFO [13]

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Yes. I think it's important to indicate how we manage this over working capital because, if you just focus on the totals and the balance sheet, you get a confused picture. At our level, we try to connect the trades payables, which are the approved invoices sent to clients, to accounts payable, which is basically the downstream payment to our subcontractors. In the situation we have, we always want to be -- have more receivables outstanding than trades payables outstandings. So far, that works good on the group level. And also, between the segments, we are in a positive situation for that. So you have to carve out trade debt as against trade payables. Another bucket we manage quite closely is that the retention value we have to receive from clients is above the retentions we have to pay. So that's also a bucket in working capital. And the last, in the working capital we have this contract work-in-progress position, for which we take quite some advances. So contract works in progress needs also be balanced by the advance payments. So that's how we look to the working capital and to what Osama is saying. I think, on the term of accounts payable, we even improved a bit compared to last year because the U.S. has had a better cash flow, which also allowed us to maintain the current status on the subcontractors.

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Operator [14]

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(Operator Instructions) There are no other questions coming through -- oh, we do have a question just arrived. It's from the line of Ahmed Hafez from Renaissance Capital.

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Ahmed Hafez, Renaissance Capital, Research Division - Head of Research of MENA [15]

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I just have a single question on the collection of trade receivables. I mean, on my calculations, it seems it has improved quite a lot over the course of 2019. I mean, looking at just trade receivables over the revenue over the past 12 months, it has dropped to 65 days compared to 94 days in the beginning of the year. I was just wondering whether this is sustainable. Is part of this related to just the way the financials is in dollars? And there has been some currency movement, so maybe some of the balances are just faster and the numbers when calculated on a 12-month revenue is a bit misleading. Or is there an actual improvement in the collection? And what to expect going forwards.

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

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Well, it's an actual improvement of the collection efforts. I have to tell you that management has been putting a lot of time and a lot of effort in the collection process, maybe to highlight that the collection process is not simply following up. It's basically ensuring that the documentation is correct, contracts are in place, final prices are concluded with the clients, particularly the Ministry of Defense, and making sure that proper invoices are in place. And so it is not just a matter of follow-up. It is a matter of making sure the process is being done in a proper fashion and in a fashion that allows us to do proper billing. There has been a challenge in the first quarter, and I think we have made a big effort and made a big step on the right direction. Let me assure you that this effort is still ongoing. We don't believe that it's the end of the road. I think I would like to see more improvement. And what we are really doing now is that we are not -- we are adamant on not progressing with any new business without proper documentation in place. So I believe this is sustainable, and I believe we should be having -- we hope or looking forward to have a better picture by Q4.

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Operator [17]

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(Operator Instructions) There are no other questions coming through, so I'll hand back to the speakers.

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

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Okay. Well, I'd like to thank you for making the time to attend the call with us. And I would like to wish you a good end of the year. We're looking forward for another robust year, as far as we're concerned. And we'll be talking again probably end of March 2020.

Thank you very much.

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Operator [19]

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Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.