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Edited Transcript of OC.DI earnings conference call or presentation 26-Aug-20 11:30am GMT

Half Year 2020 Orascom Construction PLC Earnings Call

DUBAI Aug 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Orascom Construction PLC earnings conference call or presentation Wednesday, August 26, 2020 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Osama Anwa Bishai

Orascom Construction PLC - CEO & Executive Director

* Reham El- Beltagy

Orascom Construction PLC - Group CFO, Treasurer & VP

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Conference Call Participants

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* Ahmed Hafez

Renaissance Capital Limited - Head of Mena Research

* Brad Virbitsky

* Devind Kullar

* Jake Ward

Ashmore Group PLC - Junior Frontier Equity Analyst

* 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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Ladies and gentlemen, thank you for standing by and welcome to the Orascom Construction H1 2020 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today.

And now without any further delay, I would like to hand the conference over to your speaker today, Osama Bishai. Please, Osama, over to you now.

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

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Thank you. Good afternoon, and good morning, everybody. We are welcoming you back for our H1 results call. First of all, we're quite happy that how the business reacted over the last quarter which was coupled with the COVID-19 challenges. We believe we have demonstrated a good resilient attitude as far as the operation is concerned and as far as also our financial performance. Most of our business is almost split between the U.S. and Egypt. Both areas had a much more flexible attitude versus lockdown concept. We -- in Egypt, we have worked almost fully operational, obviously, putting in mind the precautions that we take for the COVID-19. The same in the U.S. Also the sites have been maybe 87% or 80% operational. I think the pressure was on the different offices where some social distancing had to be allowed for. So the number of people in those offices were not the full capacity of the team.

Obviously, we are still maintaining our actions and provisions for the COVID-19 situations. We are taking all the provisions on site, checking temperature, asking people to go home if they have any symptoms, helping them to reach out to the right health centers on all of our sites without exception in Egypt and in the U.S. So we believe we are still looking at that. It is getting milder. We were seeing the numbers are going down. But having said that, we don't want to lose focus on this priority as we're not out of the woods yet. We believe that if everybody is right, there might be a second wave. But nevertheless, it is clear that we have to coexist with this situation. And it is clear also that our 2 largest markets, Egypt and the U.S., the drive is to maintain the business as usual. So we have to work hard on working and performing while keeping the health and safety of our guys in mind.

Having said that, we had an increase in revenue between the first half of this year versus last year. We already achieved $1.6 billion. We have also achieved a good bottom line for the first half. And I think what we did in the last quarter was achieved a healthy cash position by June 30 and that's due to the focus on collection and cash management that we did in Q2. And we have indicated that in our call when we had our Q1 results.

The other issue that we mentioned before is that we are very concerned on the projects pipeline. So there has been a great focus from the entire management team from new opportunities. I think it's extremely successful for the team that we have closed June 30, maintaining the same backlog of $5.4 billion which really gives us the comfort that we are able to -- not only to secure jobs, but also secure jobs in the areas that we like to work in, and we are quite happy with the potential returns that these projects will get.

We had, in our results, obviously, some issues. BESIX, unfortunately, had the same challenges similar to what they had in Q1 and what they had in Q4 of last year. And this is one of the reasons that -- I mean if it was not for that, our results would have been better. We have spent a lot of time with BESIX management. We can feel that there is a big drive on reversing that in the second half of this year to end the year with a good note. What's -- on the good side and the bad side is that the same issues are on the same couple of projects that we are -- that were problematic in Q1, which means that the balance of the business is still growing in a healthy way. The other important issue is that also the backlog of BESIX on a stand-alone basis also ended up at EUR 4.5 billion with new awards in the entire first half of 1.5 -- EUR 1.1 billion.

So our pro forma backlog, if we include the BESIX numbers, we should be at the level of EUR 7.9 billion, which we believe is a decent backlog in our books. We believe it will give us the right time and the right space to be selective of the new opportunities. And also, it will give us a great buying power in order for us to create either savings or to create room to offset any potential overruns in the future.

One of the issues that I would like to stress upon before we get into the financials is that the backlog that we have acquired in Q2 has also a good level of diversification. We can -- we have almost $150 million with the private sector. We have added more work on the Ministry of Housing. We still have additional roads, which is something that is extremely profitable for our business. So we are not only getting commercial building related to government work which has been the case for a while. We're seeing more on the different clients, private sector roads and obviously, we are still maintaining our focus on infrastructure and water and wastewater projects. We believe there is more will be coming in the pipeline, particularly that Egypt is driving more work and more focus on water management and treatment in order to address the water issues in Egypt.

Last but not least, we have also distributed our dividends that we have announced last quarter, where this has been executed 12th of August this month. And also, we have received around EUR 10 million from BESIX our share of the dividend, similar to what happens every year.

So I would like to leave the floor to Reham Beltagy, our CFO, to run you through the numbers, and then we can go to the Q&A directly. Thank you.

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Reham El- Beltagy, Orascom Construction PLC - Group CFO, Treasurer & VP [3]

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Thank you, Osama. Good morning, good afternoon to all. If I may take you through Slide 10 and 11 of the results presentation, at a high level, revenue in 2020 was in line with the same level of 2019. We saw some pressure on gross margin during quarter 2, especially given the operating environment. But we are pleased with our progress on collections, on debt and better cash management. This is reflected in our lower net financing costs, higher operating cash flow of $219 million and an increased net cash position of $309 million.

As Osama highlighted, our consolidated revenue for quarter 2 2020 recorded $791 million bringing H1 '20 revenue to $1.6 billion mark. Q2 revenue was flat year-on-year with cited EBITDA margin of 4.4% compared to the 9.1% of Q2 of last year. And the tighter EBITDA margin is a result of some margin pressure given the current operating environment, higher progress of lower-margin contributing projects for this quarter in MEA operations, higher contribution of the U.S. to Q2 revenue of 40% for this year compared to 26% for Q2 of 2019. As you are aware, U.S.A. margins are typically tighter than MEA margins, 6.8% compared to 1% for this quarter.

SG&A costs also increased. However, it includes a couple of one-offs. If they were removed, we would be stabilizing at a bit lower at 5%, which is our typical range.

A lot of effort has been invested in managing our finance costs, recording a net positive of $4.1 million for Q2 of 2020 compared to a negative of $24.1 million in Q2 of 2019. This is a result of both optimizing our cost of financing for both EGP-denominated debt as well as foreign currency-denominated debt as well as a reduction of the debt levels compared to Q2 of last year. This is driven by our continuous efforts to maintain strong collection.

Our net income for Q2 '20 is at $9.5 million, bringing H1 net income to $34.4 million. Net income for the quarter was impacted by BESIX contributions of $7.7 million loss which combined with BESIX loss in Q1 bringing total contribution to negative $18.5 million. As highlighted earlier by Osama, this loss is related to the assessment of cost of completion for less than a handful of projects in the UAE as well as a project in the Netherlands. We still -- so that you are aware. Also, it's important to highlight that we still carry certain deferred taxes in relation to our previous losses in the U.S. These are carry forward for around 20 years, so we have still a long line to go on that.

Moving on to balance sheet, equity accounting investees is lower than last year's closing at $390.7 million. As evident, this is a result partially of the BESIX loss as well as an $11.3 million of dividends received from BESIX earlier in the quarter as well as an additional smaller dividend received from 2 of our MEA investment.

Looking at our working capital, trade and other receivables stood at $1.4 billion, marking an increase of $153 million, which was driven by high progress in projects and billing discipline as opposed to low collection. It is also worth noting that trade and other receivables were down $96 million compared to Q1 results. Contracts work in progress or under billings marked $1 billion due to closing which increased by $130 million compared to December '19 closing. On the credit side, we see a similar increase in advances in our trade and other payable account balance, both should be looked at in consolidation due to the nature of the contractual situation in need. Our gross debt stood at $153 million in Q2 closing, reflecting an increase of $61 million over December '19 closing but the 43 reduction compared to Q1 closing of $265 million. This increase in gross debt compared to the December 2019 level is mainly a result of aligning liquidity cushion to both MEA and U.S. operations to mitigate against the COVID-19 liquidity risks and challenges of -- that might arise for financial institution.

On the other hand, cash and cash equivalents also increased by $88 million in 2020, bringing our net cash of Q2 closing to $309 million compared to $279 million in December '19 and $114 million in March of 2020. This increase in our net cash position also reflects on our strong collections this quarter. Our operating cash flow for H1 is a positive $53.2 million. For Q1 of this year, it was a negative $166 million, reflecting the continuous asset Osama mentioned in the introduction.

This concludes my brief today. Thank you for listening in, and I now hand back to Osama, as I believe we are ready for the Q&A session.

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

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Thank you, Reham. Can we get started on the Q&A session, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Michel Said from CI Capital.

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

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I have the first question regarding the post 2Q performance. So now we are almost in end of August. So how has been the group performance and projects during this period in July and August? And what kind of revenue rebound or margin improvement in 3Q we should be expecting?

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

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Okay. As far as the revenue rebound, I think we are maintaining a good revenue today. I think we will be in a normal working period. The only thing that, particularly in Egypt there has been mainly 2 weeks of slowdown due to holidays. But other than that, we are working full performance. There is obviously some challenges in the smaller supply chain where there are people that maybe are more affected by COVID-19, and we are addressing that. But I think we are -- we will be back to normal performance on the revenue level. On the bottom line, I think we will maintain the guidance that we have indicated in November for the next half. But obviously, we need to consider, number one, there has been additional costs due to the COVID-19 provisions that we are doing. I mean imagine we have 50,000 people per day. They need masks, sanitizing on a daily basis. So this is an additional cost that we are absorbing.

So other than that I believe we would maintain the guidance of lower double-digit EBITDA and -- or even a higher single-digit EBITDA with a closer number on the profitability. The other issue that we need to consider is collection. We have been very successful in Q2. As you can see from what we have seen over the last 4 quarters, it is not -- it is not a, let's say, a steady issue as far as the Egyptian side is concerned. We are maintaining our position that we are focusing on that, and we are focusing on our cash and cost savings. But that's an issue that we need to address on every quarter because historically, we've seen that always the Egyptian government makes good payments in Q2 and Q4. We hope this is not the case in Q3, and we maintain good cash collections. But sometimes, this is something that is pretty much subject to the budgetary timing of some of our clients.

On the U.S. side, we believe that Q2 was better than expected because as far as the revenues are concerned. So I believe that Q3 and Q4 will even be better unless -- I mean an unexpected impact due to the COVID that could impact the construction business as far as the presence of labor and the supply chain. We haven't seen that yet, but obviously, this is something that we need to bear in mind. So actually, what I need to say here is that we are forecasting things to improve. But we should be very mindful of the fact that we are still under an impact of COVID-19. And what I'm saying is the impact of COVID-19, which is -- it's not the past. It is that there is always a chance that things can happen, and we could face new challenges. We are very mindful of that. We are very focused that this could happen so that we don't get shocked or surprised by this. And we are trying to kind of coexist with this situation so that if there is another surge due to the approach of the fall and the winter season, we have to be ready for that.

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Michel Said, CI Capital Research - Junior Analyst [4]

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Yes, sure. Another and last question regarding the monorail. I think starting second quarter or third quarter, this should be more active on this contract, which I believe is at a good margin, I would say, compared to the other projects. So how do you see this impacting your numbers? Or is this part of what this improvement in operations should be expecting?

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

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I don't believe that we'll see material revenues this year. You need to appreciate that this is a design-based project. And we are working in the midst of the new Cairo area and the new city and the end -- the end part of Cairo itself to connect the monorail. So there is a lot of utility diversion, which is done by the government. There's a lot of management of the route and the alignment of the monorail line. And this is taking a little bit more than expected. It's not really an issue for us but it will -- it will kind of impact the cost completion method where we are not incurring costs because some progress is not happening. But on the other side, we have already started some pilot work there. We have already started some precast work. And that's why I'm saying we won't see a material progress. We see some money trickling over the next 4 to 5 months. But I would see that the real impact of that project will be in 2021. As far as the new capital and the 6th of October will follow suit.

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Operator [6]

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Your next question is coming now from the line of (inaudible) from [Sustainable].

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Unidentified Analyst, [7]

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I just have a question on capital return to our shareholders. We're very appreciative of the dividend that was paid in the face of very difficult trading conditions. But there was mention that the dividend was modest and you would look at how the year turned out and consider topping up on the dividends. So perhaps you can just talk to that.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [8]

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Okay, we have mentioned that, and you are correct that we will address this in the quarter 4 of this year. I'm glad we have good collection for this quarter. That gives us the, let's say, the power to continue progressing in a healthy manner. We are standing by our position. If we are maintaining a good cash position, and we don't -- we feel that there is no potential threat due to any circumstances, we will go to the Board and consider another tranche of dividends or maybe a larger dividend next year. But you're right. I mean, this is part of what we are looking at, and we are considering that. And I think our Q3 results will determine if this could be doable this year or would be -- or next year.

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Operator [9]

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Your next question comes now from the line of Devind Kullar from Moon Capital.

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Devind Kullar, [10]

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I was just wondering, would you guys consider increasing your stake in BESIX and consolidating the business on the balance sheet -- sorry, on the financial statements?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [11]

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Look, this is the subject that we discuss not only every quarter, we discuss every day. Actually, this is something that we are looking at. Obviously, I would like starting tomorrow to consolidate BESIX on the balance sheet, but it's a no-brainer for us. It's an issue that we need to discuss very closely with our partners. And I think it's one of the hot topics for us as management and the Board over the next 6 months, and we hope we can do something that is actionable, and we can share with the market soon. But for now, there is nothing I can report. But it is part of our consideration for sure.

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Operator [12]

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And your next question comes now from the line of Jake Ward from Ashmore.

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Jake Ward, Ashmore Group PLC - Junior Frontier Equity Analyst [13]

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Just a couple of questions from me, if I may. Just starting on the MEA margin reported for Q2, obviously you mentioned it briefly in your intro that's dropped substantially to -- was it 6.8%. I was hoping if you could just give a little bit more detail on that figure? Perhaps how it would have looked if you can strip out potentially any one-off or whether actually, given the new additions of projects in the pipeline in MENA, this is kind of a new structural normal margin that we can expect? And then just a second question on BESIX. Obviously, it's come up in the last couple of earnings calls. And I presume the Q2 results from BESIX, the net income loss is again because they've taken more provisions on those projects. Can you just give us a little bit more information on that because I thought after the Q1 call they'd fully provide for those projects. So they are surprised to see more provisioning, if that's the case?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [14]

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Okay, maybe let's start with BESIX. I fully -- I mean, one of the issues that we were -- I'm being candid here, we're frustrated a lot is the feedback we got on Q2 on the BESIX level. As I said in my introduction, number one, it's still limited to the 2 projects in the Emirates and 1 project in the Netherlands. They are the same projects that have been affecting their numbers over the last 3 quarters this way. Number one, I believe it is a continuous situation where your cost completion is going up. You're not finishing the project. And you are getting either claims or overruns from your subs and you're not able to settle things with your clients. I mean this is the standard situation that could happen with any contractor on any project. We're seeing the other projects are doing reasonably well but unfortunately, those projects are really meeting all the effort that's done on the rest of the business. We got an assurance that this is the end of that, and actually, there are a couple of issues regarding this where we are getting them all to help BESIX with particular partners and particular subcontractors that we have relationship with in order to kind of like wrap some of those things and stop the bleeding on that side. It's -- the numbers also, the forecasts we're getting from BESIX is that the second half will reverse or bring back the company to the black by the end -- by the year-end. This is the explanation we are getting.

We're trying to intervene to support. We're trying to intervene to help. And I mean we have always been extremely happy with our investment in BESIX. And I mean, even -- I mean, this happens with some companies where we have a streak of the situation like that, and we need to, let's say, accept that as part of the construction business and the equity. On the bright side, I still believe that BESIX has a good opportunity because they are having a decent backlog that will give them the possibility of having good leverage and good buying power in the market in the next period because actually, everybody is concerned about the pipeline and actually all the vendors and the suppliers and subcontractors are willing to make some compromises in order to secure business, which will give BESIX an opportunity to get an upside and let's say, reverse the current situation.

On our numbers, there are -- on the MENA region I think the explanation on the lower margins. We have, obviously, a few one-offs. But a few things. Number one, we are still having some work done without final contract value with the government. And this work is being recorded at cost without any markups. So this is one issue. The other issue is that a lot of the heavy infrastructure projects like the water treatment, like the monorail, their real impact will start showing in the second half of this year and the first half of next year. That are also -- and we have not -- and we've been very modest in recognizing, let's say, the cost to complete projections on the water business that we're having in order to make sure that we arrive, and we believe there is an upside there. Last thing is that the current -- the majority of the revenue generated this quarter and maybe the quarter before had a big impact from the commercial buildings, which always are notorious for lower margins. So that could be an analysis of that.

I believe that by the end of the year, when some of the projects that I'm referring to will start kicking in like the water treatment. We have just closed the metro line for Line 3 Phase 4B. Once we close that, we will realize some additional profits. So we believe that towards the end of the year, we will improve our average margin. But again, the more infrastructure, the more roads, the more work with the private sector we have, which we have started to see today, we believe that our margins will improve moving forward. And one of the things that obviously will help us dramatically is to eliminate overdraft, which we are working hard on that, and we have improved, as Reham has mentioned, our cost of financing over Q2. And we feel that we will continue to do better as we move on.

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Jake Ward, Ashmore Group PLC - Junior Frontier Equity Analyst [15]

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That's very clear. Just a quick follow-up, if I may. I think you answered it in the question previously, but I might have missed that. Did I hear you say that you've maintained your guidance that you gave at the end of last to for this year. So that was kind of a group margin high single digits. Is that fair to say?

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

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I said for the second half, because...

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Jake Ward, Ashmore Group PLC - Junior Frontier Equity Analyst [17]

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For the second half, yes.

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

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Yes. Because the second half should be more normalized. While I still believe that we need to be very cautious because we're not -- this virus thing is not over yet.

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Operator [19]

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Your next question comes now from the line of Nour Sherif from Arqaam Capital.

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Nour Eldin Sherif, Arqaam Capital Research Offshore S.A.L. - Research Analyst [20]

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And just a couple of questions for me. My first one is regarding the U.S. awards. We've seen some slowdown in the second quarter. So can you give us an update on your outlook for the awards after the economic ease that we've seen. Also in Egypt, we've seen some resilient awards this quarter, so -- and it is expected to continue?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [21]

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Okay, in the U.S., first of all, the -- if you are following the news, everybody is complaining about the state, the disease that the money has not trickled down yet. So I haven't seen the reason. I mean if you see numbers in the U.S. because I see -- we are following that very strongly, but I think the U.S. government has not yet trickled in serious money that will be going for infrastructure and spending or construction that will affect us. I mean, they are more focused on money to the individuals and they're still debating and all that. But having said that, I've mentioned clearly in my -- in our Q1 call is that we have not seen clients who are canceling projects. But we are seeing that some clients are deferring their decisions to Q3 and Q4. So the expected slowdown in awards in Q2 is normal, and this is exactly what happened.

We have a good pipeline, but obviously, I have to still be cautious in the U.S. about the timing of investors to spend money. It's an election year, so I'm not seeing the federal government deciding to spend money not before September 30 because that's their fiscal year, or even some decisions could be slowed down because it's an election year. And obviously, as I always say, the COVID situation has not ended yet. So I think the U.S. will maintain not very fast, not a very high level of awards, but we are seeing a good, healthy pipeline. But until it transfers from either an opportunity or a potential project to a backlog, I think it will take a little bit more time than usual. As far as Egypt is concerned, there are 2 things that we need to put in mind. Number one, the Egyptian government is mindful of the construction sector. They have indicated so many times that it's an important sector, and they would like to continue that this sector moves on. It's driving the economy. They just hired at least 7 million people in the construction sector, which is, I think, 25% or more of the working force. We have the supply chain itself is dependent on that. So I see that the Egyptian government is continuing to do that, and we're seeing that from the projects that we had in Q2, and we're seeing a good, also pipeline.

Plus the fact the needs of Egyptian government or, let's say, Egypt in general is there. I mean there is a big focus and drive on water and water treatment. Even there was announcement on different levels of, I don't know, EGP 400 billion of spending on water and wastewater. The Egyptian government is continuing to develop new areas, whether in the city of Cairo, like the Maspero area, they are looking at future areas on the North Coast. We are discussing, as we speak, additional work, both on the North Coast and in Cairo. So we're seeing that happening. We're seeing a big drive in the transportation sector. We are working on Line 3 Phase 3 joint venture with a French group and Arab contractors. We are on the light rail, we are on the monorail. There is a big program for the ministry not only in Cairo transportation, but also in the railway. So we're seeing also a drive there. So I would say we are quite optimistic on that. Again, timing could be delayed a little bit because of funding arrangements or financing or decision making. But the pipeline is there and it is short.

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Nour Eldin Sherif, Arqaam Capital Research Offshore S.A.L. - Research Analyst [22]

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Got it. And just one follow-up question regarding the legal case of Sidra. Is there any update there? I recall that there should be some hearings this summer.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [23]

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Everything has been delayed actually dramatically. We believe this thing will take -- because of the delays and because of COVID-19, this is not a secret. There is a change in the trade unions, so that will also affect the entire schedule. We don't see anything happening that we need to report to the market or to the shareholders at least in the next 6 months.

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Operator [24]

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Your next question comes now from the line of (inaudible) from Crédit Agricole.

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Unidentified Analyst, [25]

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I have a quick question with regard to your cash position. I would like to know where is this cash located? Is it directly at Orascom Construction PLC or it is at the level of the consolidated operating entities, which will be the case maybe for the advanced payment?

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

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Okay. Actually, the cash is all over the place. We have it. There is cash in the U.S. there is cash in the operating entity in Egypt, Orascom Construction. There is cash on the Orascom PLC. There is also some cash in the joint ventures. So it is quite distributed. Actually, one of the things that we have been successful in Q2 is that we have been able to extract a decent amount of cash from joint ventures to the operating entity because that's for work done and progress and stuff like that. But it is -- it's always like a geographical moving target. We're moving -- we have to look at that on every single time. We try to keep the operating entities, having enough cash flow to support the operation, and we would also like to always keep a decent amount of cash on the holding level because it would allow us for quick movements in any geographic location if we need.

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Operator [27]

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And your next question comes again from the line of Devind Kullar from Moon Capital.

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Devind Kullar, [28]

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A quick follow-up on the BESIX provisions. And apologies if you've already answered this. My phone is having some trouble. I was just wondering, what is the exact provisions in the quarter for BESIX?

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Reham El- Beltagy, Orascom Construction PLC - Group CFO, Treasurer & VP [29]

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What is the exact provisions for the quarter related...

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [30]

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To BESIX.

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Reham El- Beltagy, Orascom Construction PLC - Group CFO, Treasurer & VP [31]

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To BESIX loss?

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Devind Kullar, [32]

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Yes, that's correct.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [33]

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We have on the investment level around $7 million...

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Reham El- Beltagy, Orascom Construction PLC - Group CFO, Treasurer & VP [34]

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$6.9 million.

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [35]

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Around $7 million as a loss item in the investment cost.

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Operator [36]

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And your next and final question is coming now from the line of Brad Virbitsky from Equinox Partners.

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Brad Virbitsky, [37]

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I have 2 questions. First, on BESIX. With respect to the 2 problematic projects, is there a limit to the extent if possible losses on these projects. So like if in theory, if the delays continue for the projects, can the losses just keep growing or is there sort of some sort of mechanism that limits the loss? And then I was wondering if you could just touch on the sort of the business outlook in the Middle East business outside of Egypt. Are there any countries that are promising from a new business perspective?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [38]

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Okay. On the limit, if we're talking operationally, you need to -- part of our success as a group is that we perform, and we deliver at the end of the day. So I think the limits that I see is that BESIX, even they are losing money on a certain project, they are adamant to maintain their reputation that they are a strong performer, and they deliver the product to the client in accordance with their obligations under the contract. There is no stock loss, let me put it this way, but you don't expect to lose, I mean, like the size of your contract on top of the contract itself. So I mean there's always a logical percentage, but it is difficult for anybody like me, new in the construction operation, I think we need to deliver first. I mean this is why we are a reputed contractor. Why BESIX is a reputed contractor.

Going back to the business outlook in the Middle East, I always maintain the look that we like populous countries. So we are monitoring Iraq very well. We believe Iraq has a very high potential. Number one, it has the population. And number two, Iraq is extremely in need of major infrastructure development. There is very little development that took place since the Iraq-Iran war. I mean, if anybody can recall that. I mean they haven't had a longer -- any long piece stretch since then. So I believe that this is a country where there is a big opportunity for us. We have been there, we have been working on the power plant. And unfortunately, we had to evacuate 2013 due to the ISIS insurgence at that time. But we are maintaining a very close look. We are looking at projects in Basra, we are looking at projects in Baghdad. So that's one area. There are some opportunistic projects in the Emirates, but we don't believe that the Gulf is a target market now because I think it's extremely tight and they have also budget issues. We are again monitoring the Saudi market. We would like to be very selective in Saudi. We currently have one project which is a treatment plant that we are working there and it is a private concession.

So we are working technically with the banks, with the lenders of the developer because this is how it works. I mean we get paid from the bank. So we are quite comfortable there. So we're looking at such opportunities. There are some signs of encouragement from the government to the -- to investors to look at downstream industrial opportunities. So we are getting phone calls every once in a while. So we believe this is also that -- we're monitoring that very, very closely. On Africa, we are currently in Burundi. We are also looking in Africa opportunistically. But if I look at the, let's say, short term, I believe Egypt is the hottest construction market in the region for now. And I believe the second could be Iraq. We obviously hope that peace and order comes back in the region because I believe that between Syria, Lebanon and this part, there is major development to take place. And I believe today, Egypt has the potential to be a good source of construction resources are there.

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Operator [39]

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And your next question is now coming from the line of Ahmed Hafez from Renaissance Capital.

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Ahmed Hafez, Renaissance Capital Limited - Head of Mena Research [40]

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Just a couple of questions. First, can you give us the percentage completion of the 2 projects that BESIX had issues with? And the second, if we're looking at the backlog in Middle East and Africa on a blended basis, would that still be carrying an EBITDA margin of 10% to 12% which was historically the guidance for this part or would it be lower now?

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [41]

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Okay, I'll start with the second question. We are targeting those numbers. As I mentioned before, we are also experiencing some additional costs due to the COVID-19 requirements and the provisions that we're taking to protect our people. And obviously, any project, particularly -- have some delays. But in general, that we are -- that's what we are expecting. As far as the BESIX, I think we are maybe looking at somewhere between 70% to 80%. So I believe that it's not like we are at the beginning of the project, and we have another 2 years to go through this.

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Operator [42]

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

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Osama Anwa Bishai, Orascom Construction PLC - CEO & Executive Director [43]

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Well, thank you very much for attending the call. And we are, I think, enjoying the last weekend in summer, next weekend. So we are looking forward to meet with you again in November when we release our Q3 results, and we hope we can bring the right numbers for you guys. Thanks.

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Operator [44]

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Thank you. That does conclude the conference for today. Thank you all for participating. You may now disconnect. Speakers, please stay on the line.