Orascom Development Holding AG (ODHN) Earnings Call Transcript & Summary

Good afternoon and good morning for those joining us from the U.S. I'm Sara El-Gawahergy, Head of Investor Relations of Orascom Development Holding. And on behalf of the group, I would like to thank you for joining ODH's Full Year 2019 Results Conference Call. We have on our call today our Chairman, Samih Sawiris and the members of the Committee executive, Naguib Sawiris; Abdelhamid Abouyoussef; and Ashraf Nessim. The call will start with the presentation by Abdelhamid, who is also our Chief Development Officer, and Ashraf Nessim, who's our Chief Financial Officer, followed by a Q&A session. Please feel free to ask your questions to our Chairman or any members of the Executive Committee during the Q&A. Thank you, and I now hand over the call to Abdelhamid.

Thank you, Sara, and good afternoon, everybody, joining us. First, let me start by saying on January 31, 2020, as you know, should have been following the company, it's with a very heavy heart that we lost our CEO, our dear friend Mr. Khaled Bichara in the car accident. Shortly after that, an Executive committee was formed with Mr. Sawiris continuing as Executive Chairman, Mr. Jürgen Fischer and Mr. Naguib Sawiris as members of the Board joining in that committee and myself and Ashraf Nessim as well in that committee. Ashraf and myself have been with the company for the last 7 years, which today as part of the executive management team, dedicated us complete visibility and -- into the company's activity strategy, operational aspects and the like. So we were able to hit the ground running and carry forward the work that was started by the late Mr. Bichara. If we move on to the following slide, we now have summary. You will see that 2019 was indeed a great year, maybe the best year we've had on record to date. Our revenues were up 33%. We were able to record just under CHF 0.5 billion, CHF 453 million. Our adjusted EBITDA is also 30% up, recording CHF 74 million. And if you're not familiar with our adjusted EBITDA, what -- we just take all the one-off and all the nonoperational items, such as FX or any such effects. Cash from operations was up 44% we were able to generate CHF 80 million from our operations. Net losses were reduced to -- from CHF 45 million to CHF 31 million. It is important to notice that between the prudence related impairments and the losses from our share of associates, we would have been in the black for the first time in a few years. We have successfully issued our first bond, CHF 100 million, a coupon of 3.25% 5 years tenor, and it was fully subscribed. And we also launched Eco-Bos and the reason why this is important because this is our first consolidated European destination that is mature. And really puts us as a European, African, Asian international real state and hotels developer and not only MENA or emerging markets. As we go to our key segments, financials and KPIs, we'll see that our net real estate sales almost very, very shy of CHF 0.5 billion, 140% up from the year before. And again, that's a record for the company. Our deferred revenue, which is something that's going to carry us in the years to come for all the construction activity, the deferred revenue, again, about CHF 490 million. This balance will become very important to during the Corona crisis and afterwards. Our receivables portfolio, again, something that's carrying us through CHF 600 million, up 100% from the year before. If you consider the real estate segment on its own, our revenue is up 83% with CHF 232 million, almost CHF 250 million, with our EBITDA up CHF 266 million, up 57%. Hotel financials this is -- it has to be taken very detailed because, yes, we're up 7%, but we have to realize that even though we added a few rooms in Salalah, about 177 rooms, we also sold 3 hotels 310 Citadel Azur, Royal Azur and Club Azure. So the fact that we were able to increase our revenue and increase our EBITDA and GP despite the monetization of the 3 hotels, is something noteworthy. And I think also something that we're very proud of that our Town management has hit the brac for the first time, as they're found mature around the world in our various destinations. And this is our recurring revenue that we'll keep on getting even when we finish our Land Bank and even when Corona hits -- or hotels are struggling, Town management's as recurring revenue pipeline that fuel our lifeline. The following slide, you will -- in the revenue analysis, you can see that we disposed Tamweel, our consumer finance vehicle that was monetized in 2018. But even though, this is gone, our revenue is up, and each and every of our key segments, the real estate, hotels and the Town management is up considerably as shown before. If you look at the revenue by destination, Gouna remains to be our biggest contributor. But you can see that other destinations are catching up, Salalah will be the biggest of them all. O West is growing very fast. In revenue, it might not appear impressive, but in terms of real estate sales, it is our biggest contributor by far. And this will turn into revenue in the couple of years to come, as construction activities carry on, and we expect great things from this destination. And then of course, we have Lustica and Sifah and Taba Heights and Makadi all contributing in all different service of maturity. If we go in by destination, just I'd like to remind our audience that we have 100 million meters of land bank, square meters and only 23% -- 33% of that is developed. So we still have close to 68 million meters remaining. And this is something that we're going to focus on in 2020 and afterwards. We're going to start considering Orascom not only a land bank where we develop hotels and redevelop real estate, but rather a platform where we develop our own assets, but we also provide opportunities for third-party developers to come in and unlock the value of this land bank and develop whether it's commercial real estate -- commercial -- not residential, but commercial developments such as retail or a mall or a hotel or an a aqua park or an adventure park or any kind of activity that with help of destination, our various destinations grow more, to provide better service to our clients, will also save us the CapEx that was needed to provide these services and provide a recurring revenue stream through our land banks, whether we do it through revenue share or through land sales, which should unlock the value in our best land bank divided over the various countries and destinations. If you look at Gouna, we grew our hotel inventory by 100 rooms, and we renovated 144 other rooms. We launched more real estate projects. Delivery is on track, even in 2020, with Corona, delivery is still on track. Construction has not stopped, it slowed down in few cases to manage our cash, but we are committing to our deliveries in the various destinations in Egypt and outside. If you look at the KPIs, you can see that Gouna is still -- we're able to do CHF 128 million of the estate sale. TRevPAR is up 20%. GOP is up 6%. And even though the number of contracted units in real estate is down by almost 28%, however, the average selling price is up, and that's why our total value is up. This is part of our continuous effort to make sure that Gouna is positioned higher and higher in the Egyptian market and even the international market coming to buy in Gouna. We keep positioning it every year by pushing the services and pushing the price per square meter. Our revenue per segment. Hotel used to be the biggest contributor to our revenue, for the first time again, in a while. Real estate took over, even though hotel have grown. And the Town management is growing, and you can see a healthy mature destination, which can give you a taste of what's to come in the other destinations in the years to come. In Salalah and Hawana, we're continuing with our development of real estate. We started actually the construction of our fourth hotel there. It's a 400-room hotel, 5 stars level, right on the beach. And with -- just for the record, we only have 120 rooms remaining before we can finish our minimum build obligations. And this would secure our land bank in Oman for good. And this hotel is expected to be soft opened by the end of next year. So even -- and by that time, corona should be long gone. If you look at the KPIs, you can see that the occupancy has gone down. This is due to Khareef season, when -- if you don't know Khareef season in Salalah, is the summer season. It's a tropical season, where the regional market is very, very interested in coming at very high rates. The rain, they will come as much this year. So the occupancy is down. However, GOP will still maintain through the increased prices and revenue management. Real estate was up by 37%. And again, you can see the same trend of average selling price going up as well. And of course, on the revenue, both segments are growing. Montenegro, which is our third destination in the maturity line. We started the design of our new Marina hotel. It's a 200 unit hotel. This will bring the hotel inventory in Montenegro to about 311 units, which completes our first phase of the MBO, the minimum build obligation. Construction is ongoing. We were able to start delivering in the Centrale area. Centrale area is the mid-scale development that we have. It's not on the beach but slightly behind. So we're able to have different offerings in Montenegro. And we continue to develop and grow our Marina by adding more front views. The rooms -- the hotel, because it is a small hotel and it's still the beginning early stages of the destination, it's still not in the black. But we are confident that this is an anchor destination, an anchor hoteling destination that will yield very good results once more critical mass develops there. The real estate is hovering around CHF 30 million, and we expect with the new Marina hotel that this will increase, because this is a condo hotel that will be sold in an economic citizenship program. So Montenegro will be providing passports. So we expect a lot of interest in that program, which should facilitate the sale, the real estate sale, the best hotel on one aspect, we funded that way from the other aspects. We bring more life into the destination. O West, our black horse, as they say. O West, we started settling. We even sold 3,265. So over a quarter, this has been CHF 250 million of real estate in our first year of operation. Construction has started in Q1 2020. We also signed 3 schools through land and we were able to monetize this land for about CHF 19 million. And we continue to develop -- more schools are coming up, more retail is coming up. It's an infant destination, but it's growing very fast because of -- makes it one different than the rest of our designations, as that -- it's our first home destination. This is right in Cairo, where people are interested in living full-time, and not necessarily in a vacation home, which is allowing us to accelerate the development full speed ahead. The last destination we're covering in our presentation is Andermatt, even though we only own 49% but it is our Swiss destination that we're very proud of. We were able to sell for CHF 62 million, but there was a bulk deal for Taurus. Taurus is a fund that was -- got postponed to take a big part of the remaining inventory. We hired a new CEO. So it follows our destination management approach where we get the CEO for every destination to decentralize. However, the holding company still remains very focused on cross selling, on synergies, on linking the destinations together and benefiting from all of them. The good news on this destination is that Switzerland is the first destination of -- a country that allows us to reopen our hotels booked, The Chedi and The Radisson Blu will be opened as of the 8th of May. And as of the 15th of May, the Golf course will be opened. We believe that this is a trend that where governments one-by-one will start implementing social distancing measures and purification measures, where, thereby allowing hotels to reopen and who're like to go on. We expect Egypt to follow in the next weeks. We expect Montenegro to follow in the next months, and so is Oman. If you can see our -- in the performance of our hotels in Andermatt, we can see that, it was sold at a very high level. The go-power might be a bit below last year, but that's because of the effect of Radisson just opening as a new hotel, but the Chedi expense is positive year-on-year. Real estate, yes, it's only CHF 62 million, but CHF 110 million included a bulk deal of CHF 50 million. Again, we expect, starting this year and the next that the real estate in Switzerland will be able to take off. With that, I hand over the floor to Mr. Ashraf Nessim, our CFO, for the financial part of the presentation.

Okay. Thank you, Abdelhamid. I will start with Slide 23. I will try to explain the numbers here. And I believe the first number that I need to explain, as usual with the gross margin. You can see that how our gross margin dropped from 32% to 25%. And basically, Abdelhamid already mentioned there is component -- it was -- as he mentioned last year, we had, here 2 of our hotels fully rented out that we're deconsolidated in 2019, where -- because they were sold. So this was 100% almost half of margin in 2018. In addition, as we said, due to Khareef season and all that stuff that happened in Oman. At the same time, we had another factor that affected the margin is O West. As you know, O West -- it is the first year, so the revenues coming from O West is really very low. Only the portion of the land component in our stand-alone units or when the unit that are recognized as revenue, because construction still in 2019 was not started. It will start actually in Q1 of this year in 2020. So the revenues were on the low side. But at the same time, we have to book all the expenses related to the marketing, to the sales expense and to the offices and everything designed. So a lot of thing that needs to be expensed in 2019, with no revenue being attached. So the margin, you can imagine in O West in the first year, if it was down, it is expected to improve the year-by-year until it reaches the maturity, I would say, in 2 years' time. Also if I look at the G&A, you remember the change in the new -- we said it since Q2. As you know, we had this compensation of CEO, our -- Khaled Bichara our previous CEO, and unfortunately, as you know he passed away. But there was [indiscernible] contingent compensation that had to be booked over 5 years. So in addition to the other 2.5% related to the gifts that was given for the Chairman Sawiris. And based on the accounting standard, this as well needed to be booked in our expense for the first Q, so in particular, a little bit our G&A expense. And if I look at the share, also in the share of associate, the losses of associates improved compared to last year, 16% compared to 17%, mainly coming from the big improvement that is happening. One of our associates is -- in Egypt, we have a construction company. So it has tremendous improvement because, if you are not aware, the development on the construction in general, immediate within the last 3 years is doing really great. So very hard as well our construction company that we own and 40% of it is basically having -- it is very big improvement on their numbers. Maybe the numbers as well that it needs to be highlighted. As you saw this morning in the press release, unfortunately, in 2018, there was primarily our financial with CHF 3.5 million that is, if you remember, before we compare Club Azur that was sold in 2018, but in the previous year in 2017, they were ramped out, as I said. So when they was rented out, we had to do the fair value on older reevaluation rent to the other comparative income, to -- as profit. Unfortunately, when we sold them out in 2018, there was another -- because we reclassified this process with the P&L and basically, you shouldn't do this, so this is an error that actually pass from our side and from the auditor's side as well. So -- but the thing is, that this error had no effect at all, nor on the equity, nor on the cash group. It's only a P&L effect in 2018. There's no effect at all as well in 2019. So it only happens in 2018. Also what affected the numbers, as Abdelhamid said that we took some provision and there in this year that affected our number in 2019. If I look at the next slide, it's basically the prevailing market history show you that because as you know, we sold 3 of our hotels, Citadel Azur, Royal and Club Azur as well, in addition to Tamweel and there were the performance -- this is to show you apples-for-apple comparison. And if you look at it, even you will find that the growth isn't much higher than the one reported. If I look at the balance sheet, mainly in the number that is really different this year is the addition of O West. As you know, O West isn't new development that we are doing the co-development with the Egyptian government and then we have to recognize the land as part of our inventory as we sell it. So the inventory increased by almost CHF 400 million. And at the same time, you'll find that the liability related to the acquisition of the land increased at the same time. Worth to mention is that, the liability of O West land will be paid over the next -- not this year -- within the next year. So we have this year's payment plan and it will basically balloon towards the end. So the cash flow within the next 2 years from O West is really not in that half. If I look at the financing profile, we used to report the comparison between the full maturity profile and the new one. Since now we have a lot of discussions with the existing banks, as you know, in all, our countries that we work in, the Central Bank is already giving a lot of support to any company and basically, that's at least part of them are working in the tourism. So we already extended our payment. We already have arranged to pay only half of this amount that you will see in 2020. This is already taken, and we already had an extended tenor for 6 months. Also, we are working with the related banks in Egypt and the UAE for even better terms, so once we have a clear visibility on all this because we aim to get to 2 years of grace period, not paying the interest in order to help us in -- come back and start the construction and the CapEx plan as we had before within the next 2 years. The last slide is the cash flow statement. You can see that there is big improvement in the cash from operations to reach CHF 81 million almost compared to CHF 56 million. And you can imagine this is occurring because of all the improvement in everything, our sales or even the increase in the revenues of the hotels, and for sure, the extra addition of O West as well, the new sales coming from O West. That's clearly had a lot of collection. So improvement is coming from every, I would say, segment that we work in. Here you will find that the taxes paid was a little bit extra compared to 2018. And this is, I'd say, a one point, because we had some disputes with Egyptian government that was settled last year, and we paid based on it the extra amount that you can see here. I believe, other than this, you know as well the change in borrowing we had this year, the new CHF 100 million of the new bond that we raised in 2019, which -- this is why you can see that increase in borrowing is 63 because of -- we paid some of our borrowings as well in Egypt and in other destinations. By this, I'll finish my part of the presentation, and I go back to -- hand over to Mr. Abdelhamid.

Thank you, Ashraf. Okay. Next, we address the outlook of the full year. As the uncertainty and volatility level of the business is very high, so we're not giving any guidance, but what we will do is that we will give quarterly updates and even more frequent updates, whenever there is a major change in the business. It is very important to remember, however, that as a company, we went through the Arab spring in 2011, we went through the Egyptian Revolution 2013, we went through troubled banks, we went through hotels closing before, so as dark and difficult that this crisis is, we've been there before, and this has allowed us to react very quickly to the crisis and put measures in place, whether on the cash side, on the OpEx side, to make sure that we come out of it than before. It is, of course, very helpful that we started the year with CHF 186 million in the bank, which we are currently still holding as a balance. However, if we look at Slide 31 of the actual initiatives that we will take -- were taking, we were able to reduce our CapEx outside of the nondiscretionary CapEx and outside of new yielding obligation, we reduced them by almost CHF 120 million. We have 2 scenarios in place. One scenario is the worst-case scenario, basically, a Doom's Day where hotels remain close till end of year. And the other scenario is the base case, which we believe is more likely, where governments, one-by-one start to reopen hotels and people start to learn how to live with corona and carry on their lives albeit, in a different way. So Capex, we were able to do huge savings there. Some of the savings, of course, it's cash saving, but they will have to be done at some point in the future, but we will not touch them until the crisis is over. Our debt, as was explained by a lot of central bank initiatives all over the various destination was pushed by central banks and it resulted in a recurring cash expense of around CHF 30 million. We postponed all new hires. We reduced expenses. Just to give you an idea on the OpEx side. We were able to reduce over CHF 30 million of the OpEx of real savings. I'm not talking about variable cost that goes down like utility goes down on the hotel sales. I'm talking about real fixed expenses, whether it's from marketing or other fees or whatever fixed cost that we were able to save. The quantum, group-wide, is almost around CHF 30 million, CHF 36 million, based on which scenario you follow. And all the government used that as well. The governments were very helpful in postponing some of the dues and a subsidy, as working capital as well. As Q1 goes, yes, the crisis started hitting in February. But we were able to still perform relatively well. Yes, maybe lower than the year before. But I think higher than most people anticipated. If you look at Q1 in net value of contracted units, you see that we're almost above last year by 1%. CHF 100 million was contracted in Q1. And if you look at the hotel, you can see that, yes, there was an effect because actually the hotels were all closed sometime in mid-March, depending on which country. But if we were able to still get some good revenue, which would allow us to extend our runway going forward in the various destinations. With this I -- this is the end of the presentation. The appendix will have the rest of the destinations that we did not cover, because they were probably small enough. And now I open the floor for Q&A. If anybody have any questions.

Thank you, Abdelhamid. And John, can you please open the floor for Q&A?

[Operator Instructions] And we have questions that came through over the phone ma'am. We'll now take our first question, and this comes from the line of Cedric Lang.

I've got 3, if I may. So the first one is on the real estate segment. Just what dynamics do you see in the markets right now? Are there previous buyers stepping back from the transaction so that you have, like to resell their properties and just in general, I guess, that the sales are coming to a hold currently, just that you could give us some flavor? And then I got a questions on -- the second one is on the impairment of inventories. If you could explain what this is related to? And maybe also how this compares to the remaining inventories you still have on your books. If you see other risk for further impairments right there? And the third question will be on provisions. You used substantial part of the other provisions, if you could explain what this is related to, maybe to the tax settlement with Egypt? Or just what this exactly is? That will be my 3 questions.

Sorry, first question is about how many units were return? Is that -- did I understand you correctly?

Yes. Yes. Just how the dynamics you see if there are buyers stepping back from their transactions in the current environment so that you like to remarket their assets or stop construction or something similar?

No. Because there is, of course, some default rates that happen. But so far, we're in the single-digit percentage wise. Don't forget that in Egypt, which remains to be our biggest market, real estate is not only for use, but there's also historic value. And people when buy real estate, they buy it also with post-dated checks. So it is much more than just the cash with contracts that they can get out of, it is a real life sale. And defaults rates, as we have not seen so far an increase or rise in that default rate, which remains to be in the single-digit, percentage-wise. For your question about the inventory, can you please, repeat it, because it was all stated very quickly.

Yes. You had some impairment of inventories. And if you could explain that, what this was related to? And if there is a risk for -- because you still got a lot of inventories on your balance, if there's a risk for further impairments of the remaining part?

Sure. Cedric, let me clarify this. As you know, we had -- in order to repay this year, I think we have to take a decision of some of the impairments that we have taken and affected our financial. So some of basic impairments were related to some projects that actually are not -- if you look at it, actually is not in our plan within the next 3 years to develop. So as a prudent action, we took this as an impairment this year. But for the second part, no, I don't expect that we have other impairments related to inventory in the next year.

Okay. And the provisions you used?

Sorry? You're inquiring to remaining impairment?

No, that the provisions you have -- the other provisions you had on the balance sheet. Did they decrease substantially so I can...

Basically part of the impairments were part of the investment and the other part was partially in the fixed assets. So these are basically the inventory -- the impairment that -- which has caused consecutively.