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

Good afternoon and good morning to those joining us from the U.S. Thank you for joining Orascom Development Holding's First Quarter 2020 Results Conference Call. The call will start with a presentation by Abdelhamid Abouyoussef, Executive Committee Member and Chief Hotels Officer; and Ashraf Nessim, Executive Committee Member and Chief Financial Officer. Then we will open the floor for Q&A. [Operator Instructions] I'll now hand over the call to Abdelhamid.

Thank you, Sara, and welcome, everybody. It's been a very interesting quarter and a very interesting year so far. So let's jump right in it. So if you go to Slide 4, you'll see our executive summary. So basically, our revenues were down 5% quarter-on-quarter. As you would recall, our hotels were closed by the third week of March worldwide, depending on which country. However, let's also not forget that there was a slowdown that started happening by the end of February to the beginning of March because people were starting to be afraid from COVID-19, and this has affected our occupancy and our hotels revenue. Our EBITDA as well is down 26%. However, we're still able to get positive EBITDA of CHF 15 million, again, due to the decrease in hotels revenue and the slowdown from the end of February. Cash from operations, we were able to increase that amount by 82%. So we finished the quarter with about CHF 13 million, almost CHF 14 million from operations due to our enhanced efficiency and increased operation in the various destinations despite COVID. Our net loss for the quarter, we are at a CHF 4 million loss. Of course, if you just take a look at the numbers, the hotels were only achieving last year without any increase, this quarter would be in the green, and we are very close. And this year, 2020, I know a lot of our investors were waiting for 2020 to be our year where we make some profits, and it was on track to get there. Unfortunately, COVID was stronger than any of us. For our land monetization, we were -- as promised that this will become a recurrent revenue that we are doing, we were able to close 3 agreements over the last few months, and these 3 agreements yielded cash inflows of about CHF 32 million to ODH. All agreements were in O West, our Cairo first-home projects for school development. As explained before, land monetization is going to become an important factor going forward through our business development team for various reasons. It gives value to our land bank and it shows -- unlocks that value to the market. It gives us very healthy cash flows with little or no cash-out in expense. And it provides, in this case, schools that we need to cater to our clients in O West since it is a first-home and a Cairo destination, a capital city destination, this is very important for the sales of real estate. People want to live next to good schools, so on and so forth. Our latest development in Eco-Bos is that, finally, this destination is on track. It has started. We secured a kickoff loan, about GBP 18 million, from Shawbrook Bank. We were able also to sign our contractor agreement in February, and the groundbreaking has already happened in March. And sales will begin this month. And going forwards, we will be reporting sales revenues as its targets and KPIs as well as revenues from construction in Eco-Bos, our U.K. -- our third European, if you consider Andermatt and Montenegro, our third European destination. If we go to Slide 6 and we look at the key highlights from the segments. So net real estate up, more or less flat, a 1% increase, CHF 100 million (sic) [ CHF 107.7 million ]. That shows resilience in our destinations because even though COVID had hit almost 1/3 of that quarter, we were still able to maintain our sales momentum. And thanks to O West, our newest destination in Egypt, our deferred revenue balance and our receivables portfolio were both up 70-plus percent, up to CHF 530 million deferred revenue and CHF 651 million receivables on real estate. That's a huge chunk that we'll be seeing going forward in our revenue recognition as construction goes on. For real estate financials, again, up 6% on revenues, down some percent on EBITDA. Reason for this is that O West has a smaller margin because it's a more mass product and sold more apartments than villas, which also have lower margins, but it's mostly flat. Hotel financials is where we got hurt the most in Q1 with a 22% decline in revenue and a 40% decline in GOP. Our town management is last but not least. It is our source of recurring revenue that keeps on growing as our towns gain critical mass and as they grow in number. This is the consumption of utility, of electricity, all the services, the retail, the amenities, the marina, the hospital, the schools, and this will -- we're in the green now. So we almost did CHF 1 million in adjusted EBITDA, and this number will just keep on growing as we grow our destinations. It will be our slowly-but-surely source of recurring revenue going down the road. For the revenue analysis, as expected, real estate grew, town management grew, hotels went down. And in the -- by destination, you can see that Gouna is still, by far, our biggest destination, followed by Salalah, The Cove, O West. And the other destinations follow. Of course, going forward, as construction starts in O West, this order will change in near future and we'll have less dependency on Gouna as our main destination. If we start going to the various destinations, Slide 11. So I'll give you the highlights on Q1. We started delivery at all the sold deals that we're supposed to deliver. And of course, as COVID hit, we slowed everything down because we were into cash preservation mode. Nobody knew at the time what effect this virus will have on our destination and on our company. So every expense was saved, whether it was deferred or canceled or reduced, and every CapEx was postponed whenever possible. However, now that we see that this is not going to be ending light, as we know it, it's a big crisis, but it's a crisis that will pass, we are restarting our construction activities on the country. We're actually boosting them because we saw a comeback in real estate sales. So we wanted to show the market that we are delivering construction as agreed. We are continuing to deliver as contractually obligated. And this was encouraged by our healthy cash flow in the bank and by our continuous real estate momentum, which we will go for in the few coming slides. So on the hotels side, in Gouna, all hotels were closed, as we know, in March, March 19. However, in middle of May, the government allowed us to open 25% of our inventory. This 25%, we were able to secure during the week or at least about 60% occupancy last week of May. Starting 1st of June, the government increased the cap on this occupancy to 50%, so now we are allowed to able -- to open about 50% of our occupancy. The first 2 weeks of June in Egypt is -- the school is still in session, so of course, without international tourism and without local tourism, occupancy went down. However, we expect local tourism to come back starting in the couple next weeks as school ends. And just yesterday, the government also announced that they will be opening international tourism effective 1st of July for 3 -- for charter flights, including 3 airports, Hurghada, the Gouna airport being one of them. So we are starting to receive forward bookings on July and August from Germany and other destinations. We're very excited about this comeback, and we will be monitoring closely the speed of bookings that we'll receive in the coming days and weeks. So if you look at the KPIs. Again, there is an increase in our revenue by about 17%, went from CHF 41 million to CHF 48 million. This increase is coming primarily from real estate and from town management. The town is growing and will continue to grow irrespective of hotel occupancy and real estate as construction activities go on. In Salalah, our second biggest destination. Again, same concern, government closed all the hotels. In this case, it was March 11. And unfortunately, until now, the hotel is -- the hotels are still closed. We are getting signs from the government that they are expecting to open somewhere in the middle of July. However, this is not yet confirmed. We are still progressing with the construction of our newest hotel, 400 rooms. This will be the fourth hotel in Salalah. And this hotel will complete the minimum built obligations and make sure that there is no further liability on the landlords, the Omani government. The target opening date for this new hotel will be end of next year. For the revenue and for the KPIs, we see that we were almost flat. Even though hotels lost about a month from their revenue, real estate compensated the difference. And here, you can see that town management is still -- although it's increasing at a high pace, it's still a small quantum. And as the critical mass of the destination grows, this amount will grow and become our source of revenue stream. Montenegro. Q1 for Montenegro is usually a dead season anyway. There is very little real estate sales going on. There is very -- there is no hotel operation to speak of. So we are just preparing this week to open our hotel there. We are progressing with the design of our golf course; the design of our second hotel, which will finish the first phase of the minimum built obligation. And construction of real estate is ongoing and deliveries are going according to schedule. Q3 is really where this destination kicks into gear. And hopefully, by then, these virus effects will be reduced much more than it is today. O West, our Cairo destination, our newest destination, we have seen a slowdown in March for our real estate pickup and real estate sales. The slowdown continued in April. However, in May, we are seeing a huge comeback in -- we are not yet at the numbers of May of last year. I'm going to further details in the outlook. But it is encouraging to see that people are -- has been investing in real estate because they realize that this virus is -- although it is one of the biggest crises we have seen in modern times, but life will go on and they will continue to invest and, in the case of Egyptians, park their wealth in a safe haven like real estate. Construction has started. We have broken ground. And just last week, we had awarded the first 400 builders of the project. And revenue recognition will be accelerated in O West going forward, and you will see it also in the deferred revenue [ part ]. Eco-Bos, as explained, we were able to secure the debt for it. We put already our part of the equity. The project should be cash flow positive from the first year this year. It should be profitable in 2 years time. The expense of the losses are within CHF 2 million to CHF 3 million, so nothing to worry about. And sales are starting also this month. And going forward, we will be reporting happily on these sales. With this, I finish the destination parts of the presentation, and I give the floor to Ashraf for the financial part.

Okay. Thank you, Abdelhamid, and good afternoon, everyone. I would like to explain a little bit about the detail about the financial statements. So I will start with Slide 21, the income statement. Already, I think Abdelhamid explained very well the revenue point. I would like maybe to mention that the gross profit here, margin, dropped to 25% compared to 30% in the last year. Mainly, as we said, in the last month of March, there was the closures of the hotels either in Egypt or in Oman. At the same time, you saw from the previous slides that there was some revenue drop related to O West revenue because -- I'd like to remind you that actually, last year, it was our first year. It was the launch of the project in Q1 2019, where we sold mainly villas. And based on the accounting standards, we recognized 20% of this revenue as land sales, which is, in general, the lands have higher margin than [ the overall ] construction. So this year, in Q1, it was a mix between villas sold and apartments. So this is why you can see as well some drop in the margin because of this effect. This will be, I would say, enhanced during the coming quarters because we started construction already in O West so we'll start to see revenues coming from the construction, not only the land part. For the administrative expenses, we already -- maybe in the previous presentation for the full year, we explained a lot of measures that we have taken, and the management, to reduce, hold the expenses in general. And we've started to see some -- I will say, some gain here on the expenses point. We almost saved in Q1 CHF 1.8 million, which is a good achievement. And we'll continue this, I would say, squeeze and monitoring every expense that we need to look at in the coming quarters as well. For the other gains and losses, this includes the FX part. As you know, in the last year, the Egyptian pound was appreciated against the Swiss francs and the U.S. dollar, so we had a gain on the Egyptian subsidiary, which automatically is translated here in the gain of the group of ODH. This year, you can imagine that this -- in Q1, there was very, very small appreciation in the Egyptian pound against the Swiss francs and the dollar as well. But actually, starting from Q2, since tourism is down and the main, I would say, dollar income of Egypt is down, so we started to see some devaluation in the Egyptian pound, and we expect this to continue within the next coming quarters. So this number will be negatively affected in the coming quarters. Our share of the loss in our associates decreased from CHF 2.3 million to CHF 0.3 million. This is mainly because of the enhanced operation on one of our associates which is the construction business in Egypt. We own, as you know, 40% of [ a Red Sea company ] which is our construction arm. It is really doing phenomenal work and it is doing great compared to last quarter because in general, construction is doing well in Egypt [ in general ]. So -- and also, if I look at the finance costs, you can see that went down from CHF 10.7 million to CHF 9 million basically, as you can imagine, because of the LIBOR rate that went down. And at the same time, even on the Egyptian component, there was some under what we call [indiscernible] LIBOR. It is called in Egypt corridor. So there was as well a decrease from the central bank on the corridor rate so it enhanced our finance costs compared to last year. This is for the income statement. If I look at the balance sheet part. Balance sheet is only -- there is 2 numbers that maybe I'd like to highlight. It's that you can see that there is an increase in the inventory, which is basically the part of the component of the O West land because we recognize O West as a land in our books since the end of last year, and we continue to capitalize some of the payments here on the inventory side. At the same time, you will see that the payable parts and the other liabilities increased as well because, as you all know, the payment of the land to the Egyptian government is partly in cash and partly in kind. So the in-kind portion is basically in the other liabilities, while the cash portion is in the payable part. So this is why it is increased compared to last year. If I look at Slide 23. It is basically where we show you that we extended -- actually there was initiatives coming from the Central Bank of Egypt and, at the same time, from the Central Bank of Oman as well and even from UAE. All of them, they agreed or postponed the payment of the interest and principal for 6 months for the debt. We already took these initiatives, and we applied for it and it was approved by all -- in those 3 countries. So this is where you can see the extension of the 6 months, but we are working as well not only on these initiatives. We are working with the local banks in Egypt and in UAE and to try to even get much, much more refinancing, I would say, package from the banks where we can extend the payments by 2 years and we get a 2 years grace period in the beginning in 2021 and 2022. If we are successful in doing this, then we can see that the repayment schedules that you'll see here will be much, much reduced. And this will let us focus our operational cash flow to continue the business again and continue the renovation that we started or continue the CapEx as planned. And this will be a great achievement. We expect this to be done within the end of Q3. I believe this could be -- drive some sort of good achievements. If I look at the next slide of the cash flow. Here is the -- I would say, the very big good news and the good news that we see. We can see that the cash flow from operation actually almost doubled. It is CHF 13.9 million compared to CHF 7.6 million last year. As you can imagine, we are focusing this year on the collections. So most of this cash is coming from the sales that we have done in the previous years. And the very good news is that delinquencies or even cancellation is very, very minimal. And we are dedicating a team specifically for the collection with the client, which is basically doing a very good job. And our collection is really going [ on to drive back ]. For the payments, you saw that, yes, we slowed down a little bit the payment for PPE in Q1, at the end of Q1, because of this, but as Abdelhamid already said, that we are accelerating again the construction because life will go on. And so we are continuing in the coming quarters to start accelerating the construction progress in most of our destination. So this is a good news as well from the other side. And you can see at the end the balance of all this, that, yes, we started the year by CHF 186 million of cash in the bank, and we ended the quarter by CHF 183 million, which is a very good achievement. As I said, our focus, our main focus, this year is on the cash flow, not the P&L, and the result is -- I'd say, is obvious. So by this, I end my part of the presentation, and I go pass the outlook for Abdelhamid.

Thank you, Ashraf. So again, because the volatility of this year is so high, it's -- we are refraining from giving full year guidance. However, we will continue to give regular updates as we go along. So in this case, as you know and I just explained, hotels in Andermatt are open. Chedi Andermatt is actually quite full during the weekend, and it's 50%, 60% occupancy on a month. And Radisson is open in Andermatt, not as full because it's mostly dependent on ski. However, it's still a decent occupancy. In Gouna, we have the occupancy cap of 50%, expecting next week that it will -- we will start to see an increase in occupancy and, starting next month, increase in international travel from the opening of the borders. And in Oman, we are hoping further news during July. When it comes to real estate, in Egypt, despite the slowdown, Gouna in May is up to par according to May-on-May month-on-month compared to last year. O West is catching up. Overall, if you look at Egypt, you will see that April, we were down 36%. But you see that May, we're only down 21%. Then we -- now in June, we can see our pipeline and we can see that the number would -- might even be less than that 21% in June. And hence, the acceleration of the construction and the continuous belief that the Egyptian real estate is the safest investment they can do. And as far as the CBE initiatives that Ashraf talked about, the outlook, as far as we are concerned when it comes to this year, if you will just go to the appendix, to the deferred revenue balance, Slide 32, this will give you an indication of what kind of revenue we expect from real estate for the remaining 3 quarters, around CHF 145 million over the remaining 3 quarters due to the accelerated construction. Of course, this number does not include any revenue recognized from new sales and does not include the revenue from the third school we just sold in Q2, around CHF 12 million. So we're looking at a healthy revenue from real estate. If the -- either people get used to COVID and/or a vaccine is found or herd immunity, we expect that somewhere between Q3 and Q4, we will see rising numbers of occupancy and a faster rebound and maybe not up to last year level, nobody knows, but definitely breaking even and making some profit by end of year. And we have the real estate to compensate the difference, as well as the town management. This concludes the presentation part of today. And we'll open the floor for Q&A.

Thank you, Abdelhamid. [Operator Instructions] Thank you.

Okay. I guess everything was so well explained. No questions are on the table. If...

I think there is one question coming now, sorry, Abdelhamid, from Berenice Lacroix. Just a second. And she wants to ask you a question. So I'm going to unmute her now.