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

Good afternoon, everyone, and good morning for those joining us from the U.S. I'm Sara El-Gawahergy, Head of Investor Relations for Orascom Development Holding. On behalf of the group, I would like to thank you for joining Orascom Development Holding's First Half 2020 Earnings Call. Our call will start with a presentation by Abdelhamid Abouyoussef, our Chief Hotels Officer and Executive Committee member; and Ashraf Nessim, our Chief Financial Officer and Executive Committee member. After the presentation, we will open the floor for Q&A. [Operator Instructions] I now hand over the call to Abdelhamid.

Thank you, Sara, and welcome, everybody. It's been a difficult half for ODH, I think, as far as recent history is concerned. However, with good teamwork and a lot of measures that were taken so far, we're in good shape. If you look at the executive summary, you'll see that our revenue was affected, of course, down to CHF 164 million, about 26%. This is mainly coming from COVID affecting our hotel portfolio being shut down for the majority of the second quarter. Our adjusted EBITDA despite the closure was still positive at CHF 27 million despite it being down 34% from last year. We have been very, very stringent when it comes to cash preservation and all the cost-cutting measures that were implemented as well as all the deferring of unnecessary payments or unnecessary CapEx. Cash preservation was paramount to our peace of mind, and we were able to keep it at around CHF 180 million as a cash balance, which is more or less the same cash balance we started with at the beginning of the crisis. So we were just burning as much as we're collecting. Net losses, again, mainly due to the hotels' closure, was at the negative CHF 19 million, and monetization, which is a big part of our strategy going forward due to our large land bank, was successfully -- as you know from the last call, we already had concluded 3 deals for 5 schools in our Egyptian subsidiary, O West, worth about CHF 32 million. Lastly, we also sold about 40,000 meters for an extension in Gouna -- for one of the Gouna subdevelopers for about CHF 6 million. And as discussed, this is going to be an important part of our strategy to develop the CHF 70-plus million of undeveloped land bank that we own. As for the debt restructure, Ashraf will -- during the financial part of the presentation, will elaborate more with some potentially good news in the very near future. If we move to the key segment financials and KPIs, as expected COVID affected real estate sales as well as it did hotel. However, we were only down by 32%. Considering that there was a lot of periods where our destinations were under lockdown or curfew, we still concluded about CHF 191 million of new sales. Deferred revenue balance, which is our lifeline in the coming quarters and years, we have almost CHF 0.5 billion, a bit north of CHF 0.5 billion of revenue coming in from existing sales, and our receivables, therefore, is also up CHF 667 million. Financials of real estate, it's a bit down. This was -- this is something that we did on purpose because at the beginning of the crisis we did not know how long the crisis would take. We did not know the effect of real estate sales. So we deliberately slowed down construction. And as you know, our revenue is down on percentage of completion. So we slowed down construction, and that has affected our real estate revenue. However, starting June, after we saw that people are starting to live with the crisis and life is carrying on, sales are continuing and rebounding, especially June and July. We have taken the decision to accelerate construction to full force. We are committing to deliver all our contractual obligations on time, and we should expect a big rebound in the second half for the real estate revenue, and therefore, EBITDA to follow. For the hotel financials, again, barely positive. However, again, this is despite closing most of our hotels for the second quarter. This result was mainly due to all the cost-cutting that was done on the hotel side. Town management, we're almost at breakeven at this point. This is up from last year, mainly due to town management as the consumption of people and a lot of people -- a lot of our clients during the lockdown and curfew and the closure were -- chose our destinations to spend this period of time, which meant they consumed more, and therefore, our revenue was up. If you look at the revenue analysis, you will see, of course, hotel is down as expected. The real estate revenue is down, as explained. The introduction of land revenue through our land sales agreement, this is not all the revenue from land sales because only about one school was recognized. There are 2 more schools to come in the second half from the 3 schools already contracted and as well as the land from Gouna in the next few months. From the destination revenue analysis, you see that Gouna remains to be our biggest contributor, followed by Salalah and then the rest of the destinations to follow, but it shows that once a destination gains critical mass and gains maturity, it becomes a living self-sustaining organism that can withstand the crisis when it hits. Going into the destination updates. So as discussed, you -- starting the increase in sales in Gouna -- actually Gouna this year sold about 10% more real estate than last year in the first half, which is an incredible achievement, thanks to the local team. Based on that comfort, we were able to speed up construction, mainly to give confidence to our clients, to also hedge against potential inflation, to recognize more revenue and have the cash to do it. So the construction budget was increased, and this is expecting to generate about CHF 110 million, CHF 120 million of real estate revenue in Gouna alone by end of year. Again, we're planning on delivering all our contractual obligations on time. And there's a new real estate project being prepared to be launched in Q4. I already updated you on the land sale. Hotels, in June, we were allowed to open at 50% capacity. This 50% capacity is a cap imposed by the Egyptian government due to COVID restrictions. During the last feast, we were able to reach about 80% occupancy of the open rooms. We opened about 900 rooms from the 2,700 rooms available, and these 900 rooms were occupied at 82%, mainly and mostly local tourism that is not able to travel abroad. So we are benefiting from an uptick in local tourism. Hawana Salalah, our second largest destination, again, we're accelerating the construction on the various projects. We are still, although slowly progressing with the construction of the fourth hotel in Salalah, this will -- it's a 400-room hotel, because the hotels have been doing so well in the last few years. And we expect COVID to take its toll, but then people will eventually start traveling again. And that's why we have pushed the opening for the end of next year, by which time we expect tourism to be back. In the meantime, this will also conclude our MBO obligations and make the land free of any further obligations. Tour operators are already talking to us about reopening. Already this season in November, hotels are on sale and some early signs of rebookings are starting to emerge. If you look at the KPIs, yes, of course, Oman is under total lockdown, so net sales was affected as well as hotels revenue affected in a material way. In Montenegro, we were hoping to have a much more complete product in the schedule, Lustica Bay, because this will be its first complete year with all the new added facilities. However, of course, the COVID crisis affected this plan. So the hotel is open although at a reduced occupancy. We are also progressing with the design of the second hotel, part of our MBO. This will complete the Phase 1 of our MBO in Lustica Bay. As well as the various -- construction of the various obligations we have there in real estate. The Marina is finished with all its facilities and amenities, and people are starting to fill the Marina with their boats and starting to enjoy the Marina life on the Montenegrin beach. In O West, our latest and potentially one of our biggest destinations, again, we saw a downturn in sales due to COVID. However, starting June, there is a rebound, which we materialized in a material way in July. We'll discuss this later in the outlook. We were able to secure all the construction permits for Phase 1, about 450 villas. This should be finalized within the next 9 to 10 months, and construction is going full force to deliver these villas on time, which will also result in a huge increase in real estate revenue in the second half and the first half of next year. Of course, the schools were a big deal for us because not only does it provide services for the clients, which is affecting real estate sales, but it's also giving us a much needed cash and monetizing our land and unlocking the value hidden in this land bank for us. Eco-Bos, our latest European destination, we were -- again, some good news on that front in the middle of crisis. We got the first construction loan approved, about GBP 18 million. This will be used as a revolving facility towards construction, about 300 homes. We also signed the construction contract with one of the biggest contractors in the area. And sales have started, will be reported towards the next presentation. With this, I finish the main destinations update, and I give the floor to Ashraf, our CFO, for the financial part of the presentation.

Okay. Thank you, Abdelhamid, and good afternoon, everyone. I will highlight a few points in the financial statement, and I will start by the P&L part. So the first number to highlight is the gross profit margin. You can see that it is 26.6% compared to 27.5%, which is really almost like last year. This is -- although we have a drop in our margins on the hotel segment in general, but this was partially compensated by our land sales, either in Gouna or in O West. In O West, we have a margin of more than 65%, 65% to 70% on the land. And in Gouna, as you know, and you remember, that our cost of land on the books is $1. So basically, we have more than 95% the margin, land in Gouna, which compensated, as we said, the hotels closed. The other number to highlight here is the other gains and losses. We have a loss this year at CHF 5.1 million compared to profit last year of CHF 7.9 million. This year, we have 2 effects. The first one is that the dollar is appreciating against the Egyptian pound, which -- and since our debts are most -- immediate are mostly in dollar, then we -- due to revaluation we have basically the [ 2 ] losses in addition to some extra provision that we started to take under -- on the receivables either on the hotels or a very small amount on the real estate. While last year, it was positive due to -- actually the Egyptian pound was appreciating last year against the dollar, so this is why we have this gain last year. Our share of the losses in associates dropped, mainly due to better performance of the construction arm in Egypt, where our associates -- or even better performance in -- on ASA level in Switzerland. The finance costs dropped to almost CHF 15 million compared to CHF 21 million last year, mainly due to reduction on the LIBOR side or even on the EGP. There were several initial terms from the Central Bank of Egypt and dropped the rate on the land rate were -- is more than 3%. So we have this effect on the finance cost. And automatically, you can imagine that the tax expense will go down since some of our subsidiaries are losing money this year compared to last year. Automatically, the tax rate and the tax is down. If I look at the balance sheet, the balance sheet is -- it is really straightforward, so I would like to go to the second slide of the financing profile, where here, we can see our effort of rescheduling our debts in our destination. We already took in the first quarter -- I'd say the initiative came from the central banks in most of the countries that we work in, either in Egypt or in Oman and in UAE to postpone all interest and principal for 6 months. This is the range that we've already taken, and we already agreed with the banks on this plan. But we are -- at the same time, we are working with the Egyptian banks where the majority of our debts are, to do the rescheduling for our debt where we are trying to get 2.5 years of grace period. If we are successful in this, and I believe we are on track to reach this agreement, then you can see that the principal payment next year will go down from CHF 47 million to CHF 9 million and even in 2022 will go down from CHF 57 million to CHF 21 million and so forth. So this will avail for us some cash to continue and accelerate the construction or even to continue our CapEx plan as used to have in previous plan. If I look at the cash flow statement, you will see that the cash from operation, yes, went down to CHF 8.7 million compared to what we stated last year, and this is coming from 2 components. The first one is the hotel revenues that came down and automatically the cash collection from the hotels is down. And at the same time, the unit sales where -- of the real estate, where we take some initial, I'd say, down payment, discount payment from the new sales. So this is why you see the drop in the cash flow from operation. The interest paid, you can see clearly that we -- the initiative of the central bank, as I said, that postponed all interest paid, so it is basically CHF 3.8 million compared to CHF 14.8 million last year. At the same time, there were several initiatives coming from the government, in general, for the tax. So the tax paid is CHF 2.7 million compared to CHF 5.6 million last year. And this is the major, I would say, highlight on the cash flow, and you can see that at the end we concluded our cash balance at the bank with CHF 186 million -- CHF 180 million, sorry. And this is a very good achievement because this year we are focusing mainly on the cash because it's the year where we focus on the cash because -- not the P&L. This doesn't mean that we are not working on P&L as well, but we are very focused on the cash flow. By this, I conclude my part of the presentation and go back to Abdelhamid.

Thank you, Ashraf. For the outlook, again, it's -- COVID is by far not over. So it's hard to give a long-term guidance. However, we will, as discussed earlier in the previous presentations, give regular updates as much as possible even between the different analyst calls to make sure that you are as aware as possible on what's going on. The biggest update, I think, is that the interim phase is over. We have appointed -- the company has appointed Mr. Omar Hamamsy as our new group CEO, effective 1st of September. He comes with 18 years at McKinsey and prior to that some operational roles as well in the region as well as in Egypt. So we believe that he will be the best person to lead this company going forward. As far as real estate update, on -- since 13th of June, as discussed, we have seen a huge uptick in July in Egypt, specifically, where we almost doubled sales from last year compared to July last year, CHF 44 million. That's a material number in 1 month. And we believe this is due to a combination of factors, one being Gouna has been a sanctuary for people during COVID. And once they spent at least 2, 3 months there, a lot of people decided to upgrade their homes and/or recommended it for their friends and family. The other thing being O West, construction being started and not being affected by COVID, I think, has -- gave a certain level of comfort to our clients to increase their appetite buying within this destination as well as the usual real estate being a safe haven for Egyptians storing their wealth against -- and hedging against the inflation or devaluation of the Egyptian pound. On -- and this trend has also -- and we -- August is not yet finished, but August has seen also some good numbers. So we suspect that the rebound is here to stay on the real estate accounts in Egyptian destinations. On the hotel destination, as stated earlier, Gouna, we have about 900 rooms opened in the feast. We have about 80% occupancy. Today, we have maybe a little bit less because typically summer is not high season. But we already have some countries lifting their ban and starting to travel to Egypt, such as Belarus, Ukraine, Serbia. These are normally not our typical destination -- or source markets, which means that they did not really improve our occupancy, but it also means that travel is starting to resume. And we hope that other Western European countries will follow suit like Germany, which constituted historically 50% of our occupancy and which has also coincidentally just reopened its tourism back to Turkey. And therefore, we hope to follow suit in the near future. Last but not least, following the spend of local tourism being the dominant factor in recent months -- Andermatt, which is where our Swiss destination, and we won 49%. Chedi and Radisson Blu has really benefited from the highest occupancy in their history and starting to really give us confidence that Andermatt can be positive in the near future and as well that even without international tourism that this destination can do very, very well on domestic tourism alone. With that, I conclude the presentation, and I give the floor back to Sara to manage our Q&A session.

Thank you, Abdelhamid and Ashraf. [Operator Instructions] We already have a couple of questions lined up in the chat box, so I am going to take them in order. The first question comes from Cedric Lang. Given the take in cost measures, what is the estimated EBITDA breakeven occupancy rate for your hotel segment?

It's a good question, and it's a hard one to answer because yes, we have done a lot of cost-cutting measures, some on the utilities front, some on the cost of payroll front, some on other benefits and allowances as well, which means that our EBITDA occupancy rate has been lower. But because we operate in 4 different jurisdictions it's not the same everywhere. For instance, in Ras al Khaimah Cove and in Salalah, we have about 33% salary cuts. But the -- and occupancy in Ras al Khaimah is doing relatively okay in local tourism, about 25%, 30% occupancy. So hopefully, we can break even with this amount. In Salalah, because there is no local tourism to talk about, and international tourism has not started, so it's difficult to unify these occupancies. But I would say if you're -- Egypt with the current cost-cutting measures that we have applied, probably anywhere between 25% to 30%, we can probably break even. But that's quite a rough figure due to the different levels of hotels and different levels of cost basically.

Thank you, Abdelhamid. Second question is also from Cedric Lang. What is the explanation for the strong margin in the real estate segment in Q2? And what is the expected margin on the deferred revenue for the remainder of the year?

The margin of real estate really depends on the type of either builders or parties that we sell. So -- but in general, within Gouna it is around -- between 45% to 50%, depending on the product itself that we sell. So basically, depending on when and which type of product are we recognizing in this quarter specifically compared to last quarter, and that's it. So really -- but within the same range, I would say, 5% difference.

And if I may add on that question as well. In times of crisis, only the affluent people buy money. And the affluent people usually buy big villas with -- that cost a lot of money and have higher margins. So Q2 was the culmination of the crisis, and that's when only people who are very affluent bought really big villas with high margins. So I think it follows hand in hand with the crisis.