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 Gawahergy, Head of Investor Relations at Orascom Development Holdings, and I would like to welcome you on our 9 Months 2020 Results Call. The call will start with a presentation from our CEO, Omar Hamamsy; and our CFO, Ashraf Nessim, followed by a Q&A session. [Operator Instructions] Thank you. I now hand over the call to our CEO, Omar.

Okay. Thank you, Sara. Thank you very much. Good afternoon and good morning, everybody. Very nice talking with you for the first time. I joined about a couple of months ago and very excited to report back our Q3 performance. I'm happy to have a bit of a Q&A on the back end if this is helpful. So let me maybe start here from the exec summary, which I believe is a format you've seen before from ODH in prior annual and quarterly reviews. Our revenues for the 9-month period were down about 20% in relation to the same period last year. However, in Q3, the decline was much less than it was for the 9 months as a whole. Our revenues were down only, I dare say, 6% or so, 5.8% to almost CHF 100 million. The adjusted or operating EBITDA, as we'll probably be referring to it going forward, was also down for the 9 months by about 30%. The decline here is obviously larger than -- in percentage terms than the decline in revenues, primarily because we continue to be carrying quite a bit of costs on the hotel front, which isn't necessarily as easy to offload. And also from a posture, we've decided to take necessarily desirable to offload as the associated costs of real estate or account management. Again, a slight improvement -- well, drastic improvement, I would say, for Q3 where the decline of the operating or adjusted EBITDA was only 15% for the period. The number that we had been tracking very closely and continue to track very closely and that we're happy to be reporting back as being very healthy is our cash on hand, which is up 6% in comparison to the same period in 2019. We have almost CHF 200 million in the bank as of the end of the quarter 3. And all of this resulted in a net loss of CHF 26 million, almost CHF 27 million, which again reached CHF 7 million in the third quarter in comparison to CHF 6 million same quarter last year. So again a slight improvement or a good improvement in Q3. And finally, I think something that we are working very hard on and hoping it will close pretty soon is for the restructuring of our debt in -- with our Egyptian banks where we are getting better terms in terms of the tenor of the debt that we will be carrying as well as also improved interest rates; and finally, significantly better and more flexible terms for us going forward, which we believe will be in the better interest of the company and therefore the shareholders. That's the high-level overview. If we go to the next page, I can give you a few highlights, first, across the board and then take you to highlight a few of our destinations and just say a few words about each before we go into the financials with Ashraf, our CFO. The net real estate sales for the 9-month period were down 23% to almost CHF 300 million, down from CHF 380 million. Our deferred revenues are up 25% to a healthy CHF 535 million and our receivables portfolio is up almost the same proportion to CHF 705 million. The actual revenues for real estate despite the COVID were down only 10%, down to CHF 150 million for the 9 months with our adjusted EBITDA or operating EBITDA down only 3%, driven primarily from improvements in our cost structure as well as also improvements in our pricing for each of the units that we've been selling. And so that's a pretty strong performance on the real estate side, and we're pretty optimistic about it. The part, of course, that hurt the most is on the hotel front where, as you see here, for the 9-month period, we're down 60% on the revenues and 90% on the operating -- on the GOP, on the gross operating profits. And there's -- that's driven primarily by the fact that our -- the bulk of our exposure for the hotels was through our international tour operators, which, of course, with the negative effect of travel bans as well as also reductions in airline travel has hit us very directly. And we'll talk about some of mitigating action we're taking later on as we talk about the outlook going forward. Finally, again, I think a reasonably positive picture on the town management financials, which only dropped 6% for the -- in relation to the comparable period last year, which is a pretty significant achievement because, given the tremendous drop in our hotel occupancy and our hotel usage, that represents a pretty interesting increase in the revenues that we've managed to extract from other sources, and that's a positive development for us as a whole. Going to the next page, just showing the revenue mix as we have it. As you can see here, of course, a significant dominance of the real estate component. So up from roughly 50% of our revenue mix to 60% almost of our revenue mix, especially so if you include the piece of land that we have recognized as revenue, which is worth about CHF 29 million, represents another 11 percentage points or so of our revenue. And that's primarily coming in from the school revenue that we're getting in O West, one of our destinations in Egypt as well as a smaller component of land sale in El Gouna, which is our crown jewel on the Red Sea in Egypt, which is also a small component of land revenue there. Obviously, hotel revenue contribution has shrunk down to 18%, 20 percentage points lower than last year while our town management has more or less remained stable in its contribution to the overall revenue picture as I mentioned earlier. On the next page, we can take another cut at the revenues and look at it from a destination perspective. And in short, we see that for the 9 months of this year, really 3 main destinations have carried us over the line so far. El Gouna as always, with again a significant increase, 10 percentage points of contribution there, followed by actually Salalah -- well, actually, in this case, O West, which swapped out to be our second-largest revenue contributor in relation to Salalah. So 15% for O West and Salalah coming in at 13%. That's obviously pretty natural given that O West is a first home market for us, so purely real estate for the time being with a small contribution of the schools, the land there while, of course, Salalah is very heavily dependent on the hotel business and, therefore, has been -- has taken quite a big hit in its contribution. Let me take you through some highlights of our destinations. If we go to Page 10, just to refresh everybody's memory. We have been continuing to do the work that we do of being an integrated developer for the last 30 years or so, 31 years, out of our land bank of 101 million square meters. So far, we have remaining almost 68 million square meters. So about 2/3 of our land bank is still undeveloped or to be developed, and we do all this over 9 currently operating destinations where we have our almost 7,200 rooms of hotels. We'll go into a little bit more detail on the destinations that are highlighted in blue here while we'll -- sorry, the ones that are in blue are the operating destinations. We'll take you through a few of them, a few highlights on some of them over the next few pages. Maybe we start off with El Gouna, our crown jewel. Some of the highlights there is, A, we are planning to deliver in 2020, 200 -- sorry, 254 units before the end of the year. We've driven -- we've actually launched some extra inventory during the 2020 period in August. We put online CHF 28 million worth of inventory in the Ancient Sands Villas project as well as another roughly CHF 80 million worth of inventory in November on the Fanadir Sea Front project. We also are operating currently at about half of the capacity of our 2,700 or so rooms, so we're operating right now at 1,350 rooms roughly. And that is 100% driven by government regulation, which compel us to remain within the 50% capacity that we have. During that period, we've used the time to do some renovations, for example, the Rihanna Inn Hotel where we've renovated 84 rooms. And we're happy to report that during the peak months of Q3, peak months in terms of summer months, July and August, we had a very elevated occupancy rate in our homes, in our real estate actually, usage, which have driven a very positive impact on our account management revenues, as I mentioned before. The numbers there reached 70% and 79%, respectively, of home occupancy during this period. We also just concluded, thankfully safely and in a healthy way, our fourth annual Gouna Film Festival, which continues to attract a lot of sort of press and marketing effectively capacity for us. And it was a very successful event again this year. On the next page, a few key numbers for you just to highlight. And I'm sure you can go through them later on off-line or we can have any questions. I think I want to summarize that in the hotel space segment, we've -- we're operating at a total for the 9 months for Gouna at 27% occupancy. That's down from 83% the same period last year, and hence you see a significant drop in the hotel revenue on the right side, down from CHF 54 million to CHF 20 million. And the other element that I think is important and to point your attention to is the fact that we're continuing to increase our real estate average selling price. We've increased them by 15%, 9 months to date to Q3, end of Q3 about -- to about CHF 3,337 per square meter. And that's an important, again, metric for us that we track quite closely and that we think continues to reflect the healthy position of El Gouna as a real estate attraction. Switching over to Salalah in Oman, Salalah is our largest destination in Oman so far. We are on track to continue delivering 213 units for 2020. Up until the 9 months ending 2020, we had delivered 103 units, so there'll be -- we're pretty close to completion of delivery of the roughly 110 units that remain. Our hotel occupancy over there obviously was very limited, primarily because we've had an almost shutdown of the Oman and certainly of Salalah as a destination pretty much since the beginning of COVID. And so the ability of the local market to absorb our hotel capacity is very limited. And there's very limited travel within the country to Salalah because it's about 1,000 or so kilometers away from the large urban center of Muscat and, therefore, has been negatively affected. As a consequence, we've operated with our hotel capacity partially closed. And while we have, today, the Rotana Salalah, which is our -- one of the 2 large hotels over there, partially operating right now, we are in serious consideration right now as to whether to operate it at much more limited capacity or even potentially to mothball it. We're looking at this and following the situation of whether we'll have safe corridors between Salalah and some European destinations very, very closely, and we'll make decisions on that basis very soon. On the next page to highlight a few points, again, not to belabor the point on hotels, but obviously occupancy is -- for the 9 months was down to 26%, not very different from the one for El Gouna. And on the real estate side, again, a healthy increase in our average selling price to CHF 2,130, up 7% on our average selling price of real estate in per square meters. Again, of course, the consequence is a drop of 45% in total revenues for the 9 months, driven both from -- primarily from the hotel side, but also on the real estate, given that people are unable to travel into the destination, and hence makes it more difficult for us to complete our -- sorry, this stage is the construction. We had to stop some of the construction, and hence the drop in the real estate revenue that we've seen in the 9-month period. Our construction is back on track, on track as we speak at this moment. Switching to Lustica Bay in Montenegro on the next page -- on this page. We are, again, obviously very heavily dependent there on the travel, the international travel. Having said that, in August and September, we had reasonably good occupancy rates in the hotel, in our Chedi Hotel over there of 48% and 40%, respectively. And these produced profitable months for us, which is a positive. But of course, the challenge remains once the peak season disappears. What are we going to do? And that's something in the outlook that we'll talk about in a second, on how we want to make sure that this destination gets a big boost in momentum so as to activate it much more positively going forward outside of the peak season. Our construction over there continues to progress. We will be delivering the 45 units in 2020. And so far, at least 33 of those have been delivered. We're also finishing our works on the main marina, and that's been completed. And the main design for the golf course has also been completed, and so we're proceeding with this plan right now. Looking at it in numbers, again, no major surprise. Our occupancy as a whole has been -- in the hotel has been down, so 18% for the 9 months period. However, our average selling prices over there on the real estate side are more or less stable. We're considering also potentially lowering slightly, our average selling prices there to get some of our inventory that's been sitting with us for a while to move a little bit faster. We have a new management team in place there that we're very optimistic about how they will be driving the business going forward, and there'll be more of that conversation to be had with you in Q4 and in Q1 of next year for Montenegro as a destination. Finally, for the destination to highlight, O West. I'll remind you that O West is our first entry into the pretty competitive first home market in Cairo, Egypt. And there, the momentum is quite nice. We've actually sped up the construction pace. We have 133 houses or homes, villas as we call them, skeletons which are up and coming. That's out of the 445 villas associated with our first phase of delivery in O West. We're also planning on the -- to start the construction of 3 out of the 5 schools that we have sold in O West. That hopefully is pending the approval of some paperwork and permits from the local authorities for construction to begin. We're optimistic that we start any time now in the fourth quarter of this year. We're also finalizing developments of what we call the O West Club as master plan clubs are very important source of footfall generation as well as activation of any urban real estate development plan. They tend to be extremely large in size and have both a health and outdoor component to them as well as a very important social component to them. And they tend to draw a better quality clientele to our real estate development. And so that's an important achievement for us. We've so far sold about 1,271 memberships in this club, and it's something that we're -- we feel is very important. We've also added about CHF 30 million of new inventory in 2 of our projects, Whyte and Tulwa. And we have very importantly actually begun the process of increasing our real estate selling prices in O West. We're up already for the 9-month period versus last year by almost 16%, and that path will be one that we continue with going forward. On the next page, a couple of KPIs that are interesting. I think the first one is the one I just mentioned on the average selling price. And then, of course, we had to, at some point, slow -- stop actually our construction for a period of roughly 6 weeks. That was a government-issued directive. So that obviously slowed down our revenue recognition. But we're back on pace right now, and we are sticking by the delivery commitments that we've made to our customers for their houses and eventually apartments in O West. With this, I'm going to pass it to Ashraf, our CFO, to take you through a slightly deeper view on the financials overall. And we'll come back to talk to you about the outlook for 2020 in a few minutes.

Thank you, Omar. Here, I will go to Slide 20 and I will try to highlight the many points here. Basically, I will start with the gross profit margin. You can see that now it's currently at 25.1% compared to 25.9% last year. We were able to maintain this relatively high margin because of, from one side, acceleration on the construction side of the real estate, which is relatively a higher margin and, at the same time, the booking of the land sales coming either from O West or from Gouna, which the margin are relatively even higher than the real estate components. If I look at the administrative expenses here, it went down to 28.9% compared to 35% last year. And the main component here is between, as you remember, our previous CEO highlights the competition delegation of [ Hale ]. There was the extra component coming from the Chairman directly to the CEO, which contributed here in our P&L. So now this year, it is -- for the first 9 months, it's not there. So this is the main item here, in addition to lowering the marketing expense in general. So between both, this is why we went down to these almost CHF 29 million of administrative expense here to reach an operating or adjusted EBITDA of CHF 40.5 million compared to the CHF 57.3 million last year. Also on other gains and losses, this year, we are a bit prudent, I would say. And you can imagine during the COVID years, we want to have some provisions on the -- specifically on the hotel receivable. So we have taken some provision of almost CHF 5.7 million during the first 9 months this year, which affected the number here. While last year, there was some gains coming from FX because the Egyptian pound was appreciating against the dollar and the Swiss franc in general resulted in a gain [indiscernible] this year. Our share of associates is improving, going down from losses of CHF 8.6 million to CHF 5.4 million, mainly coming from the improvement on the construction, our construction arm of resi here in Egypt, because the construction business in general in Egypt is doing quite well with the level of construction that the government is doing across the country. So therefore, resi is doing well. And also a slight improvement on Andermatt side on the losses. Between both these [indiscernible], we see the loss of CHF 8.6 million going down to CHF 5.4 million. The other 2 numbers that I have to highlight here is the finance costs. That is going down mainly due to the LIBOR going down this year and as well what we call Egypt corridor, which is similar to the LIBOR but on the Egyptian pound, which it went down by almost 4%. So our Egyptian debt component on [ GDP ] went down by this amount. So it is now CHF 26.9 million compared to CHF 30.4 million. And as well as the income tax expense that automatically goes down because some of our subsidiaries across different destinations, specifically hotels, either breakeven or even losing some money. So automatically, the income tax expense goes down. This leads us to get a net loss of almost CHF 27 million compared to CHF 8 million during the same period last year. The balance sheet is really -- there is nothing, but mainly I would like to highlight for you or to remind you by the inventory that increased during 2019 and continued to be the same in 2020 because now we have the components of the land of O West, which was the new addition to the group last year. So this is where we think our land value of O West, was almost CHF 405 million. At the same time, you can find a table on the other side, which is basically the payments on installment to the Egyptian government within the next 7 years remaining to pay. Also as already Omar mentioned in the beginning, you can see the cash balance improving, 186 -- starting the year with CHF 186 million, and now it is almost CHF 200 million, CHF 198 million because we -- I will discuss it in the cash flow. But there, we'll remain focused on internal cash this year. This was the most important part. Next slide is the financing profile. As we already announced in Q2 that we are not only taking the initiative of different central banks to do some sort of a gain from delaying or postponing the 6 months of not paying any interest or principal on the debt that we have either in Egypt or Oman or UAE. But actually in Egypt, we took an even more, I would say, initiative from our side with the banks to extend the tenor of the whole financing and to debt. It takes 2.5 years not to pay any principal here. So this relaxed, as you can see, our repayment plan. So during the next 2 years where the effect of COVID will be gone, then we can use this cash from operation for other activities or renovation or even expansion. The next slide where it shows the cash in general. You can imagine that the cash from operations, CHF 32 million compared to CHF 41 million. This is automatically coming from some drop in the sales in addition to a big drop in content. So cash from operations went down. But as I said, we benefited from the deferral of interest payments. It is now CHF 5.2 million compared to CHF 19 million last year. And taxes as well, CHF 8.5 million to CHF 23 million. So all of these together led to operating cash flow to be positive of CHF 18 million. Also an initiative that we started immediately after COVID in March is to reduce our CapEx plan or to postpone our CapEx plan for the next 2 years. So now it is CHF 22 million roughly compared to CHF 39 million last year, almost half of last year. These 3 items together helped us in improving our cash at the bank, which make us really feel that we are very comfortable going forward with the cash balance that we currently have. By this, I conclude my part of the presentation, and I go back to Omar to give you visibility on the outlook.

Very good. Thank you, Ashraf. I'll give one quick commentary on the outlook for 2020, and then we can shift to a bit of Q&A. So in keeping with the tradition we've had unfortunately since the beginning of COVID and which many other publicly listed companies are doing of not necessarily giving very clear guidance on the rest of our forward-looking results, given the extreme uncertainty, we continue to operate under. We won't be giving very detailed forecasts. Having said that, I think a few points we can highlight. The first one is, as Ashraf explained in a bit more detail, we are confident that the Egyptian banks restructuring of the current debt is hopefully going to go through. That's an important milestone for us. Changes, as we said, our financing profile quite a bit and is very positive as an outcome. On the hotel front, what you should expect is a real focus on the cost side of things, particularly in the hotel destinations that are exclusively reliant or very heavily reliant on tour operator business coming in from abroad. That includes 2 primary destinations: Taba, which is about 2,500 rooms in Egypt; as well as Salalah, which is approximately -- which is just south of 1,000 rooms or so in Oman. And these 2, expect us to be focusing a lot more on going in a fast follower kind of hibernation mode, where the moment we get hints that the markets and the travel markets are about to open up, we will very rapidly be back in business for those. But in the meantime, we will tighten our belts very radically around those. Having said that, on other destinations with our hotels, particularly El Gouna where we continue to have an inventory of about 2,700 rooms, there, expect us to, A, continue to comply of course with government regulation of operating for now at 50%, but be very aggressively developing the domestic business in Egypt. We're creating new products for the domestic business. We're creating and activating new sales and distribution channels for that. And we hope to see improved numbers there hopefully in the next few months. Again, this is all relatively new to the way we've been running hotels, so we hope that the results will start coming in gradually in there. And we'll probably continue to operate, as we said here, at a level that's not radically different from the 35% capacity that we currently hold. On the real estate front, we are committed and we will continue to stick with the delivery commitments that we have. That part does not change. We are going to continue accelerating some construction in some of our sites, particularly O West, El Gouna. And certainly one of the destinations that we're increasingly excited about -- 2 destinations that we're very excited about are one is Jebal Sifah in Oman. That's our second destination in Oman, which acts as a nice getaway for residents of the capital city, Muscat, and where we've seen a significant improvement in our real estate sales as well as also a nice improvement in our hotel usage, particularly for what they call staycations there. And then the second destination that we're excited about, also starting from a small base, is our mini new Gouna on the Red Sea, south of Hurghada, south of El Gouna by about 40 minutes. It's called Makadi Heights. And there, we're also reactivating our sales and our development efforts there quite drastically as well as our construction. And we've put in a new management team that we're pretty confident will accelerate the outcomes there in a very positive manner. We will also continue to keep a very close eye on our cash, particularly our accounts receivable both on the hotel front, which have improved, as well as on the real estate front, which have also improved, because that's an important element for us to manage very tightly. With this, I'm going to pause and pass it back to Sara, who can moderate some of the questions that some of you may have.

Thank you, Omar, and thank you, Ashraf, for the presentation. [Operator Instructions] At the moment, we have 3 questions from Cedric Lang from ZKB. The first question, you did not mention land bank monetization anymore in the press release or the presentation. Does this mean we basically have seen the transaction we can expect this year already and that you do not pursue further land sales currently?

Okay.

Yes, I can take it, Ashraf. Sorry, I think I was waiting for Sara to unmute me.

Yes.

Sorry for that. Cedric, to your question, look, the overall direction we intend to have -- yes, let me just paint it this way and then we can talk about more specifics. But the overall direction in which we intend to go for the remaining pieces of land bank that we have, to the extent that our financials allow us to do this, which we think they still do allow us comfortably to do that is to not do raw land sales with the following exceptions, which I will mention in a second, but they are meant to be exceptions. The idea is to proceed with value-adding development of the land, be it on an asset-light model for us as ODH or asset-heavy model for us as ODH, and I can elaborate a bit more. The few exceptions that we may consider doing land sales on, I think, are twofold. One is cases where we may want to mark to market the price or the value of land, in particular developments or destinations we have, and whereby we may choose to sell very small plots of land, very small and symbolic plots of land to make sure that there is a market price associated with it for the market to recognize. And the second exception is where -- is one where, if we have an abundance of land in a particular destination and where in order to earlier or more rapidly activate the destination and get it to be sort of accelerated and revived, we judge that selling a small piece of land there to a particularly distinctive, either sub-developer that brings something different from us or to a commercial operator of sorts. Again, very -- the bar, I think, would be reasonably high on us to do that. That would be the second exception, I would say, in which we would consider land sales for the time being.

Thank you, Omar. The second question is also from Cedric.

Do you want to read it out, Sara?

Yes. The CEO's compensation. The contingent payments of the new CEO's compensations will be linked to the development of the market capitalization. Can you explain if and how this will be adjusted for capital increases?

Ashraf, do you want to take this one?

Yes. Basically, here, this -- the contingent compensation are related to every CHF 100 million, as we disclosed in the financial, every CHF 100 million of the increase in market cap. And based on certain percent, between 2% to 5% is dispersed in shares or in cash. So definitely, this is related to the increase in the market cap, not taking into effect any capital increase.

Thank you, Ashraf. The third question also from Cedric. With regards to the postponement of some CapEx and your minimum build obligation, how much of CapEx should we expect in the next 2 years in terms of your minimum build obligation? And would you also consider collaborations with third parties or a disposal of part of your assets, examples, Chbika?

Yes. Good question, Cedric, again. Look, the -- as far as MBOs are concerned, we are -- we feel and we're in the process of finalizing a couple of other government updates on the MBOs, such that we feel we should be reasonably comfortable over the next year for sure and 2 more likely that we will not be forced into CapEx deployment related primarily to MBOs, right? Again, some of these deals are being worked on right now, and we'll announce them as appropriate as they get officially finalized. But the directional answer to your question is we don't feel that our the CapEx will be driven in a significant manner by MBOs going forward. Are we open to doing deals with other players in order to relieve some of the pressure on our Capex? If we believe that they have an edge to add, be it either in terms of adding new sources of recurring revenues to us in a particular destination or if we feel that it enables us to accelerate the activation or the reaching of critical mass of a particular destination, then yes we're open to doing such deals with third parties, and that will be a consistent part of our strategy.

Thank you, Omar. The next question comes from Berenice Lacroix.

I have 2 questions actually on the real estate division. The first one is in Q3, the value of your deferred revenues stood 25% above last year's level, but it slipped by around 3% compared to Q2, which is something quite unusual but it did not happen for several quarters in a row. Also in El Gouna, as of 9 months, average selling prices dropped by slight 1.5% compared to H1, which suggests a price decline in Q3. Even if it's minor drop compared to Q2, it breaks with the fast growth that we've seen in the past quarter. So I wondered if it's the result of a more challenging commercial environment for ODH with the lagged effect of the COVID on your pipeline that put prices and a slight pressure in Q3?

Yes. Berenice, let me answer your second question, and then I will leave it to Ashraf, our CFO, to answer the first question. On El Gouna, on the pricing of El Gouna, I remain positive and optimistic that we are going to be able to continue driving price increases. What you might be referring to here may have to do more with the mix of products that we sold in relation to H1. As you may recall, during H1 when the COVID kicked in initially, we very rapidly discovered that the mix and the demand we were getting was for larger, higher price points units. And so actually, not only did we redirect our sales to that, but we also changed the product mix that we were selling towards that. This is probably what's accounting for the slight number that you're referring to, but I would not consider this to be a trend or something nor a posture that we would be taking going forward in a purposeful manner. It may be simply a reflection of the change in mix of the product that we were selling in that particular quarter and the rest of the first half.

Okay, that's very clear. And if I may have another question in the real estate. Once you say that accelerated in July and until September. What about October, if you could provide us some updates? How your commercial activity looks like as of today in the context of existing distancing measures and curfew? How do you see Q4 in terms of net sales momentum compared to Q3?

Yes, like we said earlier, Berenice, unfortunately, we won't be able to sort of give you much forward-looking Q4 quantitative answers, which you're asking for. Suffice it to say perhaps that we feel the momentum that we're seeing in Q3 ought to be reasonably comfortably continuing into Q4. And so we see at least a similar, if not an improved, overall level of performance in Q4 in relation to Q3. Let me just keep it at that high level for now.

Thank you, Berenice. We have a question from [ Diether ] [indiscernible].