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

Good afternoon, and good morning for those joining us from the U.S. I am Sara El-Gawahergy, Head of Investor Relations at Orascom Development Holding. And on behalf of the group, I would like to thank you for joining ODH's First Half 2021 Results Conference Call. The call should start with a presentation by our CEO, Omar El Hamamsy; and our CFO, Ashraf Nessim, followed by a Q&A session. [Operator Instructions] I now hand over the call to Omar.

Thank you, Sara. Good afternoon, good morning, everybody. I hope you're all well. Very excited to speak with you today and report our first half of 2021 as well as also our second quarter 2021 results. In short, we've had a very strong first half in 2021, and we're very optimistic about the current trajectory and performance of the company. Our revenues are up to CHF 226 million, almost. That's an increase of almost 38% from the same period in 2020. Our adjusted or operating EBITDA is up by 113%, up to CHF 58 million. And the margin on there is continuing to progress. If you look at the margin in the second quarter of 2021, it was up to 24% versus a margin of almost 17% for the same period in the second quarter of the last year. Our net profits are also up. I think we're very excited to actually bring, for one of the very rare times, a positive net profit of CHF 5.2 million. That compares to a loss of almost CHF 20 million in the first half of 2020. And that momentum, we hope to be able to continue driving going forward. And finally, the health of the operation is very solid. We're generating cash from the operation. And that cash that we've generated is almost twice as much as we had generated a year ago, standing at about CHF 15 million. Now let me take you through quick highlights on the different segments that we've had. The bulk of that performance is coming from our real estate segment. We've -- obviously, with the advent of corona -- with the coronavirus, we've redirected a lot of our efforts and our focus towards our real estate business. We've also redirected a big effort towards what we call account management or destination management, which is the recurring sources of revenue that we get from operating the different destinations that we have, all the while controlling very carefully our hotel operations from a cost perspective and ensuring that we're able to tap into whatever primarily local sources of tourism that we can get into our more than 7,000 rooms -- hotel rooms. Let's take them one by one. I think the part that we're super excited about is still the net real estate sales. These are up 45% for the same period last year to about CHF 280 million. That's a very solid run rate. And we are now up to a real estate receivables portfolio that is almost up to just short of CHF 1 billion, at about CHF 937 million. And that's something that gives us a lot of comfort that we have a good run rate of revenue and revenue growth ahead of us comfortably and that we're actually continuing to fill that bucket with further sales that will maintain us and sustain us for a good healthy period of time. The real estate financials, you can see the revenues are up dramatically, almost doubled at CHF 171 million. The margins have also significantly improved. They're up 140% at CHF 71 million, and that's something again that is driven by not only an improvement in pricing, we'll talk about that in a few minutes, but also an improvement in the way that we actually do our construction and value engineering that we do for our projects and that we're very focused on. In the hotel space, despite the fact that we're operating 100% in COVID this year, this in comparison to the first 2, almost 3 months of first half of 2020, which were very strong hotel months, I would say we are only "down" 28% on the revenue. However, we're almost breaking even on the adjusted EBITDA level, which is an important marker for us. So despite the fact that revenues are almost down 28%, we're actually almost breaking even there, we're losing CHF 2 million. That's thanks to a very aggressive cost-cutting set of initiatives that we have. And you can see some of those details a little bit later. And then the other part that I -- that we've been talking about in the last sets of review of results and that we talk a lot about internally here with the management team is our town management or destination management revenues. You see those up quite dramatically, I would say, despite the fact that there's virtually no international tourism and many of our destinations are completely shut down like Salalah or Taba, our town management revenues are up 21% to CHF 27 million, CHF 28 million. And they are starting to turn a profit for us from an operating EBITDA perspective and that's something that we'll continue to drive very strongly because it's a healthy source of recurring revenues and profits going forward. If we look at the way that the revenues are actually distributed, you would naturally expect them to be heavily skewed towards the real estate, and that's what we're seeing here. It's about 3/4 of our business right now while we're seeing the remaining quarter split evenly between the hotel business and the town management business or destination management business. Again, very healthy, in my view, given the tremendous year-on-year growth that we're talking about, which pretty much exceeds 45%. If we look at the geographic distribution, we'll see that El Gouna, of course, continues to be an important workforce for us but its share of the total revenues, which, again, are larger than last year's by quite a lot. Its share has actually decreased, and that's a healthy sign for us because we're starting to see new sources or new destinations that are starting to produce revenues and eventually profits that are really popping up here and worth talking about. The first one, I think, is O West, which we see here starting to carry almost 1/5 of the pie. And then the appearance of Taba -- of Makadi Heights, sorry, which is now 7% of the pie, whereas it was a very negligible destination for us before this. And Jebel Sifah in Oman, which is also carrying another 7% or so. And of course, they continued. And Luštica in Montenegro, which is beginning to show up. So very excited about the distribution, not only the fact that the number itself has jumped quite a bit, but actually that the distribution is becoming a bit more balanced. It will always be tilted towards Gouna, I think, in the short term. But increasingly, we start seeing newcomers on there that will, with time, continue taking more and more of the share and will continue to have, hopefully, a more balanced view of the distribution of our revenues, which derisks the business quite a bit. Let me walk you through some of the operational highlights from our 9 operating destinations. In El Gouna, our big workforce, I think a few things to highlight. The first one is net sales were up almost 60% at CHF 117 million. That's very exciting for us because that increase continues not only from a year ago, but also the 2020 first half was itself up 75-or-so percent -- or was itself up from the first half of 2019. So the momentum, the progression continues, and it continues at a very, very fast clip, and we're excited about that. Second thing is, it's what we feel is relatively healthy growth in the sense that we're continuing to increase our pricing. In local currency, the prices are up by almost 10%. In francs, just because of the strengthening of the franc recently, we're up 4.2%, which is something that we're very excited about. A couple of points to highlight maybe is our hotels in Gouna ran for the first half of the year at 40% capacity. And that is a pretty good performance, I would say, given that travel -- international travel was pretty much shut down for Egypt for that same period -- or almost shut down Egypt for that same period. And 95% of our guests are currently locally sourced. This is something that we did not do before. It's a muscle we've grown inside the company. And I have to say I'm very proud of the way that our hotels team has stepped up and diversified their sources of revenues and our sources of traffic into our Gouna hotels to create that performance. We're also in the process, speaking of hotels in Gouna, of transforming our hotel, it used to be called the Bellevue Hotel into a Chedi Hotel. The Chedi brand, as you may know, has been serving us quite well with the anchor, a property that we have in Andermatt, which many people go to just to go to stay at the Chedi in Andermatt, but also in Luštica, which is becoming a very nice property, which people are also flocking to and which is running currently at almost 100% occupancy. And now that will be our third Chedi in Gouna and we're excited about it. The numbers is, like I said earlier, sales are up quite dramatically. Pricing is up. Occupancy, as you can see, despite the fact that the first half of 2020 had 2, almost 3 very positive months, we're pretty much at the same level. We're at 29% occupancy this year versus 32% last year. But what's really good for us is despite the lower occupancy, despite the fact that we're operating 100% in COVID times, we were able to increase our GOP in our hotels almost by a factor of almost 3x at CHF 4.2 million. Revenues, we spoke about before. You can see them very strong, both at the real estate level as well as the town management or destination management levels, as we said before. Next important destination for us, O West. That is continuing to go very strongly. Our net sales, if we exclude the sale of land, which was done in 2020, so if we look at really proper real estate sales comparison, is up 30%, up to CHF 80 million versus CHF 61 million. Again, something we're very excited about, given the competitive dynamic in the market and given the positioning -- the repositioning that we're doing of O West, which I think is working quite nicely. That is also demonstrated by the fact that we've increased our average selling price by 15% in franc terms -- in Swiss franc terms and north of 20% in Egyptian pound terms, and it's something that's being received quite well, I would say, by the local market as proven by our sales numbers here, and that's something that's very exciting. From a revenue perspective, our revenue is up 200-plus percent because we're constructing, we're moving quite quickly on the construction front. We are -- we've completed so far 423 villas, and we started the construction of 185 new apartments, which is going to be a landmark also for this project and this development. Also important to highlight is the fact that we've progressed in the construction of 5 schools. And we're signing up increasingly people and members in our club. We only highlight this point because those recurring revenues that will be coming out of this kind of asset over there as well as also the place making value that it does and the ability, therefore, for us to increase our prices and increase our sales is going to be quite critical for us going forward at O West, and we're quite excited about the momentum there. Makadi is another one of those fantastic assets that we have, and that's been, frankly, outperforming all of our expectations with the new management team that took over in September. Our real estate sales are up almost 5x in relation to where they were in 2020 first half up to CHF 33 million, and that's starting to register. We've actually increased our pricing over there even more aggressively, but almost 70% in terms of price per square meter. It's even more so when you look at it in Egyptian pounds, and that's being very well received. The team is being very aggressive to find and identify customer segments that aren't necessarily served in the local Egyptian market as much in order to be able to generate those sales and those revenues and those prices that we're talking about. A lot of new projects within Makadi Heights have been launched, Cape and Topio, and they're being received very nicely. Also, construction is really ongoing right now, and we're nicely on track to delivering 250 almost units in 2022. We're also putting a lot of effort in place making. That's a theme that you'll be hearing us talk about also in many places, again, in line with the recurring revenues and in line with the creation of exceptional experiences for our customers in our destinations. So for example, in this particular case, there's been a whole bunch of commercial lease agreements that have been signed. There's actually a bunch of partnerships with supporting facilities that have been signed and there's going to be a music festival that we'll be bringing, which would be quite iconic by local and regional standards that we hope to animate Makadi with over the course of the next few months. The music festival will be early next year. And as a consequence, you see the numbers right there. Net sales are up very sharply, and the average prices are up very sharply. And of course, the revenues from real estate from the construction activity that we have is up very sharply. I'll talk about one more -- or a couple more destinations, Jebel Sifah in Oman. One of the things that we had to do, of course, during the period of COVID was to redirect our sales as well as our hotel activities in Oman towards Muscat, the capital city. That's what we did very successfully. You can see here that our net sales were up by a factor of 4x to almost CHF 21 million in 2021. Again, very strong performance by the team. And we're starting to deliver 117 villas and townhouses there in one of our very nice beachfront projects in December of this year. We also launched a bunch of new offerings over there against stand-alone villas and townhouses in what we call the Sifah Oasis, a sub-development in there. And we're beginning also to do the same thing -- or we're progressing and doing the same thing as we've been doing elsewhere, which is new animation, new activation events like The Beach Restaurant & Club, which will be opening in October 2021. And as a consequence of a lot of these things, we've managed to reach a 40% occupancy for our hotel over there, Sifawy, which is one of our hotels and also a 33% increase in our hotel revenue for that same period of 1H-to-1H comparison. The numbers then speak for themselves. Again, starting with real estate. You see the sales jumping to CHF 21 million. It's almost up 325%. The average selling price is healthy. It's up marginally, which we're happy with, given the current macroeconomic conditions in Oman, which are not very good at the current crisis that they're facing. And also, as I said, the hotel performance, both from an occupancy perspective as well as the TRevPAR perspective, numbers are up quite sharp. And of course, because we're beginning -- we're continuing our construction and delivery, we see the revenues jumping up, driven primarily by the real estate business over there. Last quick highlights before I pass you on to our CFO, Ashraf, who will walk you through the integrated financials. Quick highlight about Luštica Bay in Montenegro, another one of our rising stars in our portfolio. Again, a very aggressive real estate sales. That number has jumped up by a factor of 6x, almost -- or 5x, sorry, to CHF 18.3 million versus CHF 3.6 million in the first half of 2020. And that's something very, very positive for us. The occupancy for the Chedi Hotel there, which is our main hotel over there, in the second quarter, it was up to 48% with very healthy TRevPAR, CHF 125. That is actually a momentum that's continuing very strongly through the current phase of Q3, where, as I said earlier, our occupancy rates over there are extremely positive. They're running in the vicinity -- in the high 90s across the board. We're progressing with the construction of 58 units that we sold, 48 apartments and 10 villas, in both the Centrale area, which is what we intend to be our kind of our local downtown area as well as also the Marina Village, which is what you typically end up seeing on the pictures as well as this one here where we we're continuing delivery and construction. We also, again, significantly revamped the retail experiences, restaurant experiences, beach experiences over there. And we've added 30 berths into our Marina in preparation for accelerating the activities there and the revamping there over the course of the next few months and years. Consequence of this is, again, as I said earlier, aggressive increase in sales. Prices more or less stable, slightly low, but that's primarily driven, I think, by the FX between the franc and the euro, which is where we -- which is the unit we use for our business in Montenegro. And you can see the occupancy, obviously, has improved in relation to the prior year, but that's naturally given that this was the off-season primarily during COVID for 2020, but very positive occupancy as we speak now, and the TRevPAR much higher, consequence of revenue much higher, driven again by real estate. So this is just a very quick overview of the numbers as a whole, as you can see, very positive momentum and also a few highlights of some of our destinations to give you a bit of a flavor. I'm going to pass it on to Ashraf now, who will walk us through the integrated financials across the board, and we'll come back for a discussion of the outlook and any questions you may have.

Thank you, Omar, and good afternoon, everyone. I'll try to focus on some specific numbers. As you can see on the income statement, there is a big improvement in the margin, going up from 26% to 31%. And this is -- the main driver here is basically 2 things: the cost savings that we have worked on in the hotel segment in general across all our destinations since we have this corona effect in the last year. So we were focusing on these cost-saving initiatives. At the same time, we had last year, in the first half, we had O West starting its operation, so their margin were almost breakeven. While this year, as you can -- as you saw in the first slide, it started to contribute on the revenue and therefore started to contribute as well on the gross margin. So between both, there is improvement from 26%, as I mentioned to 31%. Also looking at the investment income, which increased, as you saw, in general, our average, let's say, cash balance at the bank increased. And therefore, we managed to do some treasury functions and some investment in this area and increased the investment income from CHF 2.7 million to CHF 5.8 million. All of that, this lead to the operating EBITDA to almost double compared to last year. Also on the other gains and losses, you can see between the one-off gain that happened during the first quarter of this year by selling one of our noncore investment in Egypt, had a gain of CHF 2.7 million versus product losses of CHF 3.4 million. So almost, the net is CHF 2.6 million compared to CHF 5.1 million last year. And our share of associates in different areas, and all of these are our associates. You can see that the Red Sea, which is the construction arm in Egypt that we have, is continuing on the growth path, while Andermatt in the first half is a bit lower than the first half of last year, but this is expected to be a bit better in the second half of this year. And hopefully, the total year will be much better. On the finance cost, we were able to reduce by CHF 1.5 million the finance expense in general from one part that is the LIBOR rate. And at the same time, we had some leasing loans in Egypt for some of the buildings that we owned in Gouna that we paid all these leases back. So we were able to reduce our finance costs in general compared to last year. And the last number here is the income tax. Since income tax is not consolidated on the group level, it is by entity, and therefore, since Egypt is doing very good and there is -- the level of profitability there is high, therefore, the income tax already increased compared to last year. The balance sheet is basically straightforward. There is nothing to be said here. It is more or less increase in the cash, increase in the receivable inventory, and this is mainly coming from the increase in business, either on the sales or in the construction. So it is straightforward increase, nothing special to be said in the balance sheet. On the financing profile, as we always show to the market and to show to the investor what are the level of debt profile, debt repayment that we expect during the coming years, as you know, we were successful last year to refinance most of our debt in Egypt. And this year, we are almost finished with refinancing as well our debts in Oman and in UAE. And therefore, we expected this refinancing to have a positive momentum in the next couple of years. And all the cash flow that will be generated from the business will be geared toward a CapEx and the renovation of hotels to be prepared once the COVID effect is going down, then we will be able to have a fully renovated hotel, and therefore, able to receive the guests in the renovation -- the renovated hotel. And the cash flow, you can see that the cash flow from operation automatically, based on all the sales that we have seen and all the concentration that we are doing in the collection, and we have a dedicated team on the collection side, either on the hotels or the real estate, then we will be able to increase our cash from operations from CHF 15 million to CHF 8.7 million -- from CHF 8.7 million to CHF 15 million. And at the same time, we can see that the interest rate because if you remember that during the first half of 2020, that most of the central banks of the countries that we work in would have initiatives to not pay any interest or principal so we did not pay much interest last year. But this year, we are back to normal and paying our interest again as normal. And so all of this together led to have an operating cash flow of CHF 1.1 million after paying the interest and the taxes. The CapEx and payment for PPE (sic) [ PP&E ], as I mentioned, in the first half, we started the renovation and some infrastructure work that is needed in the destinations. And this number will be a little bit more in the second half in order to be prepared for next year, as I mentioned. All of this led to have the cash balance, in general, increased from CHF 195 million at the beginning of the year to CHF 215 million at the closing of Q2, a good trend. And -- but we expect that this number could, by the end of the year, go down a little bit because, as I mentioned, we are working on either the construction activity or the CapEx and the renovation plan. By this, I finish this part of the presentation and go back to Omar for the outlook of the year.

Thank you, Ashraf. So I'll comment on 2 questions. The first one is the outlook, and then I'll give a quick update on the question of the claim by the Ministry of Environment in Egypt vis-à-vis Orascom Development. On the outlook, look, the guidance and the approach we're using is still very much the same. We're still very much in the middle of a global pandemic, and therefore, we're not going to be giving hard numbers and hard sort of guidance, particularly that a chunk of our business, the hotel business, is obviously severely still affected by COVID. Having said that, I think we can highlight a few points. The first one is that we're expecting to continue, and we've already entered the second half of this year with very strong momentum, and we feel that we're positioned quite nicely to grow and grow in a very healthy manner and continue to deliver very strong results to our shareholders. That's, I think, something that we've been focusing very heavily on over the course of the last 12 months, and we're hoping to continue to do. Obviously, the company, during this crisis, has almost -- has heavily been reoriented towards the real estate side, and that's proceeding very nicely. We continue to benefit from strong desirability of most of our destinations and actually quite a bit of capability to drive value, both on the top line as well as the bottom line parts with managing our construction costs and value engineering, though, in much more aggressive manner than we had before. That, therefore, we would expect to continue to see a strong real estate component driving the rest of the business, with the recurring revenues coming from town management and, of course, a continued focus on tourism. And speaking of tourism and the hotel sector, we're very excited by the fact that the Russian tourists have started returning to Egypt. Now historically, we didn't do much ourselves in terms of Russian tourism. We've been very -- we're trying to be quite selective with which Russian entities we deal with to bring in good customers that we want to bring on board in our destinations to improve the revenue and profitability of those destinations, and that's proceeding quite nicely. I think we'll benefit, in any case, with the fact that a lot of these Russian tourists are anyway going to fill up a lot of our competing hotels in the Red Sea destinations next to us. Hence, improving and indirectly improving anyway our financials there. So we're pretty cautiously optimistic on this front, but we'll continue, in any case, driving 2 initiatives: one is the internal tourism in Egypt, primarily towards our Gouna 2,700 rooms and increasingly towards Taba, with particularly also a focus on the regional tourism; and second, also maintaining a very, very close watch and a close eye on our costs in order to be able to manage that in a very responsible manner with an eye on the bottom line. That's the quick update on the outlook as far as we're concerned. A quick word on the compensation claim to the -- from the Ministry of Environment in Egypt. There's not really much news beyond what we announced a few weeks ago when we were contacted by the ministry. We're in very close contact with the government, with all the different ministries that relate to this particular issue and other entities inside the Egyptian government that are helping us trying to -- to try to solve this claim that don't have much substance behind. And until time when we have more clarity on what the claim is about, and we have the opportunity to look at the technical as well as legal documents and basis for which the claim is being made, we don't really have a whole lot to say but that we are working very closely with the government to ensure that we are getting what we need to react to this. And that we're very confident that this is ultimately going to get solved in a very fair and hopefully transparent manner as far as we are concerned vis-à-vis the government. That's it from our side for the time being. We'll pass it back to Sara to coordinate the discussion.

Thank you, Omar. This concludes our presentation, and we now open the floor for Q&A. [Operator Instructions] We have 2 questions in the chat box. First question is by Ferran. Could we have a little bit more detail on the performance of Andermatt in the first half of 2021? And why are you positive for the second half of the year, please?

Okay. So I'll give you a quick glimpse of what's happening with Andermatt very briefly. Overall, Andermatt has also had a very positive, call it, half -- first half of the year. Our net sales there are up quite dramatically, almost CHF 100 million right now in comparison to roughly CHF 40 million for the same period. We also have a decent chunk of reservations still over there. Our -- and that's a lot of momentum. Our hotels there are also doing very well. They have had a banner performance in relation to any other year before. We've, I guess, benefited from the fact that people are looking for premium locations and destinations that are healthy with the quality offerings that we have between the Radisson Blu as well as the Chedi Andermatt, which is a big icon, and that has resulted in not only occupancy rates that have been quite elevated, but also our ability to extract revenues from that at very high level. So it's been a banner year on a sales perspective, real estate has been a banner year on a hotel occupancy and revenue perspective. And we're very optimistic about also the, if I may call it, the soft way in which the destination is developing in terms of the type of footfall that we get there, the types of customers we're getting there and the increased level of activity and place making, if I may call it, that is happening over there. We, for example, signed up one of the very prominent orchestras for the next, I think, it's 3 to 5 years contracts. We'll be having many more of these cultural events, all in the spirit of trying to and working hard to expand the season in Andermatt beyond the winter. And that's beginning to have some very nice momentum. One more word I'll say about Andermatt, perhaps, which is that we're working very closely with the management there. As you know, we own 49% of Andermatt. So we're working very closely with the management there to help them come up with a very aggressive -- with an aggressive growth plan, but one that is capital conservative, let's say, right? One that doesn't necessarily require the difficult traditional CapEx levels that they had been delivering. And we're trying to drive them towards a much more rapid path towards profits -- positive profits rather than Andermatt's remaining a negative profit or overall loss-making entity for ODH. These are the 2 kind of big priorities that we're focusing on with the team there, and we're getting very good cooperation and response.

Thanks, Omar. The second part of the question was why are you positive overall for the second half of the year?