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

Good afternoon, and good morning for those joining us from the U.S. I'm Sara El-Gawahergy, Head of Investor Relations at Orascom Development Holding. On behalf of the group, I would like to thank you for joining our 9 months and our Third Quarter 2021 Results Conference Call. Our call will begin with a presentation by our CEO, Omar El Hamamsy; and our CFO, Ashraf Nessim, followed by a Q&A session. [Operator Instructions] I will now hand over the call to Omar.

Thank you very much, Sara. Good afternoon, good morning, everybody. It's great to talk to you again and to share with you the update on our Q3 2021, and 9-month results year-to-date. I wanted to share with you an extremely strong set of numbers across the board, a very healthy operational performance by the company across the board. So some headlines, and you can probably follow with me on the few charts we have, started with revenue growth that's very healthy at about 43%, up to CHF 372 million, almost CHF 1 million up from CHF 260 million in the same period in 2020. That momentum was actually accelerating in Q3. You can see that our revenues were actually up north of 50% in Q3 alone. So the momentum is accelerating, and we're also quite excited about the way forward. I'll talk about that towards the end. The operating margin or adjusted EBITDA is up a very healthy 131% to CHF 93 million. Our EBITDA margin is up to 25.2%, up from 16% last year. Again, very strong similar momentum in Q3. So that trend is accelerating and quite nice. Very excited to announce that our net profits are in the black right now. We are profitable at CHF 9 million for the first 9 months of the year. That compares to a loss of CHF 27 million similar period a year ago. And again, a very positive momentum continuing through Q3. And our cash from operations is up 14.6% and to almost CHF 37 million. Let me take you through a couple of other highlights, and break it down a little bit by business segment or by line of business. Our net real estate sales are up 51% to CHF 445 million, and that has resulted in a real estate deferred revenue balance of CHF 730 million, and a real estate receivables portfolio of almost CHF 1 billion, that's very, very positive for us because not only is it the highest year ever of real estate sales that we've ever had, but also the momentum and the pace at which it's happening is very exciting for us. And I'll talk in a few minutes about also the subcomponents that make up this momentum, and we think it's very healthy, and we're quite excited about it. If we look at our different lines of business, there are 3 main lines of business: the real estate revenues are up 81% to CHF 270 million with the adjusted EBITDA up 127%. Hotels are up 14% for the 9-month period. I want to highlight the fact that this is in comparison to Q1 in 2020. That was very strong. In fact, it was the strongest quarter that Orascom Development has had in the hotel segment ever. This is obviously just before corona kicked in. And so a 14% revenue increase, and a north of 200% adjusted EBITDA improvement, and going in the positive finally on that front are very, very positive numbers that we're excited about. And that momentum actually is continuing to carry on in the last couple of months of Q4 of this year. And then last, our town management financials are very important because we've been talking about this as being a recurring revenue yield-generating set of assets that we have in our different destinations. They are a fundamental element of our value proposition on our business model. And these are up almost 35% to CHF 45 million, with the profitability also being finally in the black and with tremendous comment. So all cylinders are improved significantly from last year. We're still functioning pretty much on [ 1.5 cylinder ], I would say, which is our real estate and town management cylinders, while our hotel engine or part of the engine is coming online nicely. And we hope that over the course of the next 18 months or so, we'll be back to our peaks -- peak levels of operation perhaps earlier, but nobody really is able to look in a crystal ball for the time being on the hotel segment. Going to the next page. Just basically showing the breakdown. I think if you look at it in a way where you group land sales together with real estate sales, and you look at the makeup, we're pretty much in a similar makeup as before. The hotels have obviously dropped by a few percentage points naturally from a revenue perspective, but everybody is up, as we talked about in a pretty dramatic manner. On the following page, the geographic breakdown is something that I'm increasingly excited about because the diversity and the health of our revenue is increasing, and that's an important thing for us. Two observations. The first one is the relevance and the increase of a few new destinations that we have. First of all, O West, which is starting to take up a more and more important element of our revenue base. And we'll continue to do so going forward. Second, Makadi Heights, which has been -- which has been a pretty dormant destination up until a year ago, when we have a new management team in place, and a very reinvigorated sales and operations plan in place, and that's starting to show off and show up in the revenue split. That's 7% contribution right there, and that's going to continue increasing over time. And then an interesting swap in our split in Oman, while the overall contribution of Oman this year was lower than historical because of the fact that the country was pretty much shut down for the bulk of the year for external tourists. What was very encouraging for us was that Sifah, which is our destination very close to the capital Muscat, actually performed extremely well, while Salalah, it's sales were up or pretty much flat on the previous year, but still performed pretty decently. So that's a bit of a rebalancing that you see between Salalah on the one hand and Sifah the other hand. Going now and maybe give you a couple of quick highlights by destination. I'll go to Page 12, very briefly talk about some numbers. If we take El Gouna, you can see that the real estate net sales are up, excluding land, of course, to compare apples-to-apples are up about 67%. And that's made up not only of a decrease in the number of units that we're selling, but also very importantly, a healthy increase in the average selling prices when you look at it in Swiss francs. You can also see that the overall year-to-date occupancy for us despite the very heavy corona period of Q1, and a good chunk of Q2, and the limitations that the government was putting on our occupancy levels. Net occupancy year-to-date was at 37%. And I'm happy to announce also that for the months of October and November of this year, so just this month and last month, we're operating at 66% occupancy in October and 76% occupancy in November. So the momentum there is very strong as well as also the pricing per room, which is also continuing to show a very healthy increase. If we go to O West, the similar story when you compare the sales, excluding land or commercial, rather, in this case. You see that we have a 40% increase on the sales driven from 2 very healthy well-balanced components, a big jump on the prices, up 21.4%, which is something that gives us the confidence that from a brand recognition perspective, from a health of the location perspective, from a health of the product perspective, we're actually starting to really resonate with the customer base. The high-end customer base of Cairo, Egypt, and that's very healthy. And then, of course, a north of 27% decrease in our number of contracted units, very, very healthy increase there. And the momentum is continuing to accelerate, and we're pretty excited about this. Going to Makadi Heights, the little sort of gem, if you will, the gem in the rough. Historically, I think Makadi Heights was never a topic of discussion since a year ago with the new management team in place and the new initiatives we put on Makadi Heights. We can see the tremendous jump that we've accomplished in net sales. They're up to CHF 50 million for the 9 months, and a jump of 146%. We've almost doubled [ and a half ] in that period, again, driven very, very healthily by not only a doubling on the number of contracted units but almost doubling or an increase of 74% in this case of the average selling price, and we'll start seeing the revenue contribution of Makadi Height, of course, going forward, much more -- in a much more healthy -- in a much healthier way. I don't necessarily expect, by the way, just for clarity that our pricing increases in both Makadi Heights and O West to continue at this very, very aggressive pace that we've had so far. But I am optimistic that we'll continue to see a healthy clip of not only increasing net sales but also the quality of the sales, and the selling prices that we're able to extract in this increasingly competitive environment. Shifting gears to our non-Egyptian assets, and a quick look at Luštica Bay in Montenegro. Again, a step change in performance ever since we've also put in place our new management team over there about a year ago, our net sales are up almost fivefold to CHF 48 million. primarily driven by the number of contracted units. You can see a massive jump there. Flat prices are pretty flat as we breathe in new energy into the destination as the destination starts coming slowly out of COVID, and all the effects of the lack of tourism and lack of travel to it, but it's really starting to show up on the real estate front. And I'm also very happy to say that the hotel performance was extremely strong, and beginning to show up for us. It's important for us to track out the performance, not so much because the net dollars that we're going to be getting out of that particular hotel, it's only about 111 rooms. Not so much for that, but because it's an indication of the place making and the momentum that we're building in the footfall that goes into Montenegro, into Luštica Bay, which then bodes gross very positively from a real estate development, and sales, and then revenue generation perspective going forward. So very exciting development there. Quick overview in Oman. In Sifah, as I mentioned earlier, our real estate sales are up 66%. That was tremendous to see. I think COVID in many ways in 2021, the lockdown happened in Oman enables a lot of the citizens of Muscat, the capital to discover Sifah, as an amazing 40-minute away peaceful destination by the coast in a very nice and modern environment. And therefore, the sales there, as you can see here, almost -- well, an increased by 2/3 -- by 66%, and that includes an increase in the prices even though it sort of -- even though the environment, the macroeconomic environment in Oman, I think this year was pretty challenging. So that's something very exciting for us. And that's the overview and the quick glimpse of some of our destinations. I'll pass it now to Ashraf, our CFO, who will walk you through the income statement, balance sheet, and cash flow statements, and then we can then open it up for a quick commentary, and any questions you may have afterwards.

Thank you, Omar. Good afternoon, everyone. Directly to Slide 22 related to the income statement, and I will speak specifically about the margin that went up from 25% to 30%. This is mainly coming from the focus of this year was on the real estate, and specifically even in the real estate we have O West contributed that started to show. And last year, it was the previous the first year to recognize some revenues with low margin. Now the margin are improving in O West, which contributed to the increase here in addition to some the cost in general, cost cutting on the hotel front to -- because of lower occupancy that we have seen in the first 9 months though there is -- in the next year, hopefully, will be in a much, much better situation than this year. The investment income because this year, we have, as you can see in later slides, we have the cash in our books in general is higher than the previous year at the beginning of the year. So this is the result of our investment of this cash, which also contributed to our margin. We are doing all of this while we are maintaining our G&A. So we're having the top line grew at the same time, having the same G&A, which is a good achievement. And next year, I expect this maybe to go up a little bit compared to the revenue that will increase in general. Based on the share of loss of associates, I want to highlight, yes, that we have year between under [indiscernible] our subsidiary associates in Jordan. They have relatively bigger losses compared to last year, but the expectation is that maybe by -- before end of this year, we are working with the team there. So hopefully, this will be slightly positive in Q4, positively still losses, but at least in a better trend, I would say, compared to what we are seeing in the first 9 months. Overall, the tax expense increased compared to last year because a lot of profitability is coming from Egypt and the subsidiaries in Egypt are making much more profit, and therefore, they are paying more taxes overall in Egypt. The balance sheet is straightforward. I think we mentioned in the balance sheet. Everything is on track. The receivable and the inventory are increasing based on our level of activity. There is nothing to be mentioned. It is going as now. The cash flow on the financing profile, this is our repayment of all our existing debt. And I would like you to remember that in the last year, we did this, I would say, the refinancing that we have done across different destinations, and different debts, that we have across many of our countries either in Egypt or Oman or even UAE. And therefore, we have a great period of not paying any interest or principle, and we will start paying back principal in the second half of '23 in Egypt. And in '24, we have the [ bond maturity ] of our ODH bond of CHF 100 million in addition to the repayment in other destinations in general. The cash flow, although that actually are spending a lot on our construction and therefore, the revenue is increasing, but you can see that still our cash flow from operation is still higher, almost 37% compared to 32% last year. better, although as I mentioned, that we are spending a lot of constructing on construction. We are expecting even to increase our spending during Q4 and in 2022 from one side to mitigate the inflation that is expected, and we are working on it to make sure that our margin will be intact in the next years. So we'll increase a little bit the construction activity to make sure that we are ahead of plan. So the cash flow from operation -- the payments for PP&E [indiscernible] on the CapEx in general increased to CHF 37 million compared to CHF 22 million almost last year because now this year, we will have -- we have started our renovation in our existing hotels or even adding more amenities within the destination that we have to give a better service in our destination in general. All of this together, having paid on either the CapEx or the construction, and by managing overall our cash flow, and our receivables, led to an increase in our cash balance from CHF 196 million almost at the beginning of the year to CHF 222 million, very good achievement although that we are spending. This is it from my part of the presentation. And for the outlook, we'll go back to Omar.

Thanks, Ashraf. So 30 seconds on outlook, and then we can open it up to Q&A. Look, we -- on the topic of the compensation claim from the Egyptian Ministry of Environment, on September 2, a decision was issued to pass the topic or the dispute file from the Ministry of Interior to the Egyptian Prime Minister's office. And on the 18th of October, we submitted all the technical and supporting documents related to this matter to this committee. Since then, we still haven't received any news. This was about less than a month ago. So we understand that they're studying the topic. We have wide open channels to them as maybe a commentary on this. This has historically been a path towards a resolution of similar disputes when these topics get passed from the specific ministry to the central committees at the government level, at the Prime Minister's office level. and that's usually an indication of not only desire, but a first step towards resolving in a reasonable manner, these types of disputes between investors and the government. So we're cautiously optimistic about this, and we -- and that's where we are. As far as guidance for 2021, I mean, we still maintain the same posture. We're still in COVID times, and we're -- it's difficult to give accurate guidance and so we'll refrain sorry from doing so. Having said that, as I said, our main hotel drivers, which are in El Gouna, are seeing very positive momentum in October and November. That's continuing, and we're pretty optimistic our hotel in the UAE is performing very strongly, also 78% and 80% occupancy for October and November. The Chedi in Andermatt continues to be very strong occupancy in the 60s et cetera. So we're very optimistic about the performance in our hotel sector. The mix of customers that we're beginning to see in El Gouna and in Salalah, is increasingly international guests as opposed to domestic guests. That's a good early signs. Our neighbors in Hurghada, the City of Hurghada or the resort of Tomb of Hurghada near El Gouna is overflowing with tourists primarily from Eastern European destinations or other sources. And that's having a very positive effect on us because the prices are starting to increase there. And it allows us to continue our significant premium against all of these different hotels, and gives us a further cushion to increase our prices, which we're happy about. Taba Heights, which is historically another 2,500 rooms that weren't really operating and that we've never really included in any of our forecast or conversations, is showing some early signs of life with because of the fact that the hotels in [indiscernible], which is the next competing kind of destination are overflowing also with primarily Eastern European and some Western European tourists. And that's, therefore, resulting in a positive spillover effect for us, and we're beginning to see some movement there. Again, we don't want to make too many forecasts on this one until we have a bit more clarity, and a bit more stability in the bookings, but we're reasonably optimistic about the winter season, which begins now and ends roughly end of April. That's the quick kind of a couple of words from us on the results to date as well as a little bit of a outlook for '20 for the remainder of the year. I'm going to pause here and pass it back to Sara, if there are any questions from any of you, we'll happily take them.

Thank you, Omar and Ashraf. [Operator Instructions] Our first question comes from Daniel Bürki.

I would have a question on the claim of the Egyptian Ministry of Environment. Actually, not are they really charging you? Do you know what it is, then maybe what do you expect for the time line? And finally, will you book a provision for this? Or how will you handle it financially?

I'll take the first question, and I'll pass it to Ashraf for the second question. Do we know what the exact dispute is about? The claim that we have received from them to date, if I'm not mistaken, is literally is a very short one. I think it's a paragraph or so in a single letter that we received, if I'm not mistaken, that claims that we have damaged the environment of the coast of Gouna. And that is -- I don't think there's been any further clarification since what we announced last quarter as soon as we receive that claim. And there has been no further official notification by anybody in the Egyptian government of any further details of the claim. We have requested 2 things from them. We have requested the technical documentation of the so-called accusation, and we have requested a legal basis also for the accusation we have not received either so far.

Yes. For the provision, it's basically based and we are -- since the initial report that we are getting from our technical teams, say that actually, there is no damages whatsoever on the beach were. If there is it is a little. And therefore, all the technical team. And we don't -- and since we don't know as well the nature of the calculation on the basis of the calculation that is coming from the government. So we do not have a reliable estimate of any provision that we can take. And therefore, based on the accounting standard, we did not take any provision in Q3 until we have more clarity and more understanding of the nature of the claim and the basis of calculation.

We have a question from Jarrod Castle.

Just following on from Daniel's question. Have you ever had any claims like this historically from the Egyptian government or any of the other countries that you've been operating in, in terms of claims around the environment? And then secondly, you spoke about inflation, and it sounded like you were going to speed up some of the development of projects, I guess, to try to offset some of that inflation. Can you talk a little bit about kind of what inflation you're seeing in terms of construction as well as your ability to secure the materials you need to undertake that construction? It seems like global logistics is creaking somewhat at the moment.

For the historical -- actually, we, as a company, we had a very, very small and minor claim before many, many years before in Taba Heights. It was -- and the amount was minimal something I don't recall exactly but within the vicinity of to CHF 10,000 to CHF 20,000, something like this was a penalty, because it's something, I would say, almost a negligible is something that is very, very small. In general, for what we heard overall is for any claim coming from the Ministry of Environment to any other developer or any other player, we never heard about this kind of claim at least here in the last 5 to 7 years, we never heard of any claims such at this. This, the maximum is, if I recall, it was maybe $1 million or something like this. So again, this is why we are trying to understand from the government, what is really driving this huge amount of claim, which still we did not get any detail, as I mentioned about the basis of calculation. But so far, it is huge and unheard of.

And can you repeat your second question?

Sorry, it was just around a kind of the inflation that you're seeing in terms of construction, and your ability to undertake construction indeed, if there's logistical issues in getting the supplies you need at the moment, just given global supply chain?

Yes. So let's separate the question to 2. Let's separate it into supply chain constraints and then inflation numbers. And as far as supply chain constraints because of the different parties that we're dealing with, some of whom are parties that are related parties to us, i.e., we have control over them like Red Sea Construction, which does the bulk of our construction. We actually have had so far, and we anticipate no supply chain disruptions at all, both in '21, as well as in the current quarter we're in. And as far as the foreseeable future, and we're constantly in touch with the senior management of that company, obviously, because we are an important client for them, and we are a large shareholder in them, right? We own 40% directly as ODH and Samih Sawiris our largest shareholder owns the other 40% of that company. So we have a pretty strong control over our suppliers, and we feel very comfortable from a supply chain perspective. As far as inflation goes, we have seen indeed the jumps in prices of steel, prices of cement, and prices of aluminum, that effects our finishing. And we were in the process of running our numbers and figuring out where we're at. The short version of the answer for some of our largest developments, specifically O West currently is that these inflationary pressures are hedged in 2 ways. The first one is for a large number of our contracts and our execution that is happening in 2022, we already have signed the contracts and their [indiscernible] as far as any further escalation of raw material costs or inputs to these players because what they do is they go back to back and purchase immediately the raw material. So they purchase the raw material, they store it, and then throughout the course of the execution of the construction, they do the building. That is secured for O West. That is secured for Makadi. And I am pretty sure, but we can get back to you with more details that for a decent chunk of El Gouna's construction next year that is also secured. On the second hand, on the second -- on the other side also, what we also do is that we have built into all of our business plans for each project, an inflationary equation that is built in, where we have factored in on an annual basis, at least an inflation rate of 10%, which obviously accumulates -- in our business plans accumulates regularly. In practice, it goes -- it remains pretty stable and you get these big spiky jumps every once in a while. And so within all of the returns that we desire, and the gross profit margins as well as the net profit margins that we want to extract from each of our projects. So far in O West as well as in Gouna and Makadi, we are still comfortably within all inflationary calculations that we've had. So far, we were reviewing it earlier today for O West. We're continuing to review for the remaining 2 or 3 destinations that are large and sensitive to this. And -- but we feel reasonably comfortable for the time being that we're pretty comfortable in '22. We're also going to be looking at other methods of potentially hedging in the longer term once we have a clear point of view on whether this is a minor -- well, a major in amplitude, but minor in duration disruption or whether this is likely to stay or continue to amplify over the course of the next 6 to 18 months.

We have another question in the chat box from Patrick. Dear Omar, could you give us an update on ASA, what you expect from the destination next year? Also when you plan to become positive and potentially consolidated and also give an update on Eco-Bos?

Very good. Look, let's talk about one by one. I think ASA, first of all, very excited about the momentum we have in ASA. There's a whole bunch of developments on the financials of ASA that are going very positively. First of all, both revenue and sales growth have a very positive momentum. Second, and very importantly for us, the profit, the profit margins in ASA are significantly improving. And one of the key thrusts that we have is getting towards a breakeven or a positive profit generation in ASA at a much faster pace than was originally planned. So about a year ago, when we started, I think, the plan, the internal plan for ASA, it turn positive was a few years out. A few is somewhere between 4 to 6 years. We've now turned around this plan, and we are on a maximum 1- to 2-year positive net profit plan for ASA. And there's another task force that's currently actually in Andermatt, as we speak, looking at further accelerating that path to profitability in ASA, which for us is super, super important. We will not talk about consolidation for the time being until I think we feel comfortable that we are in the black and that, and that we are also comfortably within the right levels of EBITDA to debt levels or debt coverage levels for ASA. And at that point, we'll bring this back to you as shareholders and to the Board, and talk about consolidation. But I'm very optimistic about the path at which we're going for us in ASA. There's another thing that we're doing in ASA currently, and I cannot share too much details in relation to this, but there's a, there's a potential transaction that we're looking at, which would significantly strengthen the economics of ASA, as well as also the positioning of ASA as a leading destination in the [indiscernible] and on a global scale. And it's something we will talk about in Q1 if it goes through, hopefully, but it's being looked at this point. As far as Eco-Bos goes, we're very satisfied with the way that the plans have gone for 2021. So we're nicely on track for what we call Phase 1 development in Eco-Bos. We are going to be looking and discussing with the Board in December of this year, whether and where to take Eco-Bos going forward, we'll be coming back to the broader shareholder group on a guidance towards Eco-Bos and what our intentions are. What you should know perhaps is that Eco-Bos remains a very, how should I say, a very ring-fenced, right, very sheltered and ring-fenced play for us for the time being, where our equity and cash, et cetera, exposure is very, very, very limited. It's been designed as such from the very beginning because we wanted to very carefully depart those in that environment before we actually start getting overly excited or be exposed to any potential risk there. I think the outcomes of that initial path at Phase 1 will become very clear towards the end of the year and beginning of Q1. And as such, we're shaping the story, like I said, towards the Board, of how we tend to go with Eco-Bos over the next couple of years. And we'll be sharing more of that probably towards the annual -- the AGM in May time frame.

We have another question from Ferran. He's saying would it -- if you are seeing any change or cancellations on reservations from European clients, given the increase in COVID cases?

Sorry, Sara, can you say it again, we missed that.

Ferran Tort is asking, if you are seeing any change in the cancellations or in the reservations coming in from European clients, given the recent increase in COVID cases?