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 Orascom Development Holding's Full Year 2021 Results Call. Our call will start with a presentation headed 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, Sara. Good afternoon, and good morning, everybody. I'd like to take the FY 2021 results. Overall, 2021 was a very good year for Orascom Development Holding. In fact, it was the record year in Orascom Development Holding's 30-plus year. As you see on the screen here, and I won't take you through all the numbers, I'll just touch on some of the highlights, we managed to increase our revenues to an all-time high of CHF 540 million almost, I'm going to round the numbers also for simplicity. You have the detailed numbers in front of you, which is an increase of 40% from 2020. We have managed to increase our operating margin, which is our adjusted EBITDA by over 93%, 94% to CHF 130 million. We, for the first time in as far as I can recall, and I think in many, many, many years, have actually turned a positive net profit of almost CHF 10 million in comparison to what we had been sustaining over the last few years of approximately anywhere between CHF 40-ish -- CHF 45-ish million losses annually. And our cash from operations has increased by 85% to almost CHF 70 million. So on the P&L, a very, very solid year for us. Equally, if not more important, on the forward-looking health of the business. If you look at the top line of what you see here, our real estate sales were up a very healthy level also. Our real estate sales reached, again, all-time records of CHF 670 million, almost. That's up almost 60% from last year, which itself was a pretty strong year, if not a record year. And a very healthy increase of our deferred revenue balance as well as our receivables portfolio. I'd like to also highlight the fact that these numbers do not include Andermatt results, which is 49% owned by Orascom Development Holding. And then for that, you can add another CHF 122 million of sales. Basically, you put the 2 together and you're looking at an operation that's running at roughly CHF 800 million of annual sales and hopefully will continue to grow, not necessarily at the same rate that we grew in 2021 because I think these are pretty exceptional growth rates, but certainly still continue to grow. On the revenue side, if we start decomposing it a little bit, the other thing that gave us a lot of excitement and encouragement is the fact that we actually managed to do all this while our hotel operations were still operating very much in the COVID year. So if you look at -- if I start with the middle column with the hotel operations, you will notice that we were up 40% to CHF 87 million, which is still significantly below our watermark high, which happened in 2019, which was hovering around the CHF 170 million. So we are about 55% of our peak there. And despite that, as you can see, driven by a combination of the real estate revenue, if we stay on the same page for a second, driven by the real estate revenue that grew 55% as well as increasingly importantly our town management revenue that's up to CHF 70 million. This is a very, very healthy and nice mix, and we expect that to continue to enhance, hopefully, in '22 despite the new crisis that we're having to deal with. One last comment on this page before we go to the next one. I'm very proud of the fact that our recurring revenues, which are made up of our hotels and town management components are continuing to increase. And again, as we start reaching our more normal operating levels, particularly in the hotel side, we'll also start seeing very healthy margins associated with that. So very, very encouraging and super excited about what happened. Now if we go to the next page, the nice thing about our revenue mix also is that all of this not only was achieved in a corona year or a COVID year, where the hotels were operating at about half their normal revenue-generating capacity. But also all of this was accomplished without any land sales, which, again, gives us tremendous confidence in the way that our real estate business is running as well as also the significant improvements that we're driving in our recurring revenues out of our town management operations or our ancillary revenues that come from all the placemaking and leisure activities that we offer in our destinations. If we go to the next page, you will see that also our geographic split has a few interesting gems beginning to appear in it. The first gem, I would say, is a combination of destinations that used to not register much and that are increasingly becoming of relevance to us. I wouldn't say that they are critical for our success. Yet, I hope they will be in a few years, but they're certainly beginning to ring the cash register. The first one is for the 2 of them are Makadi Heights and Lustica Bay, so Montenegro and the smaller kind of El Gouna destination, which is Makadi Heights on the Red Sea. You will also see here that O West continues to be an important component of our real estate play. In fact, if you look at the sales as well as the revenues -- well, if you look at the sales, you will notice that actually, for the first time, O West and El Gouna are equal in size in 2021, and we expect them to continue on that accelerated trend in 2022. You will also notice here that we've had a very mediocre year in Oman, and that was primarily driven by the position on the posture of the government opening or closing the country to visitors during the COVID period. We're really happy now that we're appearing to be emerging out of that. And the early signs are encouraging that the government now has a more stable policy to visitors and towards encouraging tourism there in a much more seamless manner. That obviously, lack of tourism and lack of visitors, hit our Oman sales in Salalah, particularly, where you see the -- while the number was decent for the year, you see the relative share of it in relation to other destinations was smaller, 6% versus traditionally 11% or 12%. If we go to next, please. Let me give you a quick updates by major destinations. We always start with Laguna because it still continues to be very much our key kind of driver and engine. A couple of points to highlight here. First, you can see that the hotel performance, a significant rebound. Occupancy was up to 45%, up from 27%. You can see that our GOP per available room significantly increased. So the hotel operation overall is getting very healthy. It was also extremely healthy in Q4. And going into the year, we were operating at levels that pretty closely mirrored if you normalize for Omicron, which hit us in the January time frame. But otherwise, levels that started to mirror the 2019 peak at that time. If you look at the -- the real estate sales, you can see that we were up 72%, if you compare it, excluding land, so apple-to-apple comparison. Of which, a 6% increase in our average selling price, which is something we pride ourselves a lot on, and we think is very important for the health of the sales that we're doing and for the resilience of the sales that we do in El Gouna. Going to the next destination. In O West, the momentum, which is our [indiscernible] the momentum continues very, very strongly. You can see there are net sales, excluding any one-offs or commercial real estate or land were up almost 40% to CHF 231 million versus comparable CHF 165 million the year before. And also here, very importantly, the average selling price was also significantly improved, up 17% and those selling prices continue. Of course, as our construction continues as a percentage of completion continues, the revenue starts tracking towards that, and we expect the significant acceleration in our revenues in OS given the deferred contracted sales that we've accomplished over the last 2 to 3 years. If we go to the next destination. Makadi Heights was one of those very sleepy destinations that not much emphasis had been put on in the last few years. And then in the last couple of years, we put in new management in place, much more dynamic, much more sales-oriented. And you can see it in the results here. That destination suddenly popped from being almost completely insignificant to reaching CHF 70 million in sales with very healthy price increase and a very healthy number of contracted units also increased. I'm very proud of what the team has done there. And I think this destination, once we solve some of the ongoing government discussions in Egypt, is going to have, hopefully, quite a bit of impact on the rest. It's also healthy to talk about the fact that over 50% of our customers in Makadi are foreign customers, people who are investing into Egypt, fresh dollars from outside which I think is a very important sign of trust in the quality and in the value proposition of this destination. Montenegro, another great success story with new management in place and a lot of hard work in 2021, which translated into, again, a significant jump in the sales. We landed at almost CHF 60 million, up from almost nothing CHF 12 million the year before and very small numbers for that. And here, the name of the game was primarily on the volume jump, not much increase or change in prices. In fact, what you see here is a result of the blend of units that we sold. But nevertheless, a very healthy increase in the economics on sales and, of course, on the revenues. You will also see that our hotel economics despite the fact that it's a smallish hotel, it's still a very important element supporting our real estate sales and occupancy across the year despite COVID of 45% and starting to come up at a positive GOP overall, which is something that's very exciting for us and very nicely supports our business plan there to drive the real estate development very aggressively. Great team, great momentum, and we expect hopefully more early 2022. Now Oman, as I said earlier, a very different story, almost a tale of 2 cities In Sifah, an overall good story, where sales, as you can see here, were pretty much flat in terms of volume of -- in terms of net sales. However, the occupancy -- and the occupancy in the hotels was pretty decent. However, if we go to Salalah, the next page, which primarily relies on the opening of the country -- okay. So I guess we have it somewhere in back up. I'll tell you the story very quickly. Salalah, which relies on the country fundamentally being open, so that tourism is widely available, itself hit a CHF 4 million decrease in sales dropped from about CHF 14 million sales in 2020 to about CHF 10 million in sales. These numbers are off the top of my head. I think we see them in a second. Here we go. Yes, CHF 50 million down to CHF 10 million. And the hotel occupancy, as you can see here, dropped from 22% to 13%. And that's why Salalah was relatively heavily -- effect was quite heavily affected, probably the most negatively affected of our destinations by COVID. But again, by the same token, we're optimistic now that the Government of Oman is starting to change their posture -- is starting to change our posture in terms of reopening of the country and people are starting to come back, particularly from countries like Italy and other Western as well as Poland from Eastern Europe. We're actually quite excited about the momentum that we hope to get back there. At this point, I'll pass it on to Ashraf, our CFO, so he can take you through the integrated financials and I'll come back for a quick commentary on updates in '22 so far, and then we can open it up for questions. Ashraf?

Thank you, Omar. I'll try to highlight several items here quickly. The first one is the margin that increased from 25% to 29%, mainly coming from our enhanced operation, either on the hotel side, as Omar mentioned, or even the town management that is growing and turning from negative to positive across the group as well as the continuous increase in the revenues of the real estate, which relatively has high margin overall. Also on the investment income, this came as an effort of the increased cash balance that we have and for the investment that we did, either in different options overall on the treasury management side, which increased the investment from 6% to 16%, good results for the year. Also while growing, we need to also increase a little bit of our expertise and our centers of excellence to make sure that we have a total expertise between different destinations, which we are doing quite well, and therefore, the G&A is automatically increasing in relation to the revenue. Having said that, we really have our adjusted EBITDA margin as well, growing from CHF 17.5 million to CHF 24 million. The other gains and losses, as you know, we always monitor our exposure in different destinations or segment within the destination, and we take any provision that is needed in general, each year. We revised our numbers, and we check if any impairments or any, I would say, provision that needs to be taken, and we usually do mostly at year-end, and this is what happened. And therefore, we have this other and losses of CHF 5 million. The good news here is that on our share of associates is that you can see that undermarked in the last quarter really did a great job in Q4 of last year. And therefore, there is much lower losses that's happening this year compared to last year. And therefore, the overall share of losses been associated is almost CHF 5 million compared to the CHF 8.7 million last year. And also, we decided as well to have some impairment -- to have full impairment of our operation in our associate in Jordan. So this led to the overall CHF 4.8 million compared to CHF 8.7 million last year. You can see that the finance cost as well decreased compared to last year. From one side, we already paid some of our -- repaid some of our debt, expensive debt, that I'd say specifically in Egypt in the leasing activity in Egypt. And we have also this effect because it was expensive, as you can imagine, now with the LIBOR that it is increasing worldwide. And therefore, also our rates -- interest rate in Egypt also expected to go up. So probably this number will increase a little bit in '22 compared to '21. If I look at the balance sheet, the balance sheet is growing on all fronts because of the volume of the business that we have on the real estate or even on the hotel side, the improvement that we have. So overall, our inventory, the receivable and the cash balances as well increasing quite well compared to the previous year. And this is coming from normal growth in the business overall. This is a look at our maturity profile for our debt. And we always show these numbers to show you that still in 2022 and '23 and even '24, our repayment profile are on the low side, and the company is in, I would say, good shape to repay its debt in the current -- in the next 3 years. And this is the currency mix. Look at the cash flow from operations. Omar mentioned in the beginning that the cash from operations increased to almost CHF 70 million compared to CHF 37 million last year. And even after paying the interest and paying the taxes, we have owned CHF 41 million compared to CHF 6 million in the previous year. This is a very, very good improvement coming from, as I mentioned, all the operational enhancements that we had. At the same time, as you know, we started in '21, the other -- the renovation of our hotels in -- specifically in El Gouna. And also we have a lot of infrastructure that needs to be done either in Gouna or in O West in order to make sure that we are able to make good deliveries on the real estate side in the next couple of years based on the sales that was happening. All of this effect led to increase our cash balance from CHF 195 million to almost CHF 207 million. But this cash mostly, I would say, trapped in different geographies, different destinations. But overall, we have a good strong end of year cash. By this, I end my part of the presentation and go back to Omar to give some sort of an outlook of the remainder of the year.

Thank you, Ashraf. Very briefly, obviously, we just popped out of the -- we're in the process of popping out of the Omicron and the COVID situation to land on the Russia piece. I'd like a couple of comments before we go on to -- Ashraf can you please take us back to the commentary slides? So the first thing, obviously, is that's on everybody's mind is how does the Russian-Ukrainian conflict affect our business? Obviously, Egypt as a whole is relatively dependent from a tourism perspective on Russia and Ukraine, less so on Ukraine recently because Turkey had taken up a big chunk of that market. The good news for us in relative terms is that the combination of Russians and Ukrainians make up no more than 3% of our total customer base in terms of hotel visitors. And so really, the effect for us, at least the direct effect for us, to be clear, is really negligible. Of course, the indirect effect could be that it puts pressure on our average room rates. But for the time being, neither have we seen any major cancellations in our forward bookings nor have we yet felt any forward pressure on pricing. So that's a relatively good news. In Oman, as I said, our source markets are primarily Western European -- are Western European and also some Central/Eastern European like Poland and Slovakia. Again, for now, given the very, very low base we were coming from in 2021, as I outlined to you a few minutes ago, we are still in a much healthier place, assuming, of course, the conflict does not continue in a protracted manner or cause us any further trouble. And in Ras Al Khaimah, which is in the UAE, the bulk of our business is from Germany as well as also the local and regional travel that has been relatively healthy and continues to be relatively healthy. So the hotel that will get affected to a larger extent could be the one in Montenegro, but it's only 111 rooms in relation to our portfolio of 7,200 or so rooms across the board. So I don't think that will be a significant impact. On the next page, perhaps another bit of quick commentary. We're still continuing our efforts to -- in Egypt on the hospitality segment to focus on the larger tour operators, more German-speaking source markets. So obviously, Germany, Switzerland, Austria, but also expanding into the likes of the Netherlands, Belgium, et cetera. We're continuing very aggressive pushes in the local market that has served us quite well. Again, we expect a slight deterioration here with the current ongoing devaluation and fiscal pressures on the -- or macroeconomic pressures on Egypt. We expect some slowdown from the local customers. But we're hoping that, that will be more than heavily offset -- more than offset by the international visitors. On the Real Estate segment, of course, with the recent devaluation in Egypt. One of the things we've reacted very quickly by increasing our prices in both O West and El Gouna, which are the primary 2 pieces of -- 2 destinations that we're selling actively. However, we do expect a bit of a slowdown on the sales in that context. We haven't yet sort of officially released any guidance on this. We're still seeing growth, for sure. Particularly that in the case of Egypt and especially for O West and the Cairo market, people see and use real estate as a store of value. So actually, it's a hedge for them against the devaluation of the Egyptian pound or the continued inflation that is ongoing in the country as a whole. And then, of course, we continue in our town management on pricing, on the growth of the products that we offer. For example, in Gouna, which drives a lot of our extra our time management revenues, we're pushing what's called extra works, which is how do you do home improvements after -- or at the moment when you're purchasing your house with a whole bunch of renovation packages, et cetera, and they're really working out very nicely for us and generating not just great sales, but also a very nice recurring revenue stream across the board. So we'll continue pushing on that front. Last comment I want to make. We were very, very, very excited over the last few days to announce a deal that we've been working on actually for pretty much a year now, which is Andermatt Swiss Alps. So as you -- just to remind you, Orascom Development Holding owns 49% of Andermatt Swiss Alps, that's our Swiss destination. We announced, yes, a couple of days ago, on the 28th, that Vail Resorts, which is a public, which is the global leader in ski resort provisioning and operating, they operate in 40 different key resorts across North America, so the U.S. and Canada as well as Australia, and this is their first entry into Europe in the form of an equity stake. So we've announced that they've bought 55% of our ski operations. So unlike what may have been understood by some present with us, I'd like to clarify, they are not buying any share in ASA and Andermatt Swiss Alps, they're only buying 55% of the Andermatt-Sedrun Sport AG, which is the company that operates the ski infrastructure and the ski flows as well as some of the gastro infrastructure that's on the mountain in Andermatt and Sedrun. It's a fantastic partnership for us. They're investing CHF 149 million into this, and we couldn't have wanted or had a better partner for us to bring Andermatt Swiss Alps to a whole new level of international renowned and quality. Because from now, we will start getting a lot more U.S. traffic -- high-quality U.S. traffic. These are the operators of such global renowned locations or ski resorts like Vail or Beaver Creek or Whistler, et cetera. And we're really, really very excited about this. We're also excited about it because it represents a template for what we spoke about a year ago. which is the types of deals that we, as ODH, would like to be doing and are working very hard to create with multiple third parties where we talk -- when we talk about wanting to do our next phase of growth with an equity [indiscernible] injection from our end and bring others who are better than us, who not only come with cash but also come with knowledge. This is, I think, a textbook example of this, particularly when you're bringing a New York Stock Exchange listed global leader like Vail Resorts in there, and we couldn't be prouder or happier with the consequences of this. We're working, obviously, on similar types of deals across different destinations, and we'll be announcing those in the appropriate time as they come to fruition. That's the end of our commentary. I will stop here and pass it on to if you have any questions or clarification.

Thank you, Omar, and thank you, Ashraf. [Operator Instructions] Our first question comes from [Dieter Steinmann]. Any news about the government issues in El Gouna and Makadi?

Yes. So let me give you the -- what's going on there, what we're doing and what's happening and what we can talk about and what we cannot talk about because it's not yet sort of [indiscernible]. So I would say -- so the situation in Egypt continues to be very dynamic at the level of the government policy. With the war in Ukraine, what has happened is that the pressure on the government to be able to find financial sources of dollars as well as also access to some critical assets like wheat and otherwise sort of elements that are needed for the economy to function, frankly, has resulted in realizing that perhaps these very drastic measures that were being taken with tourism developers, real estate developers were perhaps not necessarily in the best interest of everybody. And therefore, there has been a -- we are observing a shift in the posture that the government is taking right now and a reopening of the conversations on, let's say, a more favorable posture towards investors, towards job creators, towards economic drivers like Orascom Development Holding. Now is there anything formal that has been announced yet? No. We understand that there is a full review of this whole policy of taking land as was announced for Makadi, which, again, I want to reemphasize to our investors, we are contesting through the normal legal channels because there is no legal basis for this to be happening. However, there's a softening, as I said, or a realization by the government, this maybe does not make a lot of sense. And so we are hearing that there's going to be a reversal of these decisions. There are also conversations right now on trying to find a broader settlement that would make more sense for the government, for different investors, including ourselves, so that all this kind of gradual introduction of new rules that are applied on a retroactive manner would change. So it's an overall improving, I would say, environment of negotiation with the government, but with no concrete outcomes to announce to you yet. And of course, we will announce any such concrete outcomes or any material outcomes as soon as we know them, but these things do take a tremendous amount of time within the different government bureaucracies and different parties that are responsible for administering the various elements associated with the rules that we deal with. I am cautiously, cautiously, cautiously optimistic. I would say I'm slightly more optimistic than I was perhaps 6 months ago on resolving these topics. But again, it's a fast-moving situation and we're working extremely, extremely closely, not just with the ministers, with the prime minister's office, but also at the senior levels within the presidency, et cetera, to try to find the proper and appropriate fair resolution to all of these issues.

Thank you, Omar. Another question from [Dieter] of what's the impact of raw material price increases on the real estate segment? And are you experiencing any delays due to shortages?

Yes. Good question. So of course, our commodity prices have increased by almost 80% since, I think, the beginning of 2021. We're seeing a lot of that happen and also another acceleration here. We're not seeing shortages in our raw materials. So we have not been delayed in anything because of lack of materials. What we have is a lot of contingency built in the business plans of different projects that we have, and we are still nicely within the buffers that we had and the planned both commodity price increases and devaluation effects that we were anticipating for the different O West as well as Gouna as well as Makadi construction plans. So we're still very much within the parameters we wanted. The real impact that we're seeing, which is a consequence of the combination of the inflation and the devaluation is a likely slowdown in the real estate sales, which we're anticipating. And our posture here to be very transparent, is for us to protect our margins and to ensure that our pricing continues to be healthy to make sure that we're building in that increased volatility in commodities as well as in devaluation. And we're reviewing this literally on a daily basis with finance as well as on a weekly basis to decide how we should move with our inventory, and how we should move with our pricing and very importantly also how and how fast we award the contracts for construction. We're reasonably well covered overall from a construction award perspective. And for the remaining chunk, which is roughly I would say about 25% to 30% of our sold but not yet awarded, we still have enough elements in our business plans for each of the projects that give us the comfort that we're going to remain within the profit and return on assets and return on loan parameters that we set for ourselves at the beginning of the launch of every phase.

Thank you, Omar. Ferran, I can see your hand raised. So your line is now all to speak.

I actually have a small question on Montenegro. You mentioned that the hotels impact on Ukraine and Russia market was quite low, but could you quantify it on the real estate? Like [indiscernible] is mainly coming from the Ukrainian and Russian market? And then I would have another question regarding Andermatt. If I don't recall [indiscernible] on the 9 months call, you mentioned that your plan was to try to consolidate it in 1 or 2 years, is that still in line?

Let me start with the second question, and I'll pass it to Ashraf for the first one. The -- so the time line for consolidation of Andermatt is, as we had told you, always something that we're always looking at in terms of the trade-off between the positive contribution that Andermatt will have to both the bottom line as well as our debt coverage capability, right? And I would tell you that we've been putting a large -- we've put together a large transformation package for Andermatt to turn it from what had historically been a negative profit, roughly in the range of minus CHF 30 million, minus CHF 40 million per year to this year, hopefully, for the first time breaking even and then moving into positive profitability. So that element should start -- that indicator or that gate, if I may call it, should start moving in the right direction within a year or two. As for our debt ratios, if we continue on the path of EBITDA generation that we have here, I would expect that to be in pretty good shape from a debt-to-EBITDA coverage perspective also within about a year, 1.5 years from now. So you put these 2 together, barring any other crazy geopolitical or otherwise thing, I would expect that somewhere around 1.5 years, max 2 years, we hope to be able to be in a position to do that. Ashraf, do you want to comment on our Lustica Bay -- what I can tell you is that -- yes, go ahead, Ashraf.

Yes. There is 2 things here. Historically, I would say, from the start of the project, I would say the Russian in the real estate were representing almost 30% of our sales. So yes, theoretically, if we continue this conflict of this war for a couple of months more, I expect that in summer, yes, we might feel some pressure coming on the sales side, but we will be working with the team in order to try to divert as much as we can in the source market in general. But at least this is the historical figures roughly. Till now, because you know, Q1 in Montenegro is the low season, basically we can really give you a much accurate feedback, I would say, during Q2 and Q3, but I expect that there is some drop coming from the Russian market. Yes.

If I may, one last question regarding El Gouna. Could we have more or less a guidance about the CapEx that you expect to incur there and how many units or rooms do you expect to close for refurbishment?

Yes. And yes we can talk about that. We are currently, for 2022, Ferran, in the process of renovating the Steigenberger Hotel, which I think is around 250 rooms off the top of my head, but we can -- our IR team can get back to you with the exact numbers. And then also the Sheraton Hotel in phases. The Sheraton is somewhere in the vicinity of 300 plus, I think, rooms also. These are the 2 that are on the dock for this year as well as the full opening, we hope, in about in about a quarter or so -- a soft opening about a quarter or so of the Chedi Bellevue, which is of 100 rooms and will be of the similar quality to Kazachok. So we expect that to be our hotel renovation. The bulk of our hotel renovation CapEx is also some CapEx going into the Oceanview Hotel as well as the Rihana Hotel. So there are 4 hotels that were refurbishing, renovating this year over there and one that we're opening from scratch after the full renovation has already been spent. And Ashraf can share with you the exact figures of the budget. We've had a couple of iterations, Ashraf can give you the final number in a second.

Yes.

Yes, go ahead.

Sorry. Yes, for the number of rooms, you are -- yes, it is within the range that you mentioned and also confirm that it will not be totally closed, it will be closed in phases. So lot of them will be fully closed. On the total budget, I'd say, from -- it's around the CHF 20 million this year that is allocated to the renovation of the room.