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

We're happy to be hosting today ODH 1Q '23 Results Conference Call. From management, we have with us Omar Hamamsy, CEO; Ashraf Nessim, CFO; and Ahmed Abou El Ella, IR Director. As usual, we will start off with a presentation by management, and then we'll open the floor for questions. I will now hand over the call to Omar.

Thank you. Good afternoon, everyone. Good to be with you on our first quarter of '23 presentation of the results. So if we go to the first page, what I'll start with is a brief overview of how we performed against the same period last year. And then I'll walk you through a few highlights of the different destinations we have, and then I'll pass it on to Ashraf, our CFO, for the overview of the integrated financials, and then we'll come back for any questions or comments that all of you may have. So overall, we had a -- in local currencies, a very strong quarter. However, when translated into Swiss franc, of course, with the massive devaluation happening in our core market, which is Egypt, that translates into what appears to be artificially a shrinkage of both revenues in single-digit percentages, as you can see, as well as our adjusted EBITDA. And of course, our net profit because of the FX correction that happens. Having said that, the actual performance level, the intrinsic performance level in native currency has been a very strong one across pretty much all our destinations. Our revenues have grown by over 50% in Egyptian pounds in the Egypt destination. They were up 53%. Our adjusted EBITDA was up 62%. And our net profit, if you did not adjust for the -- again, for the devaluation and hence, the FX losses was up by almost 100% by almost 80% from CHF 570 million Egyptians to CHF 900 million Egyptian part. So intrinsically and operationally, a very strong quarter that I think the entire team can be very proud of. But of course, distorted quite dramatically by the FX environment in which we operate in our primary destinations in Egypt and the devaluation of the Egyptian pound, which continues currently down from approximately EGP 16.9 or EGP 7 the dollar to now somewhere in the market around EGP 40 to dollar officially 31, but in the parallel actual market is somewhere around EGP 40. So a pretty dramatic devaluation environment. If we go to the next page, please, and the one after. So if we look again at the -- sorry, if you go one page back, if we look at the sales themselves and again, all of these numbers are very positive when looked at the negative currencies. But in CHF, of course, what comes across is a shrinkage in the real estate sales in the real estate revenue -- deferred revenue balance and in our real estate receivables. Our hotel financials continue to be very healthy because they are primarily in foreign currency and hence, represents a very natural hedge against U.S. dollar devaluation that is taking place in our core market, once again, Egypt, and that makes us somewhat immune in that sector. The good news on the next page, if you go there, is that the hotel segment is therefore continuing its increase and our recurring revenues are continuing to be a larger share of the pie when it comes to our revenue. We're now at a point where even in CHF, our recurring business is 42% of our total business. Again, this is a progression that has been happening over the course of the last 3 years and one that we're very excited about and we think is an important one for the overall valuation of the business. On the next page, again, no major shifts in our destinations of importance, still very much El Gouna, still very much O West, still very much Oman remain our important ones by revenue mix today. Oman is there as opposed to, for example, Luštica primarily driven the are much larger in terms of number of keys we have then in Luštica. Let's go through the updates by destination, and I'm going to focus on Page 11 to start with El Gouna. I think here, overall, what we've continued doing is increasing our average selling prices in a very aggressive manner. We've increased our average selling prices over there by 68%. We are now selling at EGP 130,000 per square meter. That translates into very healthy numbers by local standards. We've also -- we're continuing on our construction progress in a very systematic manner. We're delivering on time. We've opened a bunch of new inventory, and we've launched a bunch of new projects there like Art Island and the Ancient Sands residences and these are being very nicely accepted. We're, of course, doing our best hedge against further devaluation by using this mechanism called the U.S. dollar cap. We're now up to $35 EBITDA per dollar. And as I mentioned earlier, our hotel performance is continuing to be very strong. with a 69% occupancy for the first quarter of '23. And today, actually, if we look at it year-to-date, it's standing at somewhere around 75%. So that's continuing to progress very nicely with an increase in the ADRs at the same time. All of this on the back of a continued and finalization of the major renovations that we have, a number of hotels, as we told you before, have been renovated and they're functioning quite nicely. And that's the uniform format. If I were to show you this page in Egyptian pounds or in local currency, that is, we would see a dramatic increase in our average prices per square meter. Those have gone up in local currency, up 68%. Our net sales in local currency are also up quite dramatically to 33 -- are up 33%. And our revenues overall for the entire destination are up 65% in local currency. Again, as you can see here in comparison to the CHF numbers, it looks like a very different picture. Going on to our next destination, O West. In O West, we're continuing with the pace of sales that we've had. It continues to be a very positive pace overall. We are at a pace right now where we have grown our sales there in -- again, in local currency, of course, since this is being sold in Cairo by overall 10% approximately, with our prices increasing by 61% in local currency. What that translates into in CHF, as you can see here, is effectively a shrinkage of what appears to be a shrinkage on net sales of 42%. And however, we are very comfortable with the margins that we're running. Our construction pace is accelerating. We're expecting to deliver over 1,000 apartments and 236 down houses as well as we finished the 444 villas there. Our handovers have begun. We had a big celebration over there that should enable us to start moving the entire project into a whole new S curve of pricing. And of course, we continue to generate our recurring revenues from the membership fees of the club that we have built over there where the both average selling prices as well as the membership numbers are increased. If we look at it in just straight numbers, again, in CHF, as I said, we have an overall shrinkage of 42% on the sales and 32% on the revenues. But when we look at it in local currency, our sales are up almost 10%. Our average selling price is up 61% and our revenues are up almost 30%. If we go to the next destination, please, in Salalah. In Salalah, overall, we were able to generate 31% higher sales, and we were able to generate a 62% higher revenues. That is on the back of very strongly operating hotels, and we still think we have more room to improve there. Our hotel TRevPAR was up almost 100%. Our GOP was up 300%, and our GOP per available room was up north of 316%. So hotel performance, extremely strong and continuing to accelerate. And real estate selling also going at a very nice pace all the while maintaining a very healthy revenue stream. If we shift gears to Luštica in Montenegro, what we've done there has been also spectacular in the first quarter. Our sales are up 40% to CHF 9 million. Our average selling price is up 31%. So again, a very healthy overall progression. Our hotel operation continues to be pretty steady and pretty stable. Again, keep in mind, this is a very small operation for the hotels, about 111 rooms. But the pace of construction is progressing very nicely. We were visiting the site just last week with the top team. And the parts are starting to come into life at the central area of the development, and the Marina Village continues to have incredible place making and a very nice sales velocity and quality as we progress. So the team there has been doing a phenomenal job. One more quick overview of Makadi Heights, our other last destination -- last big destination in Egypt, where again, progression has been very positive overall, even if that doesn't necessarily always show our net sales, both in Egyptian pounds and in Swiss francs are up quite dramatically. We're up 75% in Swiss franc terms. Our average selling prices in Egyptian pounds continue to increase quite nicely there also. And we are in the process of hopefully finalizing some further discussions with the government to ensure that we have an even more viable project as a whole. We will come back to you with some updates there as different areas clarify in our conversations with the regulatory authorities. On that, at this point, I will pass on to Asaf, our CFO, who will walk you through our integrated financials and then come back for any Q&A that you may have.

Thank you, Omar, and good afternoon, everyone. As usual, I will try to highlight some figures within the financial yes. Maybe the first point to highlight is the margin, although that we are seeing overall inflationary environment across the world and very relatively higher, much higher inflation in Egypt, which has the majority contribution of our revenues, but we maintained our margin overall either on the gross profit or the adjusted EBITDA level to be 28% compared to 26.4%. I do expect this to continue during Q2, but probably starting Q3, Q4 and Q1 next year. A drop could be expected in the margin because of this inflationary environment, but not with bigger swings, I would say. So overall, we are doing good on this front, although as I mentioned, the higher position. Also, you can see as well that after the adjusted EBITDA, there is a relatively higher losses on the other gains and losses this year, CHF 15.4 million compared to CHF 9.1 million, mainly coming from the foreign-denominated tether in dollars or in euros. That needs to be very reevaluated each quarter. And therefore, we have extra losses here into other gains and losses as well, the share of other associates this year is a bit lower compared to previous year because last year, we had big one-off sales coming in under math that had contributed to positive -- more positive results. So our share in under math this year is 7.3% compared to 10.3 million in the previous quarter in the same quarter of last year. The finance costs, as usual, continue to increase may coming from the interest rate that is increasing overall cost all the ins. Here slight changes in the balance sheet, mainly coming from the agreement with the Egyptian government, and therefore, the amount that we paid to the Egyptian government or the steady liability that we have to be paid, this gives an extra price of the land as if the price of the land of El Gouna increased by this amount. And therefore, we had to present based on present value or net present value. So it increased the inventory by almost CHF 87 million of Swiss franc. Looking at the financing profile, say nothing changed from the previous quarter that we show. And again, to highlight that or we have to refinance the existing CHF 100 million bond that exists on ODH Holding that is financed in 2024. Looking at the cash flow, you know that actually, in Q1, we already paid to the Egyptian government out of the CHF 150 million. We already paid CHF 60 million, but out of the CHF 60 million, there was CHF 30 million loan came from the majority shareholder on the current account. So basically, there is a differential of CHF 30 million that came up out of our, I would say, profit. So basically affecting the cash flow from operations this year is this cash outflow pay for the Egyptian government. While at the same time, we are continuing our acceleration of the construction cost, the construction overall to mitigate any inflation pressure coming in the next couple of quarters. That's it from my side, and we go back to Omar for a quick uptake business and data then.

Very good. Thank you, Ashraf. So just very quickly, what are we doing right now and over the next kind of horizon. A few things. I think, a, we're continuing our commercial uplift. Everything that you've seen us do for the last 2, 3 years around commercial optimization, around cost management, around aggressive pushing on real estate sales, et cetera, as well as enhancing our productivity of our hotel assets. All of that is continuing. A whole bunch of programs internally around that. We're continuing also on our operational efficiency, particularly in the areas that are hardest hit, where we're being very cost conscious and very cost-aware to enhance our profitability overall. We are shifting gears now to trying to find the mechanism in conjunction with the Board on how do we get recognition for the land value that we have, which drives us in one -- in 2 potential parallel directions over and above everything we're doing, which is, a, try to find opportunities for land sales that are value accretive for us. And #2, pushing a little bit more on the JVs that we're trying to do in the various destinations we have to have a bit of an acceleration on our financing ability and in the maturing of the different destinations that we're operating. So we hope to do a bunch of those. And then also with the guidance of the Board, we're moving -- we will be moving more aggressively on attempting to divest some of our non-core assets. going forward in order to reduce our exposure in some of the markets we're in. And of course, one of the things that we have been doing a lot over the last few years, but haven't been talking as much about is ESG. And we plan on beginning to be a little bit more vocal about all the ESG initiatives that we've been doing for many years now and that we will accelerate and do more of going forward. So that's pretty much it from our side, open to any questions or comments you may have.

[Operator Instructions] Our first question comes from [indiscernible].

2 questions from my side. First, you mentioned divestment of some noncore assets could you elaborate a little bit. What you have in mind there? And the second one, you sold less units in the first quarter in your real estate business in El Gouna and also in O West. First of all, wise, this is a general trend. And do you expect this trend to continue, let's say, in '23 and also already looking into '24?

I'll answer the second one first, and then I'll shift to the first one. Good observation about the number of units. That was a very purposeful maneuver that we did, which is, as I said earlier, a complete focus on profitability to protect ourselves from inflation that is happening right now. And as a consequence, not trying to go for as much sales volume increase as much as it is sales quality increase, right? And so that was a very purposeful thing that we did in our 2 largest Egypt destinations where inflationary costs, as Ashraf was explaining earlier. And as I'm sure you've been following in the news have been tremendous. And I mean, tremendous, I think, unheard of, even in the very difficult period of 2011, difficult period of COVID, et cetera. So our posture in full alignment with our Board has been reduced the volume of sales in the interest of marginality and protection of our future profits and eventually cash flow going forward. So that is a very correct observation you had, and it's a very purposeful posture that we've taken. We are now gaining a bit more confidence on some of the projects, financial outlook when it comes to the costing perspective. And when that is the case, then we accelerate also the sales volumes, but we are still extremely aggressive on our pricing and our margin protection. So expect that trend of number of units to not increase in a dramatic way for the foreseeable future. And frankly, when it comes to cost forecasting or further devaluation forecasting or evaluation of how the Egyptian economy might behave in the next 3, 6, 9 months, that is an incredibly difficult and highly intransparent and unstable economic environment and therefore, it is difficult for me to give you any kind of certainty on whether that is a '23 3 months, 6 months, 9 months or even a '24 kind of poster. What I can give you assurance on is that we're managing it in a very dynamic manner and we look at it on a weekly basis, and we make decisions in a very active way to protect the company's future profitability. So that's on this question. On the question of divestments, let me try to give you a little bit of clarity, but without necessarily being too specific. What we are coming to the realization of, particularly as interest rate environments continue and as we try to bring all these different destinations to maturity at the same time is that it's actually impossible to try to do that and at the same time, try to meet a positive free cash flow to equity holders "soon" requirement that the Board is also imposing. And therefore, it is essential to pick your battles which ones you fight. Now once you make that observation that you have to pick your battles, it becomes a question of 2 dimension and matrix. It's very simple. The first dimension is where are my large -- where are our large holdings, right? So by land, et cetera. And second, the mention is what is the state of maturity and hence of profitability and closeness to free cash flow to equity holders in each of those plots of lands or destinations, as we call them, right? And so if you plot all your destinations on this 2 by 2 matrix, you realized relatively quickly that there's a number of destinations that are not so big necessarily and at the same time, don't have a very strong financial contribution when you look at it from a free cash flow to equity holders in the foreseeable future. Again, foreseeable is kind of 5, 7 years out. And therefore, you come to the pretty, I think, reasonable conclusion. And certainly, the Board has come to that conclusion that those destinations may not be the most viable ones to continue to invest our time, our money, our management bandwidth in and therefore, they might be -- we might be better served by finding a more natural partner for those places. I hope that answers your question a bit more clearly.

We have a question in the Q&A box regarding the current trends across the hotel and the real estate segments.

Yes. Could you just read it out, please, for us? What's the question specifically?

Sure. The question is about a quick update. It's a kind of a request on a quick update on the current trends across the hotel and real estate segment.

So let me start with the hotels perhaps. It's pretty straightforward. Let me talk about occupancy and give you a bit of a glimpse. If you compare the occupancy levels that you see here versus the current occupancy levels, I can tell you that for all our destinations, they are dramatically higher. For all of the destinations that count they are dramatically higher. So El Gouna, we're up to 75% occupancy versus 66%. In Taba, we're at 35%, which is higher than the number that you saw earlier. In Salalah, we're at 79% or so percent in the UAE in Russelsheim Iraq. We're at 81%, et cetera. So overall, very solid and continued acceleration on the hotel performance across the board. It's something that I'm relatively optimistic about. And that doesn't even take into account, as I said, the efforts that we're currently doing on the ADR side on the -- on kind of the revenue that we generate and eventually the profit that we generate per net spent in our hotels. The real estate side, our sales are doing -- are growing very well across all our destinations, perhaps the one destination. So obviously, all in local currency. I think it's with such aggressive devaluation levels it is really impossible. I mean when your currency has lost over 50% of its value within a few months, it is impossible, of course, to make up that 50% in foreign currency. But if you look at the way that our sales are going in local currency, they're going at an extremely nice and healthy growth rate, all the while, as I said earlier, in response to Daniel's question, maintaining margins and increasing our prices vary dramatically. So I feel very good about the rate at which our real estate sales are going across all destinations and in their native currencies. And hopefully, that ends up adding up to also eventually a good number by the end of the year at Swiss francs. If and when this whole macroeconomic deterioration slows down or stops in our core market, which is Egypt today.