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

Hello, and welcome, everyone, to the Orascom Development Holding Second Quarter of 2023 Results Conference Call, hosted by CI Capital. My name is Amr Amin, Head of Corporate Access at CI Capital, and today, I have the distinct pleasure of introducing CEO, Omar El Hamamsy; CFO, Ashraf Nessim; and IR Director, Ahmed Abou El Ella. Following a presentation of ODH's quarterly performance, the floor will then be open to a Q&A session. [Operator Instructions] I now give the floor to ODH's management.

Thank you, Amr. Good afternoon, everyone. I will try to go quickly through the presentation. And then through the Q&A, we have as well Omar on the line for any Q&A that may arise after the presentation. So we jump directly to Slide 4, where we can see that our performance on the first half on the revenue side is almost, I would say, identical. It's almost the same as last year, although that when we look at every destination specifically in Egypt, they are growing by 60% either on the revenue side or even on the KPIs of the sales -- contracted sales of the real estate. So -- but unfortunately, we have the devaluation of the EGP that happened in Q1 of this year, and therefore, all the increase in Egyptian subsidiary is wiped out by this devaluation. So -- but on the adjusted EBITDA level, you can see that we are better performing compared to last year, 6.5% increase, mainly coming from all our efforts as a management to try to increase prices as much as we can in order to mitigate the inflation. And as you know, we have inflation worldwide. And when we specifically talk about inflation in Egypt, it is definitely much, much higher than the rest of the world because of the devaluation as well. So -- but managing the price increases maintained our margin, and we will see that in the P&L when we -- after a couple of slides from now. On the other front of the net profit, unfortunately, it is down mainly because of the -- as you all know, I always say this every -- on every quarter. We have almost 2/3 of our debts in Egypt are denominated either in euro or in U.S. dollar, and therefore, we have to revalue the debt in Egyptian pound every quarter based on the FX rates between the CHF and the EGP. And therefore, we have some losses of almost CHF 9 million in the first half, which affected the net profit results overall to be CHF 17.7 million compared to CHF 20.7 million in the previous year. Also, as you all know, I think tourism and hotels worldwide is doing great and also in our destination, either Gouna or Salalah, they are doing great compared to previous year. Even Taba, the smaller destination that we have, is also showing tremendous growth compared to previous year. So the hotels general performance are 32.5% increase compared to previous year. On Slide 6, where it shows certain KPIs, you can see that the real estate sales is CHF 272 million almost compared to CHF 306 million, a drop of 11%. As I mentioned, on the local level, it is increasing quite high, roughly around the 50% range in the sales when we discuss every destination in the next couple of slides. And with the increase in sales in overall in local currency, you can see that our real estate receivable portfolio, which is amount of receivable that is not collected because in Egypt, we sell on the installment, as you all know. So we have almost CHF 900 million of collection to be done within the next 3 to 5 years, depending on the payment terms of each destination. So this is good at least. We know that on the Egyptian level, we have enough cash to support all our growth and all our cash needs for the construction of the sold units that needs to be delivered in the next couple of years. When we look at the exact financials on the P&L, you can see that -- clearly, that the hotel financials, as I mentioned, grow by 32% while the real estate dropped by 11%, but I'm not looking myself again, mainly due to devaluation. Also the town management, most of it is coming from Egypt, and therefore, affected as well by the devaluation. When we look at the revenue by segment, the good news is that the hotels are starting to come back to grow against, then it is now 30% compared to 22% as a percentage of our total revenue, which is great news in order to diversify a little bit from the real estate. But still, we are predominantly in the real estate business, with almost 58% of our business come from the residential real estate revenues. When we look at it by destination, Gouna is still our crown jewel by roughly 50% of our business is coming from Gouna. And you can see that Salalah now, because of the hotels that are there, they started to grow again from 7% to 12%. Very good news. And overall, all of the destinations are on the right path. And Egypt is still, I would say, roughly 70% -- more than 70% of the business overall. I'll go to -- quickly to destination by destination, but I'll definitely not read all of this data, but give you a glimpse of what is happening on every destination. As you will see, we put the number as well in local currencies in order for you to get a glimpse of the growth that is happening in the local currency. And what is happening in Gouna specifically, as you know, that we are selling in Egypt in dollar terms, so our average prices increased dramatically compared to the previous year. Almost 80% increase in prices in local term, which is helping us to maintain our margin, as I mentioned, and even improving our margin a little bit. And we increased, as you know, the cap rate till EGP 37 during the year, and now it is at EGP 38.5, dollar to EGP rates that we are using for any Egyptian to pay in local currency. On the hotels front, we are continuing our renovation plan that we started 2 years back in order to be able to get more ARR, I would say, or ADR from the hotel business, and therefore, as well increased our margin over there. Looking at the next slide, that is the specific numbers related to Gouna. You can see that the occupancy rate increased to 72%, and the TRevPAR increased by 12% in Swiss franc, which is very good on the hotel side. And also on the profitability of the hotels, as I mentioned, went from CHF 15.6 million on the GOP to CHF 22 million. On the real estate, as I mentioned, since mainly the translation is the one that is affecting Gouna numbers and Egypt number overall. Look at O West. In O West, it is purely Egyptian play. And also, it is growing roughly by 50% compared to previous year. And also, we increased our prices dramatically, another 45%, which is as well growing quite well. And also, we started this year to sell roughly -- to start selling for mainly Egyptian living abroad and even -- in order to reduce the pressure that is happening under inflation within Egypt itself. So we are trying to increase our sales coming from the international destinations, specifically the GCC or the Gulf area and North America with the Egyptian living there. At the same time, maybe what is really important this year on O West is to -- we start -- this is the year of start of delivery. We are delivering roughly 1,000 units between now and, I would say, Q1 and Q2 of next year. Roughly 1,000 units needs to be delivered. Most of the units that were sold during 2019 and 2020, so we are on plan and sometimes we are even ahead of plan, I would say, on the delivery front. The next slide is already, as I mentioned, the effect is mainly coming from the devaluation. Looking at Hawana in Salalah. As I mentioned, Hawana on the hotels front is very, very good, and the performance there is most doubled compared to previous year as well as on the GOP. You can see that the occupancy level is -- went up to 62% compared to 34%. And therefore, the TRevPAR and the GOP PAR, excellent improvement compared to previous year. And therefore, Salalah is on the right track. Maybe we are a bit behind on the sales, but we hope that we can catch up by year-end the same level of last year. Go to Lustica Bay in Montenegro. So Montenegro is almost on track overall compared to previous year and compared to our targets. So the sales there reached CHF 23 million in the first half. As you know, the first half is the slow period, I would say, because mainly Lustica is summer destination. But you can see as well that we are increasing our prices everywhere. In all our destinations, we try to increase our prices in order to mitigate for inflation, and we are progressed -- at the same time, progressing overall on the construction and the delivery of the unit overall. The Chedi -- if you look at the next slide, you can see that we have a different strategy, I would say, in the Montenegro Hotel. It's that you can see that the occupancy went down, but at the same time, the TRevPAR is up by almost 34%. This is mainly because we are trying to reach different type of clientele who are willing to pay and able to pay higher ADRs and therefore, could also be a potential client for buying real estate units in the future. Makadi is really doing good on all fronts. It is, I would say, even in Swiss franc, the Makadi is doing great and that the sales is increasing dramatically compared to the previous year. And also, we increased the average selling price in EGP for sure. So Makadi is on the right track, it is doing very well, and this is expected as well to continue during the next 2 quarters. This is what we see for now. And as I was saying that practically, we are trying to sell for Egyptian living abroad, and I can now say that almost 60% of our sales in Makadi is coming from outside Egypt. So this is a good trend, and we are trying to replicate as well in Gouna and O West. A bit challenging there, but we are on the right track, I would say. This is for the updates of the different destinations. I will go to the financials very quickly and mention -- as I mentioned, you can see that the gross profit margin went up to 30.2% compared to 29.4%, coming from the different increases of prices in hotels and real estate at the same time. But unfortunately, you can see -- and therefore, our adjusted EBITDA increased compared to last year. But unfortunately, you can see that the other gains and losses is relatively higher than the previous year because of the devaluation and the revaluation of the debt, as I mentioned in the beginning. In addition to Andermatt, as you all know, we had in Q1 of last year a one-off sale of offshore lease that has a good effect on the profitability of Andermatt. But still, they are profitable this year but without the one-off, it is -- our share is CHF 2.3 million compared to almost CHF 7 million last year. Also, another effect that is happening that is affecting our results in the finance cost because we all know that all the LiBOR rate or the rates in general, the benchmark rates across the world is increasing in all the world, I would say, and in Egypt and outside. So you can see that the finance cost increased from CHF 17.6 million to CHF 22.9 million. All of this together led to the profitability of CHF 17.7 million compared to CHF 20.7 million, as I mentioned. There is nothing on the balance sheet, I would say, nothing special. And on the cash flow and on the repayment of the debt, we always show this. It is the same, nothing new here for this year -- for this quarter. On the cash, there is -- as you know, we paid for the Egyptian government in Q1 $60 million for the agreement that we have done on the remaining land bank of Gouna of the 17 million square meter, which affected the cash from operation for the first half, and that affect the cash from operation in general for this year because it is done at $60 million out one time. So the operating cash flow is almost CHF 47 million compared to CHF 5 million last year, and the change in borrowing is mainly coming from, I would say, the borrowing that we are taking on O West and Makadi in order to continue the construction and deliver the units. That's it for the, I would say, the presentation, and go back for the Q&A.

Operator Instructions] All right. I see Daniel Burki has his hand raised.

Yes. Can you hear me?

Yes, sir.

Yes. So I would have a question on free cash flow generation. It's still negative. In the second quarter, when do you think you can generate free cash flows? Are we talking about '24 already? Or is it is too soon? And the second one, you don't give any guidance. Even I think you probably have a nice visibility which objects you want to deliver and how the hotel bookings look like. What we can expect for the rest of the year?

Yes. For the first part of the free cash flow, as I mentioned that, in general, we want to continue the renovation of the hotels, specifically in Egypt, in order to be able to get higher-paying clients overall. So this will continue at least till end of the year. We have still 2 hotels not touched yet in Gouna that needs to be planned in our budget probably for the next year as well for renovation. So at the same time, on the other side on the real estate, we are accelerating the construction in order to deliver a little bit even ahead of plan. This is to mitigate the inflation because when we construct relatively earlier, then we have this -- mitigate the inflation that could happen. So still, the free cash flow, as you mentioned, is affected. I -- imagine that at least in Q4, we can see more or less similar trend, and '25 start to -- because most of the renovation will be done. And the inflation overall, hopefully, we all hope that the inflation trend worldwide will start to ease a little bit, and therefore, no need for acceleration again, and therefore, enhance our free cash flow in general. For the second part of the question, you were asking about -- since we don't give the guidance. From what we see of the hotel's performance in the second half, it seems more or less in the same trend as the first half as well as on the real estate, either sales or even revenue and construction. So I don't think that there is much difference between the second half and the first half.

We have a question in the QA box from Daniel Bauer, asking about the disconnect between the stock price performance and the operational and financial performance of the company. Can you please comment and elaborate about this?

Sure. Omar, do you want to connect or comment, or I should do it?

Why don't you go ahead, Ashraf, because I think you and I discussed this quite frequently, and then I'll jump in if there's anything different.

Yes. So basically, the real problem, as you know, on the -- first, as a management, we are mainly focusing on the performance of the numbers. We do not -- we try to manage the stock price in itself, but for sure, we need to activate the IR activities overall. But we are not trying to, in general, go for certain price on the stock because this is not, I would say, our focus in general. Where -- what we were focusing on is mainly improving the performance, and then this should be reflected in the stock price. The problem of the stock price is that the liquidity is not very high, and therefore, it is affecting the performance of the price overall. And I think that we are -- we wanted first to unlock all the, I would say, the headwinds coming from inflation and devaluation of the Egyptian pound in general, which affects the number, and then go to the stock market and activate all the investor relations activities, and this hopefully will start increasing the price. But theoretically, it should increase with the performance that we are having back then.

Okay. Another question from Daniel, asking about when we can expect a land sale?