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

Hello, everyone, and thank you for dialing in. This is Sara Boutros from CI Capital Research team. We're happy to be hosting today ODH's 3Q '23 results conference call. From the management team, we have with us Mr. Omar El Hamamsy, CEO; Mr. Ashraf Nessim, CFO; and Mr. Ahmed Abou El Ella, HR Director. As usual, we will start off with the presentation by the management team, and then we will open the floor for questions. I will hand over the call now to Omar. Omar, please go ahead.

Thank you, Sara. Ahmed, if you can please take us to Page 6. Just a very, very quick overview of who we are, because I understand there's quite a few new joiners on the call today. Orascom Development Holding, just to remind you, we've been in business for almost 35 years now. And we are one of the leading, if not the leading international developers specializing in creating vibrant integrated communities and towns in Europe, in North Africa and in the Gulf Cooperation Council or the Middle East, a bit more broadly as understood. We own more than 100 million square meters of land, of which 40% has been developed or is under development. And we are continuing to develop the remaining land bank we have. Our operations span 7 different countries across those geographies I mentioned. And we also operate hospitality operations as well as a very long list of recurring income commercial assets such as marinas, ski resorts, hospitals, schools and retail locations. If you go to the next page, just to give you, again, Orascom in numbers very briefly. We have almost more than 9,000 employees in the company. We've been listed on the Swiss Stock Exchange since 2008 and also the Egyptian subsidiary, which is partly owned by the Swiss subsidiary, that has been listed on the Egyptian Stock Exchange since 2015. Just a quick overview. Within those 7 countries we operate, we have 10 operating destinations, so 10 towns like Andermatt or El Gouna or Salalah, Hawana, et cetera. We have 33 hotels that we either own partially or completely or operate -- and operate for the most part. That is over 7,100 rooms. We have sold in '22 alone almost 1,800 units of real estate. These are typically villas, but also apartments. And we've received 2.4 million hotel guests that we've served. And from a financial perspective, our sales are in the range of CHF 700 million, that's in 2022. Revenues are roughly in the same ZIP codes, and our net profit for that year was CHF 51 million. Okay. That's just a very high level for those who have perhaps never heard of us or are joining us for the first time. Let me do a very brief sort of overview of what's been going on over the last 9 months for 2023, where, despite a number of headwinds in the market, our underlying operational and in a very -- in many cases, financial performance has been extremely robust and very solid. I'm not going to dwell too long on the challenging market environment we're in. Of course, inflation has continued quite strongly throughout the first 9 months of this year, primarily exposed -- the exposure was in the Egyptian market, where both a combination of inflation as well as the devaluation, which has taken place of the local currency known as the Egyptian pound, have contributed to some challenges for us. Again, challenges that we've been able to mitigate quite dramatically across the board, we think, and we think positions us in a very strong way for the next few years. Also, our interest cost, of course, have also increased, driven mainly by the increase in the interest rate environment. If we go to the next page, and let's start looking now at our actual performance for 2023 for the 9 months. Our revenues are a very solid, CHF 423 million. That is -- even though that appears as a decrease in Swiss francs by 8% from the same period last year, in reality, and we'll see it in a minute, actually, our revenues in our core market, again, Egypt, were up 55% for the same period, for the 9-month period. Our adjusted EBITDA is down only 6.5%. So we managed to pretty much maintain it, in fact, actually improve it to CHF 113 million. And our net profits for the period are positive still at CHF 28 million, which is very healthy, and we're very happy with it. On the next page, what we're trying to show very briefly is that the big chunk, 3 quarters roughly, of our financials are coming to us from Egypt -- a little bit less than 3 quarters, about 70%. And what we want to show here is a comparison between the Swiss franc performance versus the native Egyptian pound performance and to simply highlight one very important fact, which is we're still seeing incredibly positive growth in; a, our real estate sales. These are up 80% in the local currency, which is flat in Swiss francs. Revenues are up 55% in local currency, which is the number we saw earlier in Swiss francs, 14% down in Swiss francs. Gross profits are up even more at 57%. And adjusted EBITDA, which is a great reflection of our operating health, is up even more at 50 -- almost 58%. And our net profit is up almost 33%. So an extremely strong performance in our local currency and still a pretty solid performance in Swiss francs even though we've had to face a very dramatic reduction in the Swiss franc to Egyptian pound exchange rate. Okay. So very solid operational performance in our core market. Now let's look at it by line of business. We run 3 lines of business. The main one is real estate, the second large one is hotels, and the third one is all our recurring revenues, which come to us from all the commercial activities we have. In real estate sales across the entire system and again, despite this devaluation in Egyptian pounds, we've managed to actually increase our real estate sales or keep them pretty much flat at CHF 468 million, a number we're extremely proud of, a by far, high watermark for the company in its entire 35-or-so year history. Our deferred revenue balance remains extremely healthy. These are the future revenues that are almost 100% guaranteed to happen to us over the course of the next 3 to 5 years of CHF 870 million. That's an increase of 7%. And our receivables portfolio is at almost CHF 1 billion. On the -- if we go to the page -- on the next page, shows us the performance in Egyptian pounds. And I think this was simply to state that it's a similar level of resilience. Let's go to Page 15 to talk about our Hospitality segment. That's basically the hotels we mentioned earlier, the 7,143 rooms we have. And here, we see a very strong performance, both in Egyptian pounds and in Swiss currency, where we're up 24% at CHF 124 million of revenues, CHF 38 million of operating margin, which is the adjusted EBITDA and a GOP or a gross operating profit that is up 60%, also at CHF 52 million. A very strong performance by our Hospitality segment. On Page 16, we see also the performance of our recurring income commercial assets, again, in Egyptian pound, which is the bulk of where those returns are coming from, extremely strong growth. However, obviously, when you translate it back again to Swiss francs, it appears to be in diminution or in decrease, which is a very minor decrease of about 15% across both elements, but still a very healthy number. Which takes us to the next page, Page 17, which shows something that we've been progressing on over the last 3-plus years, which is the shift of our revenues towards recurring income and recurring revenue streams, which, today, for the 9-month period, make up 41% of our total revenue, something we're extremely excited about and bodes very well for our multiples going forward. These are very consistent revenue streams that we can count on over and above the one-off revenues that are associated with real estate sales that we have, but which themselves are continuing to grow at a very healthy clip, as I highlighted before. If we look at the makeup from a geographic perspective, no major change. Again, El Gouna, which is the leading destination in Egypt, continues to be very important for us, followed by a combination of O West and Salalah. Okay. So these are the highlights. Now perhaps I'll take you through a very quick sort of overview of what's happened in some of our major destinations so that you can get a bit of a sense. In El Gouna, on Page 21, I'll walk you through some highlights. We have had a very strong real estate increase in Egyptian pounds, like I said before. We've launched -- our construction pace continues to be very nicely on track. We're delivering all our commitments in time or before time. Our occupancy rates for our hotels continues to improve. We were at 73% occupancy. For the same period last year, we were at 69% occupancy, so that's a 3 -- 4 percentage point improvement. Foreign guests were ultimately the ones spending in foreign currency, which is very solid for us, represented 81% of our total hotels occupancy in that same period. Our GOP has increased, like I said, and was up 32%. And we've started our construction work for an additional 29 rooms in our leading hotel, which is Casa Cook over there, as well as the continued renovation process for the Sheraton Hotel and the Ocean View Hotel. Also important to note, and we'll talk about it a bit later on the call, that we sold a very small plot of land, but not insignificant in any way, which I think is very useful to anchor the valuation of our land bank in El Gouna, which for the time being, we're not getting any recognition for in our market capitalization. But important to note that we sold 45,000 square meters of land, a not particularly distinctive plot of land in the middle of the overall destination at 55% -- 55x its book value, a total land sale of approximately CHF 11.5 million, which worked out to be CHF 250 per square meter of gross land that was sold. So extremely -- a strong indicator for us and reconfirms to us the very strong valuations that were conducted and will -- of our land bank across El Gouna, in this case, but also the same conviction across the entire land bank in all destinations, which we'll talk about a bit later in our going-forward portion of the conversation today. On the next page, I think the -- some of the numbers to highlight is the continued increase in our average selling price per square meter. Prices have gone up by 76% in the 9 months versus the 9 months in 2022. That's all in local currency, of course, which is what we sell in. And the same numbers as we have talked about before, a dramatic improvement in our overall performance on the hotel side and the net sales growth. That all translates on the figures that you see on Page 23, which I had summarized earlier as part of our broader results, but I'll give you a second to dwell on them here. All very healthy growth rates, as you can see across the board in Egyptian pounds, and of course, some numbers affected by the exchange rate depreciation. Okay. Our second large destination of relevance in Egypt, that's O West, that is a suburb of Cairo in an extremely prime location that we have been selling and has been going incredibly well for us. And so despite all of the fluctuation in real estate -- in the value, excuse me, of the Egyptian pound, we've actually managed to sell pretty much the same amount this year as we had a year ago at CHF 185 million roughly of sales. Our net sales increased 81% in Egyptian pound terms. Our prices continue to increase in local currency terms. We've increased our prices by roughly 50%. And we are planning to launch further inventory of approximately CHF 80 million over the course of the next quarter. We're also continuing our strategy of accelerating our construction and buying raw material to mitigate the inflation. And we plan also to deliver more than 1,000 units before the middle of next year, which is a fantastic pace and one which is giving us the opportunity to continue increasing our prices locally. Very happy to announce the fact that we also signed a CHF 177 (sic) [ 175 ] million loan agreement with 2 local Egyptian banks. The loan is extremely healthy in its tenure, and allows us to basically fund a lot of our construction needs going forward. It's a 10-year tenure with a 5-year principal repayment grace period, and that will be used to partially finance our OS development as well as help us accelerate the construction pace in the period we are in right now. On the next page, again, a comparison of our numbers in both Egyptian pounds and Swiss francs, gives you a very clear picture about how fast we're growing in local currency. We're almost up 82% in total sales of which 50% is an increase in our average selling price which is phenomenal and a true reflection of the quality of the product we're selling and the demand that we're getting for it and the good solid demand reception we're getting for it. If we skip to Page 27, a quick overview of Makadi Heights, which is quickly becoming another emerging leading destination for us in Egypt and where our performance has been absolutely stellar and has been surpassing all of our expectations. Again, incredibly strong sales performance. It's an increase of 200% in local currency, an increase of almost 60% in Swiss francs. Average selling prices in local currency, up 27%, which is an amazing set of performance. This is the -- our mini Gouna, if you will, or Gouna's sort of earlier days of where Gouna was and definitely a destination that we're hoping will continue with the momentum that it has had over the last 3 years to become a super important destination for us within our Egyptian portfolio. Important to note that we're adding lots of placement -- of serious place-making components to the equation here. For example, Metropolitan School, which is a very successful school here, have opened their preprimary education in Makadi Heights. Makadi Heights is actually a place where a lot of people who live and work in Hurghada, particularly in the tourism industry as well as lots of foreigners who decide to move to Egypt and make Egypt their permanent home decide to go to. And we've been incredibly fortunate to host these people and to have them as part of our community -- ever-expanding community in Makadi Heights. Lots of wind in our sails here. We also signed a 10-year partnership with Orange, the telecom provider, to establish a very high-quality fiber network across the board with very high-speed Internet connectivity, et cetera. We're very nicely on pace for an accelerated construction and delivery of hundreds of units throughout this year. As you can see on the next Page 28, the financials are very promising, with the volume of sales dramatically up and the average selling price very high. We're now starting to really knock on the door of the next sort of second most successful Red Sea development around us, and we're beginning to really offer them a good run for their money in terms of the competitive positioning of Makadi. I'll touch upon Salalah very quickly then Luštica, and then I'll give it over to Ashraf to walk us through the overall financials, so we don't dwell too long on each of the destinations. But overall, in Salalah, we've reached a CHF 20 million almost net sales over there. Our hotel's performance is incredibly convincing. We're up 60% on our occupancy, up to 56%. We're up 73% in our total revenue per available room. We're up almost 400% on our GOP as well as 350% on our GOP per available room. So very strong performance on the hospitality side. Keep in mind, Salalah is our second most important hospitality destination after El Gouna, so very strong performance there. And the real estate performance is hopefully going to be accelerating further in the remaining of this year and into next year. A quick overview of Luštica on Page 32. Also a very strong increase in sales of real estate there. We're up almost 18% to CHF 44 million for the same period. Prices up quite dramatically. In a market that has been relatively stable, we've managed against competition to increase our prices by 18% in the same period, a number that we're very, very happy with and very proud of. Our hotel also continues to operate in a very healthy way with its gross operating profit up 80%. Gross operating profit per available room up 84%. And total revenues per available room up almost 17%. So very strong performance there, too. At this point, I'll pass it on to Ashraf, our CFO, who will take us through the integrated financials, and I'll come back for a quick overview of what's our strategy and continued outlook over the course of the next few months and years. Ashraf?

Thank you, Omar. Again, I'll try to -- as usual, try to concentrate on a couple of numbers in the P&L and cash flow. You can see that the gross profit margin, although Omar mentioned several times about inflation, specifically in Egypt that is relatively very, very high, and even in other destination outside probably Switzerland, but we are able to maintain roughly our margin to be 30% compared to 31%. So this is -- I think it's a great achievement because we were always trying to increase our prices in order to mitigate the inflation and to follow what's happening in general in the market. So this is good from one side. And as you can see as well, the G&A is going down year-on-year, mainly because most of the expenses as well as [indiscernible] that we are increasing our center of excellence, and we are increasing our ability of the team with new headcount and new experts on the team, but it is mostly on the Egyptian side. So when translated to Swiss francs, it is down compared to previous year. This -- again, this year, we had the effect of the FX loss, CHF 6.6 million of loss on the -- specifically the debts that we have in foreign currency in Egypt. But we mitigated to a high degree or most of these, I would say, losses by other mitigation technique like the gain that we are -- have on the financial instrument of CHF 4.5 million, it's mainly some sort of trading and treasury management that we were able to gain from that CHF 4.5 million to mitigate part of the FX costs in general. Also this year, we have the effect of Andermatt because performance of Andermatt during the last 9 months in the previous year was great because of selling of a number of chalets that had tremendous, I would say, effect on the profit. This year, we do not have this effect. So Andermatt relatively, instead of being our share, CHF 7 million positive, unfortunately, this year is CHF 3 million on the negative side. You can imagine as well that our finance cost is increasing year-over-year because of the increase either in LIBOR or in even the corridor rate in Egypt. So this is for the P&L, the highlights. Maybe if we go to Slide 37, where it shows the level of, I would say, the repayment of our existing debt and some of the metrics that we have, key ratios that we use. You can see that still our debt-to-equity is 0.9% or 90%. And that total asset is relatively low. And you can -- you all know that actually, we never reevaluated any of our assets on the books. So these are the historical value, I would say, which is -- does not include any market value, so 0.253 on the low side. As well as our net debt to adjusted EBITDA, 1.6, this is very low number in general. So we are relatively confident about our debt level over all. Look at the cash flow in the next slide. There is -- this slide, I would say, there is a drop compared to previous year, not slight, but I would like to remind you that in Q1, we had to pay the famous $60 million to the Egyptian government as part of our agreement on the old remaining land bank and getting all the permits and getting all the extra requirement that we need on the remaining land bank in Gouna. So we paid $60 million in the beginning of the year, and therefore, affected our cash from operation in general. Having paid all of that between the external borrowing and the capital increase that we have done, we are able to maintain roughly our cash level to the same level as last year. So basically, this is it from my side as highlights from the financial, and I go back to Omar.

Thank you, Ashraf. So let me give you maybe 2 minutes on or 5 minutes on the way forward and outlook, and I'm happy to take any questions that you may have. Our strategy, as you know, for those who've been following us for the last 3 years, has been extremely consistent. A, focus on growth, growth, growth; b, do that in a highly profitable manner while hedging for such potential discontinuities like devaluation of the Egyptian pound or discontinuities related to changes in the hospitality, macroeconomic environment and identification of new sources of profitable growth that we hadn't tapped into in the form of recurring revenue sources and, hence, recurring income sources. We have added the number of components to this strategy over the course of 2023. And we're in the process of accelerating that. Those elements relate to; a, a faster monetization of our assets in order to generate and get us much faster and much closer to free cash flow to equity holders capability; and second, we've been increasingly looking at improving our capital structure and optimizing it wherever we have opportunities to do so in our capital structure. So let me walk you through what we're doing going forward also on this, and why we think that strategy still is absolutely the right strategy for the company and for the shareholders going forward. So on the commercial uplift, as you well know, if we go -- yes, if we go to this page, as you well know, we've been on an incredibly aggressive growth path across everything, be it real estate sales, be it overall revenues, be it the generation of those recurring income revenues, which we'll talk about in a minute. But that's really been the oxygen that we're doing, on which we're building the entire business, right? And we're doing this not by simply focusing on selling volume. That would be pretty dangerous. We're doing this by focusing on improving dramatically our pricing, improving dramatically our margins and accelerating our volume while maintaining those constraints. And that's been something that really protects us in the downturns that we may have or in -- to face inflation or any changes in the environment in which we operate. So that's something we'll continue to work on, and I'm not going to bore you with the details of how we're doing this, but that's basically the entire commercial transformation that we had, the entire operating transformation that we've had and, of course, the beefing up of our teams and our expertise in all of those areas as we've gone along over the course of the last 3 years. The second thing is the acceleration of our monetization on the next couple of pages. One transaction you well know, and we've been talking about this, and we're now accelerating the processing of this is to tap into other companies or other people's both money and expertise. So for example, as you know, we had raised CHF 149 million by giving a 55% stake in the ski resort in Andermatt to Vail Resorts because we believe they are a better operator for us. They want to invest in there. They bring in fresh cash and expertise, and that's a model that we've been continuing to employ and operate. We're also, on the next page, very much open to and in the process of finding the right transactions for land monetization where appropriate. We're not going to -- we're not doing mass land sales, as you well know. But we do very responsible, small size land sales that not only enable, hopefully, our investors to recognize the actual value of land, which in this case is -- turns out to be at 55x the book value that it carries, which by the way triangulates extremely well with all the valuations that were done previously. We had, had a valuation in the case of Gouna by the CBRE back in 2018 that had valued the land at somewhere around $1.5 billion. And if you run the numbers and you take the translation of this, that would put the value at a number dramatically higher than this $1.5 billion. It's not necessarily what we're claiming here, obviously. But it shows very clearly, it demonstrates very clearly that there's a lot more valuation, there's a lot more value that is locked up in our land bank and that we're able to monetize occasionally. We were also, as you know, on the verge of completing a full transaction for O West at CHF 125 million, which was put on hold due to the -- sort of the macroeconomic deterioration at that point in time vis-a-vis the buying entity from the UAE. The third piece, as I said, is the growing recurring income base from all the assets that we have, be it on the hospitality side, which you can see here, or in a minute, I'll show you also nonhospitality. You can see very clearly that not only is our occupancy and our total revenue per available room up quite dramatically and consistently up over the last 3 years, but also our revenues are in record territory right now. And we will end the year, hopefully, in record territory vis-a-vis our best years ever. And all of this has been done with virtually, actually with slightly less available rooms to us than it was in 2019 because we've been renovating lots of different hotels throughout this period as well as also making some further enhancements in some of our hotels. So it's something that's very, very solid and an engine that will always be there for us. And on the next page, as I said, and you could see very clearly the trend there. We decided that we need to start tapping and creating new revenue streams -- income -- and income generating revenue streams. And as you can see here, just between 2020 -- before 2020, we were operating at right around just south of CHF 50 million on average per year of Swiss franc revenues. And you can see that we had managed to increase this by 70% just in the 2-year period until 2022. And still for the 9-month period here, again, we were hit a little bit by the devaluation, but still we'll close at a very healthy clip and hopefully surpass even last year's numbers with a little bit of luck this year. But a very healthy trend overall, and it continues to grow. And we'll continue to identify those new sources of revenue. Third element, as I said, our last element, fourth element, is the improvement of our capital structure. As you know, given the dramatic improvement in our underlying cost base, something I did not talk much about here but something that we worked on very hard during 2021 and 2022. We managed to actually up our profitability to much higher numbers across the board. That's what's giving us the resilience to withstand everything that's going on right now in the macroeconomic environments in which we operate. And as you can see, the result of that is our net debt to adjusted EBITDA has dropped to a record low, to a historical record low that we had never ever reached before, which gives us plenty of cushion and that also enables us and has enabled us very recently -- up until a few weeks ago to continue very comfortably to raise money if and when we need it. We obviously try to minimize that to the strict minimum required. And we think we now have a current debt that is nicely distributed by currency in relation to our revenues as well as also in the different countries in which we operate. So a very strong balance sheet also is what we've been working on, and we will continue to maintain that strong balance sheet over the course of the next few years. I'm going to stop here. And if you have any questions, happy to take them.

Thank you, Omar. We can now open the floor for questions. [Operator Instructions] We have a question in the Q&A box. It's about Andermatt, why is it negative again and despite the fact that per square meter prices have increased dramatically and the destination should get to the mature phase?

Yes. Great question. And short answer is, in this particular instance, it was 100% driven by the hotels. And I'll give you a couple of indications in a second. The prices per square meter, as you said correctly, have continued to increase. So the quality of our sales and -- has dramatically increased. We have sold or we will close the year hopefully somewhere around CHF 180 million of sales, which is a tremendous addition to the rest of our sales across the group. It makes Andermatt our third largest destination by real estate sales. Very healthy profit margins, very healthy sales prices and very healthy continued increase in the price per square meter in the offering. So that's very clear. The part that did not perform as well, very transparently, has been the hotels, the 2 hotels that we have there. And that has been driven by a couple of things. The first one is the overall occupancy this year in Switzerland has gone down in relation to the prior year, primarily, we believe, from market research and speaking to a lot of our customers, because the opportunity for travel outside Switzerland post-COVID opened up, and therefore, people tended to spend more time outside of Switzerland, that gave us a double whammy of both the occupancy being lower than we had hoped for and worked against as well as also the revenue per available room not being where we had hoped for it to be. One of the things we've done in consequence or in response to that is we've actually hired a new cluster manager for the hotels in Andermatt. He started approximately a couple of months ago. He has finalized his full review of the entire hotel operations and performance, and we're grouping a lot of the operating synergies, we're identifying a whole bunch of synergies. We've already identified CHF 2 million worth of cost synergies, which were integrating by running the 2 hotels as a cluster. As well as also very soon we'll be adding to our top line revenue management and yield management capability with this new cluster leader in order to actually drive our revenues much more aggressively in those hotels. So that is fundamentally what has resulted in the numbers as Ashraf described Andermatt as.

Thank you, Omar. We have a question from Daniel Bürki.

Yes. I would have 2 questions. The first on cash flow development. When can we expect a positive equity free cash flow also related to your investment plans? And maybe second one, the obvious one, did you see some changes in your bookings in the hotel because of the escalation we have seen in the Middle East in the last few weeks?