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

Hello, everyone, and thank you for dialing in. This is Marlene Milad from CI Capital Research team. We're happy to be hosting today ODH 4Q '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 management for the presentation.

Thank you. Good afternoon, everyone. I hope you're all doing well, and welcome to the results for 2023. Let's jump to Page 7 immediately and maybe a few highlights of what happened for us in 2023. 2023 was, from a macroeconomic perspective and an operating environment perspective, arguably yet the most difficult year of our operation, of our existence. And despite that, I think we have delivered extremely positive results that we are very excited about. We continued our operations in 11 different destinations. We have increased another 123 new hotel rooms to our portfolio. We're now up to almost 7,300 hotel rooms across our 34 hotels. And from an operating perspective, we sold over 2,000 real estate units during 2023. We welcomed over 2.7 million hotel guests in our hotels. And we have made one land sale in El Gouna at 45,000 square meters for CHF 12 million, which was, I believe, 55x the book value of that land sale, just an indicative sense for how undervalued our land is in relation to its actual real commercial value in the market. From a financial perspective, a very strong year despite extreme, extreme headwinds. CHF 704 million of real estate sales, CHF 655 million of total revenue across the entire group, CHF 174 million in adjusted EBITDA. That's our highest -- that's a high margin that we have accomplished there and our highest net profit ever of CHF 54 million. If we jump to Page 9 and look at some of these numbers and compare them to last year in Swiss francs, and then I will show you the same numbers in Egyptian pounds to give you a sense for how hard we've been hit by the devaluation. And despite that, we've managed to maintain almost flat revenues and almost flat EBITDA, so a shrinkage of 5% and 6.6%, respectively, which I think are incredibly strong performances given the environment. And despite all of this, we managed to still extract a higher net profit out of our operations of CHF 54.4 million, which is despite an CHF 11.2 million of losses on the FX because of the Egyptian pound devaluation. But it just shows you the health of our operating franchise and how we've managed to do that. On Page 10, the following page, you can see that if you were to compare some of those metrics to the Egyptian pound metrics, you would -- and this is for Orascom Development Egypt, so for our entity operating in Egypt, which roughly is half the group, you will see that actually our revenues in local currency -- or sales, sorry, in local currency were up 75% from 2022, which is a dramatic increase. Our revenues were up almost 50%. Our adjusted EBITDA or operating profits were up 47% at a margin of 38%. And our net profits were up 63% at an improved margin of 20%. So the underlying business remains incredibly healthy. We obviously, like everybody else in the markets where we operate, end up having to fight against a difficult macroeconomic environment. Now of course, just as a general commentary with what the -- with what levels of injection have been made into the Egyptian economy by foreign supporters, by governments supporting the local government to get the economy back on track, we're optimistic that this is actually the beginning, hopefully, of a much more positive economic cycle going forward that should give us much more tailwinds rather than the headwinds that we've been operating with over the course of the last 3.5 to 4 years. If we go to Page 12, starting to look piece by piece at the real estate market first, our real estate business unit, so you can see again, our sales were almost flat from the previous year in CHF terms, again, much higher in local currencies if we were to look at it this way, resulting in a deferred balance of CHF 743 million and a total receivables portfolio of CHF 1 billion. On the next page, if we look at the same metrics -- sorry, if we look at -- sorry, if we go 2 pages down, so Page 14, we look at our hospitality metrics. We will see that our revenues are up almost 20%. Our profits, our adjusted operating profits, our adjusted EBITDA is up 65% at CHF 54 million. Again, this is a record year for us, very happy with where we're going and the accomplishments that we've done there across the board. And much more to be seen, hopefully, over the course of the next few quarters and years. On the following page for our recurring revenues, and again, what you see here is a shrinkage only in CHF, in reality, in local currency, our revenues continue to increase from our commercial activities as well as from our time management activities. And that's something that we're very excited about also going forward. If you go to Page 16, we will see that our overall contribution from recurring businesses in our portfolio continues to increase. That is a consistent theme that has been happening over the course of the last 4 years as we started our transformation. We are now up to almost near 40%, 37% of our total revenues are recurring revenues from areas like hotels, retail, marinas, ski slopes, hospitals, schools, et cetera, what we call our commercial assets as well as obviously our town management. So everything has to do with the basic provision of services in the towns that we operate. On Page 17, you can see the large contributors. As always, El Gouna continues to be important for us, less than half our business, 44%. O West continues to be important at 18%. But the shining lights and the parts that I'm most excited about going forward are the increase in relevance and importance of our Oman franchise. So between Sifah and Salalah, we can see that Oman contributes approximately 15% of our business today, and that should continue to increase. And the same for Montenegro Luštica Bay, which is contributing 10% of our business and continuing to increase. So that these are elements that I'm very excited about, and that will continue to have increased importance in our business going forward. I'll give you a bit of a glimpse on by every destination just to talk about some of the major highlights there. If we go to Page 20 in El Gouna or perhaps just go to Page 21, so that we can talk directly about the numbers. And we've shown here 2 sets of numbers, which we hadn't done before, but obviously, in light of the major devaluation that happened in 2023 and also the -- we'll do the same for 2024 for the first half year. But for 2023, what you can see here in local currency for El Gouna is that our net real estate sales were up 71%. Our net sales, our average selling price, which is a very important metric that we keep track of very closely because that signals and clearly shows our profitability going forward, and that's the only way that we're able to protect ourselves against devaluations or inflationary pressure, that was up 78%. We are, by far, the most expensive real estate sellers in all of Egypt in El Gouna, and that's something we pride ourselves on very strongly. If you look at the hotel performance, 2023 total occupancy of 73%. Our TRevPAR is up 5% in CHF, up almost 80% in local currency. And our gross operating profit per available room is up 17%, which is a very strong performance by our operating and our commercial teams in El Gouna. Revenues, obviously, on the next page are up quite dramatically in Egyptian pound terms, down slightly in CHF terms, 100% driven by the devaluation effect. O West continues to be an incredibly highly performing asset for us and destination for us. We are extremely competitive. We are now priced and perceived in the West of Cairo as being of the top 2 developments in all of the West of Cairo, which is a major, major win for us, given where we started 5 years ago, where we were not even considered of any relevance to any of our buyers of real estate in Cairo. And that translates directly into the results you see on Page 24. So again, in local currency just to give you a sense, our sales were up 60%. Our prices were up 51%. Of course, when you look at it from a CHF perspective, that makes our sales pretty much flat to shrinking at 7.5% loss. And the prices obviously show a slight decrease, but in reality and for the local market, we are extremely high priced. And by the way, that trend is continuing in 2024 quite strongly. If we jump to Page 26 to talk about Makadi Heights, another very, very strong performance by a destination that again, 2, 3 years ago was not on map, which with a lot of focus and a lot of dedication, we've managed to bring to life not only by creating much more vibrant communities locally but also by accelerating our sales there. On Page 27, you will see that our sales in Egyptian pounds were up almost 2x there, so 181%. And the average selling price is up almost 50%, which shows, obviously, an increase in CHF as well as also a slight decrease in the average selling price. But again, a very highly performing destination which is getting a lot of demand, not only inside Egypt, interestingly enough, but also from abroad, North America, Europe, et cetera. And that has resulted on Page 28, as you can see, a dramatic increase in our revenues there in local currency and almost flat in Swiss francs. Switching gears and maybe just highlighting a couple of more destinations, Salalah and -- which is in Oman, and Luštica in Montenegro. So in Oman, our biggest success there has been more in the hospitality area. This has been a bit of a year of reset for us on the real estate front. On hospitality, all our metrics were up. Our occupancy was up 48% to 61% as a whole. Our TRevPAR was up 57%. Our GOP per available room, up 200%. So a very strong story on the hospitality side with a very strong return and very aggressive commercial management of our contracts there. Our real estate did take a bit of a hit in Oman as we have changed the whole management team there, and we've had a very strong start now to 2024, where we are tracking our best year ever both across Salalah and Sifah. But obviously, as you can see, that impacted our sales in 2023. One thing we wanted to emphasize still, which is the same philosophy we maintain everywhere, which is to focus on pricing and not decrease pricing. So we were accepting the fact that we were going to have lower net sales in Oman despite the fact that we have not moved our prices almost at all there. At Luštica, a very, very positive story across the board. Our net sales were pretty much flat from the previous year, which is a very strong accomplishment almost at -- almost CHF 90 million that was effected actually. In fact, actually our sales were slightly higher than the previous year in local currency, which is in euros. But of course, with the strengthening of the Swiss franc, we ended up with a minor negative. But still very strong increase in the health of our sales. Our average selling prices are up 33% in Swiss francs. And our hotel over there performed very well, and that resulted obviously in revenues increasing by almost 50% across the board, something we're super excited about. And we're again entering the year with very, very positive momentum in Montenegro and continuing on this very positive trajectory. So that's a bit of a glimpse across the entire board. I'll pass it on to Ashraf, our CFO, who will walk us through the financials. And then I'll give a quick commentary of what's going on and then open it up for any questions you may have.

Thank you, Omar. Good afternoon, everyone. As usual, I will try to jump to the main points in the financials, starting by the gross margin [indiscernible] this year. Mainly this is coming from the relatively extra or higher inflation that is happening in Egypt during the last 2 years. And since [ we sell ] of plan as usual, so we sell in advance. And for sure, we anticipate some inflation, but the inflation that actually happened was higher than what we anticipated in our model and in our pricing. So it affects a little bit the margin on the real estate side. But the good news is that we are relatively diversified. Hotel business either in Egypt or in Oman had a good year in '23 and mitigated a little bit the drop in the price or in the margin that happened in the real estate. Also, you can see that the G&A is continuing to decrease year-over-year, partially because of cost savings, partially as well because of the devaluation, which is good because big portion of our, I would say, G&A is coming in Egypt. Therefore, it is relatively converted to a lower CHF overall. So you can see that our adjusted EBITDA reached CHF 174 million compared to CHF 86 million in the previous year. Also, the other gains and losses, we have -- as you know, every time we have a devaluation of the Egyptian pound, then we face an FX loss on the P&L due to translation of the dollar debt that exists on Egypt level to Egyptian pound. Therefore, we have this loss overall. We expect another one this year because of the devaluation that happened this year as well. So you can see the comparison compared to last year. On the balance sheet, that is actually nothing to be discussed here. But mainly when I go to the slide after it is basically the refinancing. As you all know, we have CHF 100 million of CHF bond that will mature on ODH level in October. We are working from now on trying to find some alternative bank offering to be available as well as we will go to the market for sure to try to refinance before October. This is the main item that needs to be paid in '24. And hopefully, we'll be successful to refinance this amount in October. Looking at the cash flow, you can see that on the cash flow, although that we always said that we will be accelerating the construction in specifically in Egypt in order to mitigate all inflation risk, so we -- and we really accelerated the construction mainly in O West, Gouna and Makadi. Having said that, but you can still see that the cash from operation is higher than the previous year, CHF 88 million compared to CHF 75 million. So this is good because of the sales level that Omar mentioned that the increased sales level that happened overall. So on the other point is practically we have the PP&E, which is mainly coming from the continuous renovation of the hotels in Gouna in addition to fulfilling the MBO in Salalah in Oman for the 123 room mentioned by Omar and also the infrastructure that is needed to deliver the units of the real estate sold in the previous year. So -- and but having said that all this cash outflow that we have done, you can see that the cash -- our cash balance is increasing year-over-year. And we ended the year by CHF 213 million, almost CHF 214 million, which is -- make us very comfortable in general to any fluctuation in macroeconomic situation. That's it from my side, and I go back to Omar for closing and strategy.

Sure. Thank you, Ashraf. So that was 2023. Maybe a few comments on where we are in our transformation journey and where we're headed in 2024. So as you know, we started 3.5 years ago exactly our transformation journey. That has taken us through 3 years, so '21, '22 and '23 of increasingly more profitable years. We started out the first year at almost CHF 10 million of profit; second year, about CHF 50 million; and now we're somewhere around the mid-50s and hopefully continuing on an acceleration. All of this has been, as I said, despite incredible headwinds macroeconomically, geopolitically and from a global kind of doing business perspective environment like increased interest rates and inflation, et cetera. Having said that, we've been focused on the last 3.5 years on 3 major pillars, all of which have been paying off and actually will continue to accelerate paying off for us. The first one was our institutionalization pillar. I don't talk much about this on investor calls because it's more about internal processes, internal realignment, it changed completely in our operating model, the creation of our centers of excellence, hiring of a lot of people of different caliber, et cetera, et cetera. But that's been paying off for us tremendously. And still we have a long ways to go, and we'll continue on that path. The second one has been hiring incredible people and changing the way that we're managing our people and our culture change journey. Again, I don't talk much about it in our investor calls because it's primarily internal stuff, but that's actually resulted in us having a dramatically higher caliber of people inside the organization, particularly in the senior and middle level of management, where we've hired over 250 new managers over the last 3 years out of the roughly 10,000 people that we have. We've launched a culture change journey which we're going through with the entire management team. Right now, we changed already 3 years ago, our performance management systems altogether are targeting -- linking everything from compensation to promotion, et cetera, to performance. And that has obviously had all the impact that you've seen, which brings me to our third pillar, which is our operating and financial results. And there has been a whole bunch of topics that I have mentioned on a number of our previous calls, ranging from some of the centralization efforts we've done on things like procurement and construction, elements of all the sales strategy that we've changed, the channels that we've changed, the new markets that we've opened, et cetera, ranging to hiring an entirely new team on the hotel side and changing our strategy on the hotels away from the tour operators to go much more towards the FIT market, which is resulting already in early signs of improvement of our margins there, et cetera, et cetera. I'm not going to list all of this. But those 3 pillars, we are continuing to work very hard on them, all the while being incredibly cautious on where we spend our money, particularly our CapEx, and having much more rigorous processes associated with our CapEx. As a consequence, we've been, as you can see, not trying to add more countries and more territories and more land, et cetera, as was historically the path. We've been very disciplined in actually remaining super focused on the destinations that we already have and also classifying the ones that are of truly strategic importance and relevance to us versus the ones where we have to be a bit more nuanced about our investments there. That's number one. Number two, as you see, we've begun to do land sales and we will continue to land sales. We're working on a whole bunch of deals. Obviously, the macroeconomic environment has genuinely, genuinely been very difficult. But we're pretty close to a number of transactions, and we hope that they will go through. You've seen the one in El Gouna, as I highlighted before, 45,000 square meters for almost CHF 12 million, again, 55x the book value that we have. So our land is dramatically undervalued on our books across the board, across all destinations, but that's fine. And then third, we are actually doing a bunch of divestments. We were very close, as you know, a year ago for O West. And then the macroeconomic situation in Egypt didn't help. But we have now a number of other transactions ongoing, and we hope that at least one, if not a couple of them, will go through. And that will help both our balance sheet as well as our P&L very directly. Our goal and the goal that the Board is asking us for is to aim for a positive cash flow situation, where the ability to pay dividends becomes an option to the Board to decide on. Again, we're working very hard against that, and we hope we'll get there sooner rather than later. So with this, I'm going to pause here and open it for questions if you have any.

Thank you, Omar and Ashraf, for the presentation. We will now open the floor for questions. [Operator Instructions] We already have some questions in the Q&A box. The first question is, what positive impact do you expect for 2024 with the EGP to USD going to 40 on your results?

Yes. So I think there's a couple of effects here. And let me try to deconstruct them a little bit, and then, Ashraf, you can also talk to it from a pure -- also from an accounting perspective on our books. Let me just talk about the market dynamics as we go from an Egyptian pound that went from $1 reaching EGP 70-plus to now $1 being at around EGP 46, EGP 47, and hopefully continuing to drop a little bit more. There are 2 dynamics that take place here, the -- 3 dynamics perhaps. The first one is there was a dynamic as the Egyptian pound continued its devaluation where people were going more towards real estate in Egypt as a store of value, right? We've seen that with our competitors. We think that our numbers are relatively intrinsically solid and they're not -- they don't have as much of the blip of the very aggressive selling and buying that people were doing. But there was definitely a component of the market growth last year that had to do with the devaluation that was ongoing at that time. So we will see less of that right now. That's number one. Number two, there's a very short-term effect which will probably affect our Q1 results, which is that during a moment of transition, and that transition typically, we have seen it at least in the last 3.5 years, take anywhere between a couple of weeks to about a month, 1.5 months, so anywhere between 2 to 6 weeks. There's typically a bit of a freeze of the market, right, where people are waiting to see where things land, where things stabilize before they get back into the market and start making transactions. So I expect us to see a relatively slowdown right now, which is the period we're in, those 2 to 4 weeks -- 2 to 6 weeks that I talked about, where people are still kind of testing and seeing where life will go. I do believe, though, once those transient effects stabilize, we will find ourselves in 2024 and onwards, hopefully, in a much more positive environment that hopefully will be more reflective of the tailwinds that we had in the 2017, '18, '19 time frames, where there was a healthier macroeconomic growth in Egypt where people were able to invest in regular businesses and generate, therefore, extra cash. And that cash ends up being -- going to places that are, in our minds, extraordinary and amazing like El Gouna or O West or Makadi, et cetera. And so we think we'll be net beneficiaries of this in the mid- to long term if you think about it over a 1-, 2-, 3-, 4-year period. But you do have these transient effects in the very, very short term that are taking place right now. Ashraf, I don't know if you want to add something a bit more specifically on our P&L as it relates to recognizing some of those FX losses or gains as things move.

Yes. Yes. Actually, on the accounting side, on the P&L, as I said, every time we face a devaluation of the Egyptian pound and we have dollar debt in Egypt, then automatically, we need to translate this in the Egyptian subsidiary to a higher number, which should practically there is an FX loss on the P&L. So we do expect that in Q1 of this year, there could be a net P&L loss. But this will be as we go within the year, within the quarters, practically the -- on the other side, the gains came from the cash balance that we have in U.S. dollar and the receivable that we have also in U.S. dollar, then we'll mitigate more and more going through the year. But on the short term, on the Q1, we do expect that we should see some P&L losses coming from the devaluation.

Thank you, Omar and Ashraf. We have a question from [ Tobias Kloepper ].

I am [ Tobias Kloepper ] at [indiscernible]. I got two questions on the development in 2024. The first one, have you seen any impact on the geopolitical tensions at the beginning of the year, especially regarding El Gouna? And the second one would be what do you expect in 2024 regarding the free cash flow development? Can you talk a bit about it? Is there any potential for it to already be positive this year?

Thank you, Tobias. I'll comment on question two, and I'll let Ashraf comment more accurately with the numbers on it in a minute. But to take your first question, impact of the war in Gaza, so initially, there was not a dramatic impact on us in El Gouna. There was a dramatic impact on us in Taba. Let me decouple those two. In Taba, of course, which is much closer to the border with Southern Israel, actually, as it is, still, there was a feeling overall that security was going to be an issue there. And therefore, what we decided to do was to shutter down our operations there completely. So despite the fact that Taba was on a path, on a track to have an incredibly positive year, possibly the best year ever in the last decade or so, we ended up having to shutter it down very early in October of 2023. And it's still right now mothballed until further developments and stabilization of the situation there. As we had done during corona, COVID, we also kind of obviously reduced dramatically our operating costs and our people costs over there, et cetera, et cetera. So that's -- that one was dramatically affected. And unfortunately, we ended up booking only CHF 13 million of revenues in Taba despite a much higher potential in '23 and certainly a way higher one in 2024. We were on track for a very strong year there. So that's Taba. For Gouna, what we have seen at the beginning is actually almost a very negligible change. And then very recently, since the Red Sea tensions began in -- near Yemen, what we saw is the overall drop in our occupancy there by approximately 10 percentage points. So I think there's been a bit of worries that the word Red Sea is associated with some tourist segments with El Gouna or with Egypt in general. And unfortunately, that confusion generated a drop of 10 percentage points in our occupancy. Having said that, it's still a very strong year so far for us across the board there, particularly that we have launched, as I said, with our new management team, a full commercial transformation in our hotels across the board and in El Gouna in particular, with a heavier focus on our FIT traffic and a higher GOP per available customer, not available room in this case, i.e., moving upward in the segments of customers that we attract. So I'm hopeful that, that drop in occupancy of 10 percentage points will not affect the results overall in as bad a manner on the hotel front. And that's the answer to that question. As far as your question about positive cash flow, look, we're working hard on it. The difficult part to predict, Tobias, right now, unfortunately, is exactly where things stabilize in Egypt. And so it's pretty difficult to give you an accurate answer to that from my end. But I don't know, Ashraf, if you want to add something a little bit more quantitative to this answer. I know we've looked at it many times together.

Yes. Still, I think for the free cash flow, if we talk about cash flow coming from operations when we deduct the CapEx, I think still in 2024, it will be still on the negative side because still the cash coming from operation, we need to continue the renovation and we need to continue the CapEx in Montenegro specifically. The good news is that Oman is done with the 123 room. So practically, Oman, the level of CapEx will be much lower. But I think that the cash flow to firm will still be on the negative side, not very high, but still will be in 2024 on the negative side. Hopefully, by '25, we can turn to positive.

Thank you, Omar and Ashraf. We have a question if there are any land sales in the pipeline, but I think this has been already addressed. So we have another question. Do you have any idea who is still selling the huge chunks despite the fact that besides the underlying prospering business, meanwhile also the macroeconomic outlook for Egypt has strengthened massively in the last couple of weeks?

I do not. I don't know, Ashraf, if from an IR perspective you have any such insights that we can share?

Unfortunately, no, I don't know.

Okay. Do you consider there to increase the free float of the stock as investability for institutional investors due to this massive improvement in the macro side?

So this is not a management decision. Obviously, this is a Board decision. And to the best of my knowledge, the main shareholder of the Board is not currently inclined to do so.

Thank you, Omar. Do you plan an Investors Day this year in Switzerland to recount the great investment story to potential investors?

So we do have an AGM coming up sometime in May. I know the data is being tweaked a little bit. As to whether it would be a -- yes, so that's for the AGM. I think it's going to be a virtual AGM. As far as the Investor Day or participating in some of the events like the Investor Day that we did last year, I'm hopeful that we absolutely should participate in such events this year. And our Investment Relations team is on top of these things and hopefully organizing those.