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 1Q '24 Results Conference Call. From management, we have with us Omar El Hamamsy, CEO, Ashraf Nessim, CFO; and Ahmed Abou Ella, IR Director. As usual, we'll 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, everybody. I'm very happy to report the results for Q1, and we'll dive right into it to leave you any space in the second half of the presentation for questions. Maybe on the next page, quick overview for those who may not be too familiar with Orascom Development. We've had a very strong 2023. We continue to operate in 7 countries. Some of the '23 highlights: we sold over 2,100 units; we welcomed in our guests, over 2.7 million hotel guests; and we still have 34 hotels with over 7,300 or around 7,300 rooms, of which 123 were added in Oman, where we have, therefore, fulfilled our MBO or minimum building obligations. So no further legal requirements to add any further capacity or anything else. Some key metrics, some key financials from last year, just to recap before we dive into Q1. To put it in perspective, we closed the year with CHF 704 million in real estate sales, a very strong performance; CHF 655 million total revenue, CHF 174 million of operating margin and/or operating profit, which is our adjusted EBITDA and a net profit of CHF 54 million. Let's look at a little bit what happened in this first quarter, which was one of our very, very strong quarters in comparison to any of the before -- any of the previous quarters, are continuing on a very positive momentum for the company with one minor adjustment, which, of course, is the big event that took place in one of our core markets, Egypt in March of '24 of this quarter, which is the formal devaluation of the Egyptian pound dropping officially from somewhere around EGP 30 to the dollar, EGP 31 to the dollar to approximately EGP 50 to the dollar, a major devaluation obviously, which did not affect our operational results in any way, shape or form. However, of course, is something that we have to reflect in our net profits as a consequence of the $150 million or so of debt that we hold in Egypt in a combination of euros and U.S. dollars. Having said that and gotten that one out of the way, we've seen our revenues progress very nicely despite the devaluation. Revenues [ were up ] 15%, 16% quarter-on-quarter. Our adjusted profits, operating profits [Technical Difficulty] adjusted EBITDA was up almost 20%, while we're growing the top line very aggressively and our adjusted [ net ] 3% quarter-on-quarter. But of course, we have to take a negative hit on the books due to the balance sheet debt that we hold and where we have to do the revaluation of it in -- with the new FX rates. We anticipate that that net profit over the course of the year will continue to be reversed, partially and hopefully completely because of the positive effect of the U.S. dollar cap that takes in for our Gouna real estate, where we actually get to recognize a more positive, ultimately revenues in U.S. dollars and hence, in CHF in relation to what we had originally planned for or budgeted. We can get into more of that detail later on when Ashraf walks us through the very detailed financials. If we go to the next page, what we can see here is to show you the evolution of our Egyptian entity. This is an extra page we've added in times of major disruption to give you a sense for the incredible operating health and positive outcomes financially of the Egyptian unit, both in Egyptian pounds and in Francs all the way down to the one-time adjustment that I spoke about. What you will see from it here is that not only have we grown our sales quarter-on-quarter by 218%, which is a dramatic increase in sales in local currency and 167% in Swiss Francs, but we have also pretty much managed to maintain our gross profit margin in the mid-30s, our adjusted EBITDA margin, which is our operating profit margin in the very high-30s and our net profit margin, which has actually improved when not accounting for the one-time FX correction. So, that's the overall picture there. If we now go segment by segment, if you can forward to the next set of pages, please, and we start with the real estate. As I just said, our real estate sales are up in CHF to CHF 256 million, and therefore, that grows our deferred revenue balance by an extra 10%. These are the future revenues that we get from the payment plans that we have in Swiss Francs. Our cash collection continues on track at a very healthy clip. And so far, we haven't seen any worrisome signs of early defaults or anything like this post the devaluation event that took place. On the next page, we can see the real estate revenues, which is a representation of the percentage of completion progress that we're making on building and delivering. That's up 13.8% and our operating profit there is up 8%, almost 9%. That is probably the one area that will continue to improve going forward, given the fact that we think we are near the end, if not at the end of the inflationary pressures that have come out of all of the macroeconomic turmoil that we've seen in Egypt. And in fact, we are beginning to see very early signs of potential deflationary costs in our cost of construction. But we're still not taking that all the way to the bank until we see some true stabilization and permanent position there. On the hospitality side, on the next page, you will see that our revenues are up a very healthy 10% in Swiss Francs. Our adjusted profits are up 32%, and as you will see a bit later, our GOP is up by 7%, 7.6%. So a very healthy track there and record numbers for us across the board. And last segment, our recurring revenue from commercial activities is up 42% in Francs and dramatically up in our profitability with a profit margin that reaches 18.3%. Again, a very important new engine of growth for us. We've been talking about it for the last 3 years. You've seen that number increase year-on-year, quarter-on-quarter, and we continue in a very healthy perspective. If you look on the next page, you will see that by now, at this point in the game, 43% of our revenues are now fully recurring revenues, which is something that gives us extreme resilience and something that enables us to think through the true valuation of this company. If you separate those 43% consistently recurring revenues, which come from hospitality and other -- actually for all of them, very profitable commercial operations, one has to ask oneself, what kind of multiple is the market assigning to such recurring revenues, let alone the revenue contribution that comes from real estate. Let me give you some highlights by some of the key destinations that we have. If we go to Page 21, please. Talking about El Gouna, I'll talk about 2 dimensions in El Gouna. We continue very much in our healthy, not just jump in the net sales in real estate, which was up 257% quarter-on-quarter in Egyptian pounds and a similar number in CHF, but we also continue our average selling price increase across the board. That is the one key element that I have been focused on for the last 3.5 years in every quarterly call that we have together. And it's the one element where we're driving a lot of our commercial activities from segmenting our customers very differently to opening new markets for our sales to actually designing and making sure we're delivering the right product for the right segment, and we're delivering them at the right margins to protect ourselves from what has been happening over the last 3 years in the macroeconomic environment, which we've been operating in Egypt. You would also note here a very healthy increase in our overall GOP in the hotel business, driven primarily by improvements in our total revenue per available room and a very healthy -- still healthy overall occupancy levels. Despite what's going on in the region, of course, which is the Gaza war and all of that. In O West, if we jump to Page 24, please. You will see again a very similar picture, very strong net sales increase over the period, all triple-digit percentage increases. You will see again a consistent continued increase in our average selling price. We are, by far, the leading single project provider in all of Cairo from a price perspective, and we're certainly in the Top 2 [Technical Difficulty] from a quality perspective for what we're offering there and that [ translate, I mean ] shows us, once again, a very similar picture across the board. Net sales up dramatically, a number of contracted units up. But very importantly, average selling price is up double digits, healthy, very healthy double digits. And by the way, I'll say something about Makadi. Our international sales for Makadi, same thing, by the way for Gouna, are in very, very exciting territories where it gives us a lot of resilience going forward and we're very excited about that. Two pages -- 3 pages down, Page 30. The story in Oman is a very exciting one [Technical Difficulty] as you remember reshuffle in Oman at the beginning of '20 or in sort of early -- the first half of 2023. We're very happy that the new management team has been now accelerating the performance, carrying out the strategy that we've been working on and working very smoothly with all of the corporate centers of excellence that we have to actually be much more commercially attuned. And you can see this in our net sales being up by 70% from the similar quarter last year. Average selling price holding pretty steadily, which is a good thing, up 5.6%. And you can see also that our hotel performance in Oman was absolutely spectacular for the first quarter. we had occupancy of 92%. Overall, we had our GOP up 30% and our GOP per available room up 16%. So, very strong -- very, very strong and very positive performance in Salalah, which represents a big chunk of our Oman operations. I'll say the last thing about highlights of our destinations is Montenegro, Page 32. Again, here, super healthy first quarter, sales up 25%, average selling up 17.8%. This is all in Swiss Francs. Obviously, we sell in euros over there, and the hotel there, which is very small, but which we use as a methodology to attract real estate buyers as well as extracting positive performance from, as you can see, as it was performing quite okay given the scale of the hotel. That's the very quick tour of what's going on across or the highlights of our destinations, and the highlights of our numbers. I'm going relatively fast because this is just the first quarter. I'll pause here and I'll pass it to Ashraf, our CFO, who will walk you through our income statement, balance sheet and cash flow, and then we'll stop the presentation here and open it for any questions you may have.

Thank you, Omar, and good afternoon, everyone. As usual, I will try to focus on several numbers within the financials, mainly the margin. As you can see, although that we had very high inflation in Egypt and now we are constructing the units that we sold 2 years before, we -- you can see that our margin only dropped by 2%. While this was totally mitigated, when we look at the adjusted EBITDA margin, it is even higher by 1%. So it is 29% compared to 28%. So, this is a very good news, although that we had inflation, as I mentioned, in the last 2 years. Maybe the number of this quarter is the number of the FX loss, which is very high compared to the same period last year, almost CHF 57 million of losses. But this number going forward quarter-over-quarter will be reduced, as maybe Omar tried to explain is, this will be reduced by the fact that we are constructing and building the units in Gouna that we sell in U.S. dollar at a higher rate than the official rate. So therefore, with the [ reconstruction ] and the delivery of the unit, we recognize more of these gains going -- more and more during each quarter. So, I expect that this number will go down by the end of the year, in addition to the performance of the operation itself. So we hope and we are aiming at -- and this is our internal target, is to try to reduce or actually return to the black by the end of the year and hopefully to be positive. Also, we can see the finance costs increasing a little bit compared to last year, actually not a little bit, increasing quite well compared to the previous year, mainly because of the increase of the amount of debt that we take on O West, and it is mainly in Egyptian pound. And as you know, the Central Bank of Egypt increased the interest rate to be almost around 27%, which is relatively high. Also, this going forward, once the inflation in Egypt starts to calm down a little bit, then we'll start seeing this extra high debt or interest to go down quarter-over-quarter. Looking at the balance sheet, mainly there is one number to look at is the cash. You can see that all these losses, it's paper losses, and you can see that the cash at bank more or less is the same as the cash that we have at the beginning of the year. So it's only paper loss, as we say. But I do expect maybe that this amount also to be reduced going forward because we will try as much as we can to use the cash from the banks to continue the construction in O West instead of using more debt, although that we have a line up to EGP 6 billion of line of credit line that we can use, but I will try to minimize as much as I can withdrawing from this amount unless it is extremely needed and therefore, we use some of our existing cash. As you all know, we have CHF 100 million of bond that will mature on ODH level that will mature in October. We are currently working with some of the banks outside Egypt to secure also a credit line up to $70 million or $80 million out of this [ $100 million ]. And also, we'll go to the debt market in Switzerland, maybe we'll start the preparation by end of June, early July in order to be ready to go to the debt market and refinance the bond in October. So between these 2, this is -- our plan is to try to refinance and hopefully secure even a bit more to cover our expenses and G&A during 2025. The cash flow, I think, a huge improvement compared to previous year. You can see that the cash from operation went from a negative CHF 18 million to a positive of almost CHF 42 million, great achievement. And therefore, the operating cash flow, when I deduct from it the payment on the CapEx and all of this, it is still positive. So this is very good news. And as I mentioned, the cash level is more or less the same, around CHF 213 million, CHF 214 million at the end of the period of [ CHF 1 million ]. So we are in a very, I would say, healthy cash balance that we have across all our destination. This is the end, and I go back to Omar for concluding remarks.

Thank you, Ashraf. Maybe only a couple of more remarks without any further pages to share on, which is, we're continuing very much on our strategy that you have seen in operation over the last 3.5 years. We believe in it very strongly. We believe we're actually beginning to see the true dividends of this strategy, which, again, I will remind you, is around extreme commercial improvement for growing the top line, growing the sales, growing the resilience of our revenues and identifying and growing -- building and growing new revenue sources altogether, number one. Number 2, a very strong look at the profitability while we're doing all this growth. So it's not just growth for the sake of growth, but growth for the sake of both operating margin improvements across the board, which we are consistently making and consistently maintaining despite literally 3 years of nothing but headwinds of our operations, and a consistent improvement in the net profitability across the board. Third, and that's one big important element we spoke about and I spoke about, is the beginning of seeing the light at the end of the tunnel when it comes to free cash flow to equity holders, which may or may not translate into -- which will hopefully translate soon into the ability potentially to pay dividends, that's -- then whether to pay a dividend or not would be a, obviously a Board decision and a majority shareholder decision, but the ability to do so, we are beginning to have some line of sight as to how to do that. And that is basically the third pillar that I want to talk to you about, which is the monetization of the land that we have. As you probably recall from all our discussions, and as you know, if you've been following this company for more than the last 4 years, there is a massive land bank that is dramatically undervalued. We've shown through a transaction last year that the book value of our land in Gouna is about 150th what it actually got us in the market. We also told you that we would be ramping up our M&A activity or rather our divestment and land monetization activity. It's what we've been doing. We now have an extremely healthy pipeline of discussions that are taking place, active discussions are taking place across actually 5 of our different destinations, across multiple countries, not only in Egypt. They are looking promising. We will be making announcements pretty soon for one of the transactions that has gone through and more transactions, hopefully, will be coming through throughout the year as we get to closure, and that's something that we're very excited about. So, that's the third pillar of what we're doing is the monetization and a line of sight towards cash flow -- free cash flow to equity holders, which is ultimately the main objective that we're driving at. Exact timing to be dependent very strongly on, because I'm sure somebody will ask this question, very dependent on the conversion rate of the pipeline of transactions that we have in place right now, which is difficult to predict, but looking quite positive for the time being. Fourth pillar has been our continued institutionalization internally. All of these results that you're seeing here don't happen on their own. They happen because we're working much more systematically, much more professionally, much more like a true multinational institution with the right centers of excellence, with the right people, with the right capabilities, et cetera And we're not going to talk much about that. This is a lot of the plumbing and inside wiring of how our company has been progressing on the inside, but it speaks to future resilience and future sustainability of everything that we've been working on, and all of the results that you have seen in the last 3.5 years. Last is our people agenda. Not only have we hired over the last years, over 250 senior management into our ranks and promoted many people from the inside, particularly young, talented, driven, hungry new managers who are willing and ready to change and to learn and to develop, et cetera But we've also launched, about 6 months ago, a very extensive culture change journey which will take many years -- many years to go. I've done a bunch of these in my previous life, and they do take 3 to 5 years to stick. And that's ultimately where the soft part, the DNA of the company gets changed towards a much healthier mindsets, behaviors, and hence, sustained results again, and linkage to results and performance again that we're doing. These are the big, big 5 pillars that we're working on. below each of these are literally tens of initiatives that the members of the Executive Committee, the senior team members on our team are working on day in, day out, and that's what's been delivering all these results, and we're very proud of what we've been doing and will continue. And we think at this point, with Egypt having by and large, I would say, turned a big corner. I don't know if it's the final corner, I hope it is. But certainly a big corner over the last 4, 5 years of economic stability, cash injection into the economy and an increase and a return of foreign investors in the country. I think this is going to be actually very positive for us going forward and the future is looking very bright. Thank you.

Thank you, Omar and Ashraf for the presentation. We will now open the floor for questions. If you have a question, you can type it in the Q&A box or tap the raise hand button, and I will unmute your line. Okay, we have a question from Daniel Burki.

Good afternoon, everyone. I would have a question first on the commercial assets where you had tremendous growth in the first quarter. Could you elaborate a little bit where this is coming from? So what services are growing that strongly? And maybe on the hotel occupancy, El Gouna had obviously went down, Is this because of the Gaza conflict? And do you expect it to improve in the course of the year?

Very good. I'll walk you through exactly what are there. So, let me give a bit of color on the recurring revenue commercial dimension, so outside of hospitality. 82% of that comes from El Gouna, right? And El Gouna is one of our more mature, which is what gets me excited, frankly, because it's one of our more mature destinations. And it tells me basically that as we go forward and as we take that same playbook that we've been implementing over the last 3 years of recurring revenues, it actually tells us the tremendous potential that all of our other destinations have when we start implementing the same thing. Now to give you a bit more qualitative description of what sub elements in here are generating this. One is -- and that's a whole new business that we built up to roughly a EGP 1 billion business for this year, I hope, which is very, very, very crudely. By the end of this year, we'll be a CHF 20 million business, maybe more, hopefully, is what we call El Gouna plus, which is, everything has to do with home services advisory for your renovations in your home, for upgrades of your home, for adding new features or products or capabilities in your house, right? That's one of the big ones. Second big one is all of the marinas that we have. We've been expanding our marinas, adding more berths -- adding more berths to our marinas, repricing our marinas and finding new opportunities to find ancillary revenues across all of our other long tail of line of businesses, be it our hospital business, be it our schools business, be it our Marinas business. That's number 2. Number 3, our retail business, of which we have a few hundred retail stores, almost 1,000 retail stores, if you include the entire system, we've been actually looking much more systematically at the client mix that we have in those stores. How is it that we're doing our pricing with them? And we've gone in and changed a lot of these contracts from a pure rental agreement to a rental agreement as a minimum, plus a revenue share or a portion of their sales that come into us and we're putting in all the systems and the POS' that you have to have to be able to measure all of that and be able to make sure that we get all that in. So that just gives you a bit of a flavor of what I'm talking about. The other big thing that we've done is also repricing and changing the contracts on all of the offerings of the basic services that we had, like water, electricity, sewage, landscaping fees et cetera, et cetera. So that's at the super high level of what is there. On your second question, you're absolutely correct, the impact that you've seen on occupancy, which is roughly 10 percentage points, is what we are attributing directly to the Red Sea tensions. Actually, interestingly enough, it was not so much driven by the Gaza events as much as it was driven by the consequences of Gaza of what happened in the Red Sea and the attacks that happened on some of the ships in the Red Sea, and I think what that did is it spooked, at least partially, some of the customers that were coming to El Gouna on the Red Sea. And therefore, there were some cancellations that happened actually in the first quarter and you saw the 10% drop there. The good news that I can tell you is that April and May, year-to-date have been incredibly healthy record territory across the board. So it appears, and I don't want to oversell it because obviously, the conflict in Gaza is far from being over. But it appears that the customers are returning back again in a healthy manner in our hotels on the Red Sea, in El Gouna specifically. Taba, adjusted for extreme precision, we have gone into a mothball -- mothballing of that destination and running on a very, very minimal burn rate.

As a reminder, if you have a question, you can type it in the Q&A box or tap the raise hand button and I will unmute your line. We have another question from Daniel.

Of course, also, other people can ask questions, but if not, I'm happy to go ahead. On the currency, you mentioned that the negative currency impact was mainly due to your debt in foreign currency, and this should ease in the course of the year, correct? Right? And I didn't get the explanation with this U.S. dollar cap in El Gouna, that's another one. And the second question regarding operating cash flow, do I hear you correctly that you expect a positive operating cash flow and also free cash flow in '24 overall and going forward?

Yes. Maybe I'll take these questions on the FX. Yes, it is mainly coming from the foreign currency debt that we have in Egypt, which are basically either in dollar or in euro. So once there is a devaluation on the Egyptian pound, it is automatically reflected in P&L, but not on the cash flow as much. This will improve going forward, not because of the debt will be reduced, but because of the gain that will mitigate this loss on the debt side, the gain coming from the receivable that are denominated in U.S. dollar, but with a limit or with a cap to the Egyptian pound. So, yes, going forward, this amount will be reduced by the mere fact of having some gains coming from the receivable in Gouna. This is for the first question. For the second part, yes, for the operating cash flow, you can see we have a positive operating cash flow, and we do expect, at least for this year, the operating cash flow could be positive, yes.

I just want to clarify so that we don't have confusion, Daniel, that Ashraf said the operating cash flow, right?

Yes.

No the total free cash flow to equity, that is going to be dependent, as I highlighted earlier. Okay. So, just want to be crystal clear on that so that it's not lost in translation.

I got this one, yes.

Thank you, Omar and Ashraf, there seems to be no further questions. So would you like to make any closing remarks? Sorry, we have a question from Ferran Tort Barniol.

I would have a question with regards to the monetization and any leads that you may have as of now. Are they all related to land sales or are you having, like, leads for like full destinations or...

Both.

Okay. And the timeline that you expect? You mentioned probably -- can we see something already by the end of H1?

I think in terms of -- we will see something by the end of H1, yes. But some of the larger transactions will probably be more likely to happen if they happen, of course, by end of H2 from a closing perspective.