Oriental Weavers Carpets Company (S.A.E) (ORWE) Earnings Call Transcript & Summary

Hello, everyone. This is Ingy El Diwany from Beltone Financial. I'd like to welcome you all to Oriental Weavers' 1Q '22 Results Conference Call. We are pleased to have on the line Jonathan Witt, President of OW USA; Hani Amin, General Export Director; Shehta Farouk, Group Financial Controller; Radwa Kamel, Group Treasurer; and lastly, Yasmine El Gohary, Investor Relations Manager. Now I'll hand over the call to Oriental Weavers' team. They will start with a brief update, and then we can open the floor for questions. Yasmine, please go ahead.

Thank you, Ingy, and hello, everyone, and welcome to Oriental Weavers' quarterly investor conference call. Today, we'll update you on the company's results of the first Q 2022 and give you guidance for the full year. Against the backdrop of the geopolitical tension and the rising inflation, Oriental Weavers has continued to deliver sales growth and generate strong cash flow. Sales of our products remain strong and the design and features we are bringing to the market give us competitive advantage in all price points. In 1Q, sales reached EGP 3.2 billion in 1Q 2022, which is an increase of 18% year-on-year. This came mostly due 21% increase in the local sales and 17% increase in the exports. Due to higher raw material costs that we saw during the quarter, gross profit margin contracted to reach 10.93% from 17.4% in the quarter Q1 2021. Core attributable net profits, excluding FX losses and capital losses declined by only 4% year-on-year to reach EGP 289 million. We have recently partnered with McKinsey with a scope to focus on OEE in weaving. OEE is the overall equipment effectiveness. This is in order to push and support OW in the aspiration to unlock the next horizon of cost by minimizing scrap, other types of waste and rework and taking OW from good to great porting accounts. We have confidence in the long-term future of our business despite the near-term uncertainties that we're seeing. And just to shed the light, we're currently seeing that cost -- sorry, we're seeing a decline in costs mainly in freight costs and Mr. Amin can further elaboration on that. And also, we're seeing a decline in raw material costs, mainly the polypropylene prices. The dynamic in the polypropylene is not as correlated to the oil prices as previously. The dynamics is -- there's more supply in the market and less demand for polypropylene. So we're seeing prices now at $1,450 per tonne, and this is expected to remain for the rest of the year. I'll leave the floor to Mr. Hani to give us an update on the export market.

Yes. Good afternoon, everyone. This is Hani Amin, Export Director of Oriental Weavers. Briefly, we -- of course, all of us are aware of the challenges that are being -- that faces us like every day, starting from the post-COVID situation until the Ukraine and Russian war. And of course, the disturbance that's happening in the supply chain and the logistics worldwide. We have been -- we had a very good year in 2021, exceptional year actually in terms of market expansion, export revenues and market share and increasing market share as well. And fortunately, we maintain this momentum -- this positive momentum in the first quarter of 2022, where we actually ended -- I'm talking mainly also about the woven segment, more or less, which is the bigger division. For the woven segment, we actually had a very positive quarter in 2022, where we actually grew more than the first quarter of 2021. And the main reason for this is logistics -- is the amount of orders that we had in our hands throughout 2021 that we shipped during the first quarter of 2022. We are also having like some good opportunities rising in different markets. Definitely, there are a little bit of slowdown in some markets like in the U.S. and some European markets. However, we are trying to balance this off through taking the opportunities we have right now in some other strategic markets like in Saudi Arabia, like in Morocco, like in Brazil and definitely also trying to gain more promotion orders in -- with some retail chains in Europe and also in the U.S. The competition is not in its best situation as well. Compared to our competition, our utilization rate is much higher, which is a good sign in the first quarter. We expect that we will go in the second quarter with some difficulties with -- which still exists from the first quarter, like the slowdown and the inflation in some markets. However, there are some positive signs that started to appear during the month of May. Like for example, the freight rates that started to go down a little bit compared to the last 15 months. In the last 15 months, we faced increasing freight rates in different destinations. We just got updated like last week that some major markets are now having less freight rates like in the U.S. and Europe, Australia and South America as well. So in spite of all the challenges, we are still kind of optimistic that we can have opportunities in our favor that will actually try to balance off the situation for us. Definitely, the growth plan will not be as in 2021, which, as I mentioned, was an exceptional year. However, we are trying to be as flexible as possible with our current clients in the remaining or in the coming 2 quarters in order to have a balance, as mentioned, between the markets with declining sales and the markets with still healthy opportunities. I think this is just a brief of the situation, and we'll be happy to answer any questions. Yasmine?

Mr. Hani, thank you so much. Jonathan, if you can shed the light on our U.S. facility.

Sure. Good afternoon. In Q1, we made some strategic decisions to exit a few programs and categories of products that were challenged from a profitability and margin standpoint due to the freight cost that Hani referenced and also raw materials. So our decline in sales overall really the rug side, residential side of our business was basically flat even with those planned reductions in business, and our hospitality side of the business was continued to be challenged in the first quarter in the U.S. state. However, looking forward into Q2, the hospitality segment is poised for a very strong Q2 and Q3, which will help drive our sales number back up as well as the reduction in freight and domestic polypropylene for our production facility here has also declined over the past 2 months. That said, obviously, we are facing uncertain economic times and unprecedented inflation here in the U.S., which has an effect on demand. Fortunately, with our business that's in the higher price point markets such as furniture stores, we're seeing a continued demand on pace with 2019 levels, which next to the unprecedented 2021 numbers that we saw in 2019 was our best year in the United States. So there is still a very strong demand in the marketplace, and we're encouraged by that. And again, the hospitality side of things is really picking up as far as their investments as people return to travel. Yasmine?

Jonathan, thank you so much. Let me give you guys an update from my side before we open the floor for questions. So the local market is still remaining strong. It's continuing on the Q1 positive performance. The focus mainly for the coming period would be to focus on the wholesale side of business, which caters to wholesalers. So we satisfy the market due to the import restrictions that we're seeing opening. The tufted segment, we're expecting Q2 to have better results than Q1, given that they're securing the clients and again mainly Q2 and Q3 will see better results coming from the segment from the export side of the tufted segment, the local side of market continues to be strong. In Q1, the price increase happened by mid-Q1. So the full impact was not -- did not show in the results. So we're expecting the full impact of the price increase to be evident more in Q2 results. In terms of export rebates, we collected EGP 165 million in Q1. We're expecting a small number in Q2. But by Q3, we're expecting another 3-digit figure in Q3. Yes. And in CapEx, we're expecting to spend around $10 million. We declined CapEx than recently guided, it was recently guided to $15 million, but we declined it to reach around $10 million given the market dynamics. Yes, so that's it from my side. I'll open the floor for questions.

[Operator Instructions] I can see a question in the Q&A box from [indiscernible]. What are your expectations for the cost in the coming period?

So as we mentioned that we're seeing that the polypropylene prices are going down. We are seeing freight costs are going down. So we're expecting cost to decline compared to Q1. And let me share with you again the guidance for the full year. We're expecting top line to be in the range of 15% up. The gross profit margin to average in the range of 12%. Net profit after minority in the range of EGP 900 million and net margin to be in the range of 8%.

I have a question. Do you expect any change in strategy in the wake of the new recessionary wave that we are seeing in the U.S. and Europe, especially in your pricing strategy?

Well, it's -- right now, it's difficult to focus on a specific pricing strategy due to the fact that there are a lot of costs involved with the whole process like, as we mentioned, the raw material and the freight prices. However, we will try to revisit this topic again, I think by the end of Q2, when we see actual decline in freight prices and maybe raw material prices as well. Right now, we try to balance things between the mid- to high products we are currently selling since or we're trying to focus on selling since last year 2021. And at the same time, we are trying to now to also sell more of mid- to entry-level products, which actually customers are asking for right now due to the fact that there is a recession and there is a lot of inflation in different markets. So right now, there is no solid change in the pricing policy, only maybe change in the product portfolio mix that we are trying to offer to our customers. For a specific pricing strategy, as I mentioned, I think we need to revisit this by the end of Q2.

Focusing on product innovation and supplying the market with products and supplying the consumer with something he thinks he doesn't need. So it's new that what intrigues him to buy. So yes, we're focusing mainly on increasing our portfolio with new innovative products.

And by how much do you expect to raise your local and export prices?

In the range of 20% compared to last year, both export and local.

Local prices, do you expect to raise it by 20%?

Yes. We already raised it around -- there was a 5% and a 15%. And yes. So if you average it compared to last year, it's going to be around 20%.

And do you expect any price increase in the export market?

The export market prices will go up in EGP terms because of the impact of the devaluation.

But in USD terms to keep it as is?

We'll increase -- we did increase around 3% at the beginning of the -- that's the risk that Yasmine was talking about that it was delayed a little bit from the beginning of the quarter to the middle of the quarter and that's why they weren't reflected in the margins.

Okay. We have a question from Yasir [indiscernible]. He wants to know about the management plan to increase sales and open new markets?

Okay. The management plan generally revolves around finding the markets, the export markets that our competition is selling there quite good volumes of rugs and carpets. And where we still have opportunities either that we are -- we have like low market share or we have an advantage selling there. For example, in Saudi Arabia, our competition is still not allowed to enter the market, which is giving us a very big advantage. We already increased our sales in Saudi Arabia in the last 18 months in unprecedented way. We still have plans to develop more qualities and new, like Yasmine mentioned, new ideas of products for the Saudi market, so we can able to maintain and grow our market share. Same thing will happen in markets where we have also kind of free trade agreements or general trade agreements and advantage for us like in Brazil or some African markets. We definitely look for specific markets in some strong geographic locations to increase and expand our market share. As an example, also in Europe, we are targeting markets like France, like The U.K., like Poland and Germany. In Asia, for example, we are targeting Australia and Japan. We are already selling in these markets, but we have aggressive plans to increase our market share there through new products or new clients. And definitely, Africa is a very big market, and we are still trying to find new opportunities in Africa, whether in the markets we are currently selling to like in Kenya or Morocco or South Africa or in the markets that we are still not selling there like West African markets as Nigeria, Ghana and Senegal. So this is -- generally the management plan is to keep pushing for more sales in existing markets, find potential new market that consumes a lot of carpets and rugs and also offer like -- or spend more time and research to offer products that are developed for specific markets to meet the needs of these markets.

Thank you. We have another follow-up question from Yasir [indiscernible]. He is asking about the management's plan to secure raw materials and reduce fluctuation ratios -- reduce calculation and ratios.

Hello, can you guys hear me?

Yes, we hear you, Yasmine.

Ingy can't hear us.

Ingy, can you hear me?

Yes.

Okay. I just wanted to add on regarding the local market. Management plan is to continue on increasing our showrooms throughout Egypt through different governance and increase and go to underpenetrated markets there and also focus on the online segment.

Which is a high-margin segment.

Yes. In terms of the raw material question...

Okay, our policy in general is that we try to have a minimum acceptable level of inventory, which is currently around 2 months. We, as you all know, secure out polypropylene from our sister company and we do have contracts with other companies mainly in the GCC. We don't want to reduce that. The market direction as we see it currently is that the prices are going down. But we don't want to be very speculative and take a direction of reducing that stock. So we'll continue with the current stock level just to have a buffer in case market directions reverse. But we do, in all cases, have contractual agreement that secures us monthly volumes as planned.

Your expectations for Q2 margins, we're expecting gross profit margin to be in the range of 12%, which is better than Q1 margins.

And moving forward, the margins should improve, especially in Q4 when the demand is usually in the export market. It's strongest at its strongest level.

In terms of the export rebates, nothing to add on that front. The government announces an initiative, and we apply for it, and that's how we take the export rebates. So we're expecting another bulk by Q3, already corrected 155.

Are you facing any shortages in raw materials now?

No, not at all because our main raw material is the polypropylene and actually since the COVID we tried to diversify our suppliers portfolio in order to increase the number of suppliers we're dealing with, and it's one of the supply chain strategy to have more one than strategic supplier for each raw material.

Could you give guidance for local and export volumes for 2022?

Yes, sure. For the local, we're expecting flat in terms of volume. And for the exports, we're expecting it to be down in the range of 7%. So it's more of a value-driven recovery in the export market.

Could you please repeat it again because the sound -- your voice is...

Okay. For the local market, in terms of volume, we're expecting it to be flat. And for the export market, we're expecting it to be down by around 7%. So it's more of a recovery -- volume recovery in the export side.

And actually for the time being we're being conservative in our guidance because of the tufted segment sales, we feel that because the demand is mainly coming from the USA market and in the first quarter the demand wasn't as strong as it used to be. So -- but we know that now they are approaching other customers and securing more orders from different other customers and other new customers. So hopefully, maybe by -- within the coming months, we'll revisit this guidance and it will reverse upward.

Have you witnessed any weakness in orders from Saudi Arabia given that the import ban from Turkey has already been lifted early this year?

No. Until now, we didn't face any slowdown of order flow from Saudi Arabia. And actually when we check with our partners, there is no official announcement that the relations are going back to normal. All these are speculations, but nothing is confirmed. Anyway, we have now a strong customer base in Saudi Arabia. And even if the relations are going back, now I think the Saudi importers see like the risk of having all the volume with just one source. So I believe even if relations are back to normal, they will still be willing to give us a big share of the volume of the Saudi market, especially the Saudi market is huge. Meanwhile, just to confirm...

Hani, I believe your line is cut.

So adding to Hani until he reconnects and usually, the Saudi consumers, there's a language barrier between them and between the Turkish suppliers. So they find it easier to deal with us and Oriental Weavers is kind of popular for its service. And we have a virtual showroom and a catalog and a whole virtual area, whole digital dynamic with our clients, which is rare to find with the Turkish supplier.

Thank you. We have another follow-up question from Yasir. He is asking about how much do you expect to receive from export incentives?

Yes. For my guidance for this year, I'm still expecting the EGP 300 million. This could be revised up as we go along the year.

Thank you. And another question, how big is the impact of the increased interest rate on the company's results?

Okay. While we used to be [indiscernible] I don't think that this would be the case this year because of many reasons, actually, one of them in the increase in the LIBOR. Also because of the new regulations enforced by the Central Bank relating to local sales. We thought that -- they informed us at the very beginning that local sales would be exempted from this LCE regulation. But later on, they are asking companies to open LCEs for intercompany local sales so -- which is putting somehow a pressure on our EGP borrowing rate and the financing charge in general. Also because of the devaluation, the equivalent of the interest expense would increase while usually -- the first time in 2016 -- end of 2016 when the first devaluation happened, the EGP depreciated, but the rates on T-bills went up. But what we witnessed this time is that they depreciated the currency, increased the corridor rate but they didn't have it reflect on T-bills rate. On the contrary, maybe they went down slightly. So while our credit interest would remain may be lower because of the EGP that we're paying on the LCEs portion of the EGP available will be used to open the LCEs. So in general, we wouldn't be as -- we would no longer be an investor, and I can share you with you the figures, I guess, there will be a difference of like maybe EGP 80 million between credit interest and interest expense. This is reflected in the guidance shared by Yasmine. And also in the guidance shared by Yasmine, we accounted for a more depreciation of the currency, just in case it happens.

Could you please share the interest rates that you borrow at in the local market in EGP terms?

For the EGP terms for delivery and so on, we used initiative, which is 8%.

Are there any changes in this -- in the initiative rate of 8% so far?

No. No. Still on. And -- but a portion is now -- we never used it before, but now there is a small portion used for opening LCEs and the rate is the corridor rate. For the foreign currency, our financing charges is 0.9 over 1 month's LIBOR. But the 1 month's LIBOR did go up. So all in rate now is around -- is around, yes, maybe 2%. And also because of the expansion that we spent last year, we spent like $10 million or $15 million for the expansion. So this -- all this is putting pressure on our financing charges.

Thank you. Yasir is asking what's the reason for the increase in expenses?

What? Interest expense or what kind of expenses, I don't understand?

I believe it's interest expense.

I guess we covered it.

Covered it, yes. Already covered. Administrative -- administration expenses?

It's partially due to inflation, yes.

You're talking about the SG&A?

SG&A expenses.

The percentage didn't change much from Q3 and Q4. Yes, the revenue went up. So they always are within the rate of 5% from say 4.7%. So the rate didn't change much.

And it's around -- 85% of it is fixed cost. So it's a function of sales.

[Operator Instructions]

I'll add to someone's question. In regards to SG&A, they are relating to salaries, for example, and salaries do increase every year, but the percentage doesn't change much from 1 year to the other. So it's always within the 5% rate.

Yasir added that there was an increase in expenses of around 25%.

In EGP terms, you mean? It's 150 compared to last quarter last year, which was 140.

It's partially due to salaries, yes.

And this is normal, by the way.

And Q1 was -- Q1 2021 was considerably lower. So the comparison...

125. Yes, if you compare it to first quarter, yes, there is a difference of EGP 25 million, but this is a portion of the SG&A is relating to salary -- so -- and to some sales commission and some fees paid to the...

Yes, and adding the new hiring for the expansions, insurance costs. [Foreign Language] Does that cover the question -- the answer?

I think so. [Operator Instructions] I believe we have no further questions. Yasmine, the floor is yours, if you want to give a final remark.

Well, thank you, everyone, for joining and taking the time. Just to give you a reminder that globally there is a structural deficit for the housing that will take years to satisfy, and we should benefit from the strong long-term trends in the home construction, residential remodeling and commercial products. So thank you everyone, and hopefully next quarter with better results.

We would like to thank management for their time and valuable input. We would like to thank all our participants for joining the call today. Thank you, everyone, and have a good day.