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

Hello, everyone. Ms. Alya Ashraf from CI Capital. I would like to welcome you all to Oriental Weavers Second quarter 2022 Results Conference Call. I'm pleased to have on the call today, Jonathan Witt, President of Oriental Weavers U.S.A.; Hani Amin, Export Director; Shehta Farouk, Group Financial Controller; Radwa Kamel, Group Treasurer; and Yasmine ElGohary, Investor Relations Manager. We will start with a presentation by management, and then we'll open the floor for Q&A. Yasmine, please go ahead.

Thank you, Alya, and hello, everyone, and welcome to Oriental Weavers quarterly investor call. Today, we'll update you on the company's results for the second quarter of 2022 and provide high-level guidance for the third quarter. In 2Q, sales reached EGP 3.2 billion, which is an increase of around 14% year-on-year, supported by price increases, enhanced product mix and devaluation impact. Local sales increased by around 27% year-on-year and export sales increased by around 8%. Due to higher raw material costs compared to 2Q 2021, gross profit margins contracted to 11.8% from 17.6%, but we can see a Q-on-Q improvement in margins, given the pricing strategy. Core attributable net profit, excluding the FX losses and capital losses, declined by around 17% year-on-year. As the quarter progressed, the global economic environment became increasingly challenging. Inflation is causing changes in the consumers' discretionary spending, especially in our export market. In 3Q, our volumes and margins will be slightly lower than the second quarter of the year as we are witnessing softening in demand from our export markets. Our local market continues to be resilient, with strong growth expected to continue into the second half of 2022. To adapt to the current conditions, we're taking numerous operations actions, including cost controls and productivity improvements. In regards to OW China, the Board has approved the bid offer for the sale of its 99.97% ownership in OW China. This investment was fully impaired in the company's financials back in 2019, and we anticipate to report a full capital gain in the second half of this year, subject to the deal standard closure and the regulatory bodies' approvals. In terms of the export rebates, we are getting very positive signs from government officials that our rebate collection will be on track, and we are expecting to receive an amount in 3Q. Total figure for the full year might increase the guided 300 figure. In general, our business is well positioned to benefit from the long-term growth in new home construction, residential remodeling and commercial projects. OW has successfully managed through economic cycles many times before. I'll leave the floor to Mr. Hani to give us his input on the export markets.

Yes. Good afternoon, everyone. As Yasmine mentioned, we started to witness a little bit of slowing down in the demand in the last quarter, and this has been reflected in the flow of orders we have been receiving. Definitely, the most affected is Europe and the U.S. and also, to some extent, some markets -- scattered markets in different regions in the world, for example, Kenya and other markets in Africa has been affected with the devaluation of their domestic currencies against the U.S. dollar, which made the import cost a little bit more difficult. However, the bigger impact, as I mentioned, has been witnessed in the U.S. and in the U.S., basically due to the larger stocks that has been in place since last year with major retailers and also even for the online business, the sales is not as it used to be good like in the last 2 years. Again, the expenditure and the discretionary income of the citizens are much less due to inflation. And I think Jonathan can later elaborate on this for the U.S. market. For Europe, of course, we have been faced with the consequences of the war between Russia and Ukraine. And this has really affected some major markets, especially Germany, which is the biggest market for rugs in Europe. We still have some like running business, especially for special programs. But these are all planned before the first quarter of 2023. Other markets are in Europe are also affected, especially in the East and Scandinavian. For a few markets that are still not very much affected, you can consider maybe France still working somehow in a healthy way. However, overall, when we say Europe, the situation is not very good. Retailers are also overstocked, and a lot of people now started to travel as well. So with all what is happening in Europe, a lot of the people's dropped their expenditure on home distribution items and started to travel, to only spend on necessity commodities. Overall, we still see like a sales figure, especially for the woven segment, a little bit better than last year. But again, this is based on what we have from the orders we received over the last 1.5 or 2 years, and we are still producing. The flow of order, as I mentioned, is getting less compared to the same period last year. But there are still opportunities that we try to grab in stable markets. We talk markets like Japan, maybe markets like Brazil in South America. In the Middle East, things have been fairly going well in Saudi Arabia until July. We started to feel a little bit of a slowdown due to the fact that normally and historically August is the slowest month in Saudi Arabia in all the year. However, we expect that after the middle of September, things will start to rise again in Saudi market and the market will be more active than it is in August. In Oriental Weavers, for the sales and the export team, we are trying to get from the competition share. We're trying to get opportunities through like some new clients in existing markets. We already got in the last 6 months, more than [ 18 ] new clients in different markets. We've got new clients in Germany, in Brazil, in Japan, in South Africa and now and also in Saudi Arabia as well. As well as now, we are also trying to get new clients in U.S. market. Hopefully, by the fourth quarter of the year, we will start to see a little bit rebound of order flow than what happened in the third quarter. Competition is suffering as well. Our main competitor Turkey is having, I think, the worst time in the industry for them. A lot of -- not a lot, but several factories have closed down or reduced their sizes. A lot of factors are actually selling their machines due to the fact that there is a lot of cash liquidity problem and commitment to banks that we cannot keep up with. And I think as much as it is bad for the industry from the competition, this might create like some good opportunities for us in the coming months, especially in big markets like in the U.S. and Europe as well. Thank you.

Thank you, Hani. Jonathan, if you can shed the light on the U.S. market and our U.S. facility.

Sure. I think everyone knows that in the U.S., we've faced a lot of challenges over the past 3 to 4 months with the inflation and at the same time, a very strong job market, which has made it hard to fill positions and increase the cost of labor. And with all of those headwinds, though, at our trade shows and as we speak with customers, they've been still very confident that this is going to be a short-term cycle and that going into Q4 and especially into Q1 of '23, they feel things will normalize. Another comment we hear and something that internally we evaluate is performance this year versus 2019 pre-pandemic. That was our best year on record prior to the pandemic and also a very stable environment where when you look at '20 and '21, you're looking at a mix of all the supply chain issues and packing maybe 2 years of demand into a 15-month period. So it's a better baseline for us as we try to evaluate the strength of the business when we look at 2019. And that's what a lot of our retailers are doing as well. So the good news there is that we are essentially even with 2019, not only in dollar terms but in meters. And while May, June, I'll speak about July as well. We really started to see a decline in May that accelerated in June, basically stayed about even in July. But then suddenly, in August, we are now really seeing comps that are ahead of last year and 2019. So sometimes we talk about the -- since we are selling direct to retailers as they order many times the increase or decrease in demand, we feel immediately where the [ mother ] company in Egypt will feel it a little bit after us because incoming orders for them are based on the demand today. And so I think it's encouraging, as Hani mentioned, maybe a little bit lighter orders right now, but I think that's a reflection of where business was through the summer. So as we see it become stable again and comping well, we should see orders increase back to Egypt as discussed. Another part of are weathering the storm of the summer has been we've picked up some market share earlier in the year due to poor performance from other importers and manufacturers. So as those new programs have been arriving and going in place. That's been a business that was not only new market share but also timed appropriately to help us through the summer and our diversified distribution. And many of our competitors focus on specific markets, so they may only try to sell on the Internet or maybe only to mass merchants. We have the most diversified distribution channel sales of any of our competitors here in the U.S., where we're working with mass merchants and home centers up into online and then the furniture retail chains and brick-and-mortar stores. I will also say that the furniture segment has been the strongest through these past 3 months, and that is positive as that's a higher price points, better margin side of the business. So that has also helped through this time. Otherwise, I think all the indications and incoming orders and plans for promotions in the backside of this year and in Q1 of '23 continue to be on pace. There's been a lot of news of the major cancellations of orders for the fall and winter. The major markets or major retailers in the U.S., and we've been lucky to not experience that at this point. And based on the turn that we're seeing this month, we feel confident. Yasmine?

Thank you, Jonathan. I'd like just to highlight in terms of our guidance for the full year given in EGP terms, we expect the top line to be buffered by the devaluation. So we're expecting in the range double-digit figures on the top line and the gross profit margin to remain in the range of 11% to 12%. I'll leave the floor for questions if anyone has any questions for management.

Thank you for the presentation. We'll now open the floor for Q&A. [Operator Instructions] We'll take the first question from the chat from [indiscernible] What is the expected polypropylene prices for 2022?

Okay. So basically, -- so currently, we have high-priced inventory. So we're expecting that to continue with us into Q3 in the range of 1,550, that's the average [indiscernible]. But we're expecting Q4 to see a better -- a lower figure than the average for the 9 months. So to answer your question, we're expecting the average for the full year to be within the range [ 1,500 ]

If I may ask, I have a few questions while we wait for attendees to type in their questions. Could you please share your view on the expected revaluation and how this might affect the business? Should it happen?

In regards to the devaluation, definitely it reflects positively on the sales figures because 65% of our experts are direct -- are in U.S. dollars. So whatever is going to be the impact of the devaluation would mean an increase in the top line. In regards to margins being a net exporter, they also slightly improve. So you can say that Oriental Weavers in general is a good hedging option.

I'm sorry, can you raise your voice a bit?

Okay. Should I start from the beginning?

As you like.