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

Hello, everyone. This is Mirna Maher from EFG Hermes, and welcome to Oriental Weaver's Third Quarter 2022 Results Conference Call. I'm pleased to be joined today by Hani Amin, Oriental Weaver's Export Director; Shehta Farouk, Group Financial Controller; Radwa Kamel, Group Treasurer; and Yasmine ElGohary, Investor Relations Manager. I'll now hand over the call to management for a quick presentation, and then we'll open the floor for the Q&A session. Yasmine, please go ahead.

Thank you, Mirna. Hello, everyone, and welcome to Oriental Weaver's quarterly investor conference call. Today, we'll update you on the company's results for the third quarter of 2022 and provide high-level guidance for the full year. In 3Q, sales reached EGP 2.9 billion, which is an increase of 7% year-on-year. Local sales increased by around 28%, and export sales declined by around 3%. The local market continues to be resilient in demand, while the export marketing -- the export market is facing a slowdown, especially from the U.S. and Europe. We witnessed a margin contraction, with gross profit margin reaching 8.5% compared to 15.3% in 3Q 2021. This drop is associated to lower manufacturing volumes leading to unfavorable cost absorption, decline in utilization rates, creating this economy of scale in addition to rise in raw material costs. EBITDA recorded EGP 286 million in 3Q 2022, representing a 41% drop, with EBITDA margin reaching 9.6%. The year-on-year contraction comes on the back of lower gross profitability, coupled with higher SG&A costs. While adjusted EBITDA, which includes the export rebates, reached EGP 411 million, a decline of EGP 24 million with associated margins of around 13.8%. Net attributable profit declined by 69%, reaching EGP 79 million compared to EGP 260 million in 3Q 2021 as a trickling down effect from the gross profit level, coupled with higher net interest expense. In terms of export rebates, we managed to collect around EGP 125 million during 3Q, and we're expecting to receive a significant lump sum in Q4 alone of around EGP 400 million. In terms of pricing, early this year, we managed to increase prices in both local and export markets, with demand softening in our export in specific. We are unable to increase prices any further to recover the inflation. We are seeing the reduction in our raw material costs that should align with our current pricing when our higher-cost inventory is depleted by 1Q 2023. While on the local front, we will implement another round of price increase to account for the devaluation/inflation during fourth Q. In terms of dividends, we will maintain our strategy as a definite play. But up until now, I don't have full guidance on the exact figure to share with you guys. Management's main focus for the coming period is capturing market share, improving utilization and efficiency in addition to working capital management. To enhance sales, we are increasing promotional activities, introducing differentiated collection and reacting to competitive actions. During the past decade, OW has successfully managed through many challenges and industry recessions. The fundamentals of our business remain strong, and flooring remains an essential component of all new construction and remodeling. In terms of guidance for the Q4, we're expecting sales to increase by double digits compared to Q3 of this year and margins for the fourth quarter to be within the margins you saw in the third quarter. And in terms of a very high-level guidance for next year, we're very optimistic for next year, and we're hopeful for a recovery, especially in the second half of the year. And in general, we're expecting top line to increase by around 25% and margins to reach the normal level of 12%, and the bottom line in the range of EGP 1.2 billion. I'll hand the floor over to Mr. Hani to give you a quick review on the export markets in general.

Yes. Good afternoon, everyone. As Yasmine mentioned, we witnessed like a slowdown of commercial sales in our biggest -- 2 biggest like export markets, which is the U.S. and Europe. Of course, like the world, this is mainly a consequence of the war that started in Q1 2022 between Russia and Ukraine and especially affecting Europe, and then eventually affecting the U.S. as well. We -- this has coincided with in the U.S., with a lot of retailers having a lot of stocks that remain from 2021, the inability, of course, to give more orders in the second half of 2022 without first selling what they have from the current stores. The slowdown in the U.S. mainly happened due to the reduction or the decrease in the purchasing power in the U.S. from almost all segments of buyers. And the second thing is less sales that was witnessed from the e-commerce customers in the U.S. In 2021 and 2020, as travel was much less, so the people who stayed mostly home used to change a lot of their home decoration through like buying online. Once traveling restrictions have started to be less, more and more people have started to secure and allocate more budget for traveling, and this has definitely affected the performance of the e-commerce, which again they ended Q2 2022 with having a lot of stocks. In Europe, of course, the prices and the inflation that happened due to the increasing prices of energy, especially in the biggest market like U.K., like Germany, like Poland, this definitely affected the flow of buying -- or the buying behavior of most customers in these markets and definitely also added to the problem of overstocking by the retailers with -- regardless of the type of the retailer in these markets. For other markets -- I mean, this is like the most negative signs we had witnessed in the last 6 months, and I think it's starting to remain also with this slowdown until maybe the end of Q1 in 2023. However, we had other positive signs on the other side that's balancing the situation a little bit for our commercial sales. For example, we remain strong in Saudi Arabia. We had a very good edge in the last 3 years in Saudi Arabia due to the boycott between Saudi Arabia and Turkey. However, we successfully managed to build a strong brand and a strong market share in Saudi Arabia that proved to be quite resilient even when the Turkish products started to go back again to Saudi Arabia. So Turkey started to supply its goods in Saudi Arabia starting from August. However, until now, until the end of 2022, we still have even bigger sales in Saudi Arabia more than 2021, which was already the highest year ever for us in Saudi Arabia. Other markets also witnessed a bit of positive signs like -- which was actually translated into orders coming from these markets. Like in Brazil, for example, we have a very good turnover in Brazil. We almost tripled our sales in Brazil in the last 2 years. And we have also very good performance happening this year in India. India this year is going to be the highest ever for our export sales in India in the last 20 years. Also, we are witnessing good -- or almost the same flow of orders coming from Japan. Other markets that were affected by the COVID in the last 2 years and had almost shut down the business have started to come back to order this year. And definitely, the sales in such markets are bigger than in the last 3 years. And specifically, I'm talking here about a market like Indonesia, which is quite a big market. And most of our rugs are in the mosque carpet section. We are also seeing a lot of opportunities in Africa in markets like South Africa. Like in Libya as well, there's a lot of construction and a lot of new projects taking place in Libya with the partial stability that's happening in the market there right now. All these positive signs from these markets is also combined with other opportunities that arise from the U.S. and Europe as well. So not everything is negative. For example, in the U.S., we have -- we were able to add new clients in 2022 as well. Still not big clients, but we believe that in the next 2, 3 years, these clients will represent a very good opportunity with bigger volumes as well. Also in Europe, we managed to add at least between 10 to 12 new clients in Europe until the end of Q3 2022 in different segments and in different markets. We added new clients in Italy. We added new clients in Germany. We added new clients in Greece, in France, in Spain and in the U.K. as well. Regarding pricing, we -- I think we still -- the last devaluation that happened to the Egyptian pound, we didn't decrease our prices much. However, of course, after the devaluation, we will have to give a bit of price reduction to our customers, which, in turn, will definitely help us in Q1 to generate more volume and more turnover using these prices. Another reason for giving like lower prices is what is happening in the competition, especially in Turkey. Turkey is going through a very difficult time, whether with the rug producers or the economy in general. And several factories have closed down or are now partially producing. You can say that a lot of Turkish producers are now on survival mode. They are trying to do whatever it takes so they can continue production and continue having business without losing a lot of market share. We believe this is not going to continue for long because it's not easy to maintain like such low prices in Turkey while, at the same time, the prices of electricity and gas is rising as well. So in a brief, yes, Q3 was not a very good quarter in terms of sales due to the general slowdown. And also, we have to remember that we are comparing Q3 2022 to Q3 2021, which was actually probably the highest third quarter ever in the history of the company. I believe that with the prices that we are trying now to maintain, our market share with the new clients we are gaining and with the opportunities that we see in markets like India, Brazil and Japan, we will be able to lift our turnover. Also in quarter 4, we -- I believe that it will be better than quarter 3 this year for the simple reason that we had a lot of promotions, especially in Europe and in the U.S., going to supermarkets and hypermarkets mainly. And these are going to take place to be shipped between November, December and the beginning of the year. Thank you.

Thank you, Mr. Hani. I guess that's it from the management. We can open the floor for questions.

[Operator Instructions] The first question in the chat is from [ Ahmad Syed ]. He's asking on the provisions that you took in 9M. Most of them were booked in Q3. Are they related to the quarter?

Yes. This provision was taken especially for one of our companies, MAC, the tufted segment. We're doing like a compensation program for elder employees as pension plans so that early -- sorry, early retirement plan. So that's a compensation or a provision regarding that aspect.

And it will affect just one part.

Yes, it's a onetime cost, and it will not be reflected going forward.

[Operator Instructions] We'll take the next question from Ingy Diwany.

I'd like to ask about the current contribution of IKEA to total export volumes. And what's the plan when it comes to shipment to IKEA? This is my first question. My second question, what level of discounts are you expecting to implement for the export sales? And that's it.

Well, actually, IKEA is going also through a period of slowdown as like -- just as much as other retailers in the world, especially in Europe. And they actually closed a lot of shops after the Ukraine war, especially in Russia, of course, and also a bit in other markets like in the U.K. So I believe if you compare their contribution to our turnover between -- if you combine Q1 and Q2, it was around maybe 19%. I believe now it went down to 17%.

And going forward, do you expect further decline?

Yes. Next year, they are not very optimistic in terms of like opening new shops. Every year, they open new shops. But I think they will slow down in the process of opening new shops. However, I'm not expecting they will close any more shops next year so I believe that the percentage will remain the same throughout 2023.

Can I just clarify one thing? For the percentage that Mr. Hani just mentioned, that's for the woven segment.

Yes. I'm talking about the woven segment. Yes, the biggest.

Yes, it is around 80%. But if you can -- if you want to look at it as total exports, it will be in the range of 14%. IKEA would now be in the range of 14%.

So this was the main reason for the decline of exports to Europe? So the 90% drop was mainly because of IKEA?

Yes, true.

Yes. IKEA is our biggest client normally, and most of their shops are located in Europe and in the biggest markets like in Poland, in the U.K. And these markets are the ones that are mostly affected by the war. So besides the ones they already closed due to political reasons, like in Russia, they have also witnessed light less traffic, I believe, in the last 3, 4 months, and this caused this decline in their turnover.

Okay. And the discounts that you are planning?

I think the discounts will be in the range of around 5%.

The next question is from Saudi Egyptian Industrial Investment.

This is Bassem Hesham. My question is related to the separate company financials. I would like to know the source of the financial investment -- the income from the financial investments coming from the Oriental Weavers International company of an amount of EGP 797 million in the separate financials.

Yes, one second. Give me one second.

That is dividends from related parties from international and EFCO and MAC.

Dividends from what, sorry?

From related parts of company, subsidiaries.

Intercompany's dividends.

Intercompany dividends. Did you get that?

So this is eliminated from the consolidated.

Okay. Second question, the amount of the sale of the China facility, when will it be recorded in the financials?

In 4Q. You should expect...

In the 4Q?

Yes. You should expect around $10 million.

Okay. And what is your outlook for the oil-related raw materials costs in the upcoming 2 years given the OpEx situation?

Okay. So what I have is guidance for next year so far. What we're seeing on the polypropylene is that global demand in January is slowing down and it's impacting the price. In our budget, we're expecting polypropylene to range around average $1,150 per ton for next year. So far, what -- our last purchase was around $1,100. So it's already declining, and we're expecting that to continue for 2023.

So it's your forecast, expanding in margins next year?

Yes.

We have another question in the chat from [ Ahmad Syed ]. The dividend policy under these shrinking margins, is it expected to change this fiscal year? And what are the major steps that you'll be taking to improve the margins next quarter and next year?

Okay. So in terms of the shrinking margins, so far, we will maintain to be -- to give out dividends. But as I mentioned, I don't have full clearance on the amount to share with you at the moment. And also Q1 -- when we see Q1 results, it will also play a role in the decision-making. So management has decided to wait on deciding the exact policy of the dividend payout. In terms of major steps we will take to improve margins again, well, partially one of the things that could impact margins is the raw material already declining that will automatically play an impact on our margins. And also, we're working on efficiency and in reengineering our operations and watching all our costs to eliminate the cost factor and decrease our costs in general to improve our margins going forward. And Radwa wanted to share something.

Yes. There are also positive news relating to next year, as Hani mentioned. For example, freight prices are going down aggressively, which puts a pressure on this -- on 2022 margins. As Yasmine mentioned, polypropylene prices went down. Whenever polypropylene prices are going down, our margin usually improves. Also this year, we had an unusual high stock of polypropylene that we had to buy to account for polypropylene prices increases. At that time, we were worried that polypropylene prices were going up aggressively. And we also were worried because of the supply chain disruption. So all this affected this year's margin. Also, as you know, and as Yasmine mentioned several times, we onboarded [ Mckenzie ], which is helping us in increasing our utilization rate. So this would impact to -- have a positive impact on the fixed cost. Also, as we mentioned a while ago, we're talking about early retirement plans throughout the company to -- which would reduce the salary cost. So that's why the figures shared by Yasmine showed an improvement in gross margin, which are also conservative figures.

[Operator Instructions] We have no more questions at this stage. Yasmine, would you like to conclude the call?

No. Thank you, everyone, for joining the call, and have a nice day.

Thank you, everyone, for joining. This concludes today's call.

Thank you. Bye.