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

Welcome, everyone, to the Oriental Weavers First Quarter '23 Results Conference Call hosted by CI Capital. My name is Amr Amin, Head of Corporate Access at CI Capital. And today, I have the distinct pleasure of introducing Group Treasurer, Radwa Kamel; and IR Manager, Yasmine ElGohary. [Operator Instructions] I now give the floor to Oriental Weavers' management team.

Hello, everyone. Thank you, Amr. I'll go ahead and start. So welcome to Oriental Weavers' quarterly investor call. Today, we'll update you on the company's results for the first quarter of 2023 and provide high-level guidance for the year ahead. Q1 sales reached EGP 4.1 billion, which is an increase of around 27% year-over-year, supported by local sales increase of around 39%, while export sales increased by around 21%. The export sales were supported by the local currency devaluation. We witnessed margin improvement with gross profit margin reaching 13.6% compared to 10.9% in 1Q last year. This increase was as a result of COGS rising at a slower pace in the group's top line figure as a result of lower priced raw material in dollar terms and increase in selling prices, as COGS to sales reached 86% in 1Q '23 compared to 89% in 1Q of last year. EBITDA recorded EGP 619 million in Q1 '23, representing an increase of 67%, with EBITDA margin reaching 14.9%. The year-on-year improvement comes on the back of higher gross profitability trickling down impact. OW's attributable net profit reached EGP 411 million in 1Q 2023, an increase of 74% year-over-year. This increase is attributed to gross -- to higher gross profitability and the China divestment. Net profit margin stood at 9.7% in 1Q compared to an 8% in 1Q 2022. OW recorded EGP 277 million in this quarter as a result of OW China facility divestment. Due to the operational difficulties that we witnessed during the pandemic, management made the decision to sell the asset after it was fully impaired on the financials. To give you guys an update on the export rebate program, so the recently announced initiative from the government, we have applied our [ folders ] to this initiative, and this covers exports for the second half of 2022. We expect to receive around EGP 200 million from this initiative. And we also expect the announcement of the new program from the government that will cover the coming 3 years, starting 1st of July 2023. This program we're expecting to hear from the government by the end of May. Highlighting the export markets. So after DOMOTEX, which is a renowned flooring industry platform held in Hanover, Germany of this year, the export team secured around 25 new active clients. In general, to give you a perspective, the export cycle, it takes 3 to 6 months to take impact. So what you saw in sales in Q1, this was a result of orders that we have received in the second half of last year, which was a slow year for us, so that impacted the Q1 results. What we're seeing now as flow of orders, we're seeing very good flow of orders in Q1. That makes us anticipate that the second half of the year will see better figures. In terms of Europe, Europe figures that we usually disclose is -- it's embedded in them our European client IKEA. IKEA last year had a slow year. It was one of the slowest -- lowest sales, and they closed around 18 shops worldwide after the Ukraine-Russia war. So that impacted our sales to IKEA and impacted the European figures that you see us reporting. But heading into the year, recently, IKEA announced that they are planning to invest $2.2 billion in U.S. And specific after the closure of Bed Bath & Beyond, they're expecting to take over this market share. So we're hoping for better figures from IKEA going forward. We're also getting more clients and more orders from other European markets, namely France, Germany and Sweden. In terms of U.S., which is one of our biggest markets, we're seeing very good flow from U.S. and a recovery and improvement of flow of orders from the region from big retailers like Costco and the likes. So this would all be indicated in -- are shown in the second half of the year figures. Generally, we did not apply any discounts for the export clients in specific. It could have been like a case-by-case situation, but no general discounts were applied. Also to highlight on the local market. Local market is starting to normalize heading into second quarter of this year. So what we're expecting that there's going to be a shift of dynamics instead of the local market taking over the increase in sales that we saw in the second half of last year, there would be a shift and the export market would be doing really well in the second half, and the local would be normalizing. And in general, we increased our prices in the local market early this year, and we'll continue to do so gradually throughout the year. We opened one new showroom locally, and we're expecting to open 9 more throughout 2023. Also, just to give you an overview of the market dynamics and the consumer behavior that we're witnessing. What we're seeing now is what they're calling a dumbbell-shaped behavior, where the higher-end or the premium-priced products are increasing, the middle class is shrinking and buying down, and the low class is also expanding. So there is -- the gap in the middle class in the middle is shrinking, and we're seeing, both on the top and the low shape, it's expanding. That would shape our strategy going forward. We'll be focusing both on the high end and the lower end at the same time. Also to give you a highlight on the guidance for the full year, we're expecting the top line to increase by 50-plus figure, namely triggered by price increases. Margins to range from 13% to 14%. Bottom line after minority, targeting from EGP 1.7 million to EGP 1.8 million. That includes around EGP 600 million export rebates to be accounted for during the year. Yes. So in terms -- also, just to give you a highlight on the polypropylene, we have around 2 months of inventory priced at $1,100 per ton. I think that's it from my side. I'll open the floor for questions.

Thank you to Oriental Weavers management team. The floor is now open to questions. [Operator Instructions] Okay. I see Ingy EL Diwany has her hand raised. Ingy, go ahead.

I have a question regarding the CBE initiative. Could you give us an update about it?

Well, the amount is very minimal this time. So we're talking about maybe -- I cannot recall exactly, around EGP 100 million, so not a significant amount. And then you've got to apply to the central bank and then get the approval. We already applied, so we're waiting for the approval and then we proceed and benefit from it.

So do you expect this to reflect on the breakdown of debt?

No. We [ there isn't ] that much. We're talking about substantial debt amounts. So no, I don't think so. We're talking about a total around EGP 4.96 billion, so no.

I have questions in the chat box. How are you thinking about the export subsidies and rebate going forward? Okay. So the guidance that I gave, I used the figures that we saw in the last program, in the first year of the last program, which was in the range of 7.5%. This is the number I'm using and anticipating. And I take into account the second half of 2022 sales, export sales, and the first half of 2023, as accounted with that percentage, and I anticipate the 6-month delay in collecting the second half of 2023. So the sales -- so the rebates for the second half of this year, I would be receiving it in 2024. What we're hearing so far from the government is that they want to pay us as soon -- at a quicker pace. I'm choosing to be more conservative on that front. If they end up paying as quick as they are saying, given that they're planning to make it more to be online and it should be at quicker pace, then that would be a positive. But otherwise, sticking to the conservative side of EGP 600 million. Okay. The second question, what is the raw material drove the gross profit margin expansion given polypropylene prices has not dropped? Polypropylene prices did drop in -- around 33% in dollar terms. What happened is the gross profit margin was impacted also by the price increases that happened during the quarter. Did you want to add something? Go ahead.

No.

[Operator Instructions]

Well, I have a couple of questions from my side. First, can you please quantify the price increases that you're still planning to pass on to the consumer and the local market? And...