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 Weavers Second Quarter 2023 Results Conference Call. I'm pleased to be joined today by Hani Amin, Oriental Weavers' Export Director; Shehta Farouk, Group Financial Controller; Radwa Kamel, Group Treasurer; and Yasmine ElGohary, Investor Relations Manager. We will first start the call with a brief update from the management side and then we'll open the floor for Q&A. Yasmine, please go ahead.

Thank you, Mirna. Hello, everyone and welcome to Oriental Weavers' quarterly investor conference call. Today, we'll update you on the company's results for the second quarter of 2023 and provide a high-level guidance for the year ahead after applying 6+6 budget revision. 2Q sales reached EGP 4.2 billion, which is an increase of 31% year-on-year, divided into local sales increase by 25%, backed by an increase in average selling prices locally, while export sales increased by 34%, supported by the local currency devaluation. We witnessed margin improvement for the second quarter in a row with gross profit margin reaching 14% compared to 11.7% in Q2 of 2022. This increase was a result of the COGS rising at a slower pace than the group's top line figure supported by softness in the polypropylene prices. EBITDA recorded EGP 658 million in 2Q '23, representing an increase of 62% with EBITDA margin of 15.5% compared to 12.5% in 2Q last year. The year-on-year improvement comes on the back of a higher gross profitability trickling down impact. OW's attributable net profit recorded EGP 290 million in 2Q, an increase of 37% year-over-year despite the lower export rebate collection compared to Q2 of 2022. Net profit margin stood at 7.7% compared to 6.9% in 2Q 2022. And attributable net profit, excluding the export rebates include -- increased by 108%, recording EGP 286 million in 2Q compared to EGP 137 million of last year. Just to give you a quick updates on certain topics. In regards to the local market, we opened 4 new showrooms in the first half of this year and planning to open 6 more in the second half in underpenetrated areas. Volumes will remain pressured in the second half in the local market given the macro situation. Also to give you an update on the polypropylene prices, global polypropylene prices are not expected to stage a meaningful recovery in 2023. There's a lot of supply coming into the market that is pressuring the price. We guide polypropylene price of $1,100 per ton for the full year. In regards to the export rebate program, according to the latest initiative announced by the government in the so-called the sixth initiative, we received around EGP 300 million in July and will be -- that will be recorded in 3Q results. The government is expected to announce the seventh initiative in November, where we are expected to receive the rest of our proceeds. Guidance for rebate collection remains to be EGP 600 million for the full year. In regards to the anticipated new export rebate program that will indicate the percentages used for the coming 3 fiscal years, so far, we haven't received any official figures to share with you. But what we understand so far that the government will apply the same percentages used in fiscal year '20-'21 -- 2021, which was the first year in the previous program. But adding to that, in the previous program, the government had announced a new initiative, which was an additional 2% incentive for exports that included OW trademark. Management has been striving towards achieving this and has managed to secure OW trademark on selected products in order to achieve the extra 2% initiative. Moving on to guidance for the full year, before I leave the floor to Mr. Hani. A top line figure, we are guiding it to be in the range of 35% to 40% increase. Gross profit margin remains as guided earlier, 14% to 15%, bottom line around EGP 1.8 million -- billion, sorry, EGP 1.8 billion. That includes the EGP 600 million in rebates and assumes polypropylene of $1,100 and exchange rate of $31 -- EGP 31. I'll leave the floor to Hani to give you an update on the export markets.

Good afternoon, everyone. Well, moving to exports. In spite of all the challenges we faced in 2022, we did have a lot of opportunities that also arrived and gave us more chances to grow in some export areas. This included adding new customers and new segments. Also, we are -- we had the chance to work on some promotion orders with major retailers in the U.S. and some markets in Europe, which was actually very good news. Also, additionally, to these market opportunities, we had a chance to decline our cost of raw materials and freight prices to major destinations. These have all been positive signs in spite of all the challenges we had this year. All these positive signs actually make us relatively optimistic for the second half of 2023 that we will be able to recover big part of the first half. Going more specifically into the export regions and markets. We start with the U.S. market being the largest market for us and also for rug consumption generally. The market unfortunately witnessed a slowdown in both Q1 and Q2 in 2023, basically due to higher inflation rates that decreased the purchasing power of consumers and the fact that major retailers were highly overstocked since the last quarter of 2022. We have seen the same trend of overstocking among other retailers also in Latin America, especially in countries like Chile, still and as mentioned earlier, the second half of 2023 is expected to be better than the first half. And we are now working on more promotions that either have been already confirmed or in the pipeline. And retailers are also starting now to get rid of some of the stock they used to have in the first half of the year. Some of the promotions we are working with, with major retailers, include retailers like Walmart, Costco, [indiscernible] and Home Depot and all -- these are all very big names in the retail business in the U.S. Additionally, new customers were added in the U.S. and Canada this year as well. In Latin America, there will be a very big opportunity to grow in Brazil, especially as we know, due to the MERCOSUR agreement, the custom tariffs are actually declining by 10% every year on all goods coming from Egypt. So basically, we are becoming more competitive and this is creating a lot of opportunities for us in Brazil. We already added 3 big clients in Brazil this year and second half is expected to be better with existing major clients. Moving to Europe, being also the second biggest or among the top 3 biggest export markets for us. As everyone knows, the economy has been very slow and there was very high inflation rates. However, there are several markets in Europe that we see will witness some kind of recovery, like France, Portugal, Sweden, Italy and Hungary as well. We expect that the Eastern Bloc countries will recover in the second half of 2023. Germany is witnessing some kind of severe stagnation. However, we are working on some new orders and promotions that could be reflected in dollar terms on the second -- on quarter 4 of 2023. The countries that were really affected by the Russia-Ukraine war has been basically the Scandinavian countries due to the close proximity to the borders between both countries, especially Finland. However, we have also been able to add some new clients in different segments that will probably contribute to some kind of good recovery by the end of the year as well. Finally, in Europe, it's just worth mentioning that the one that really was highly affected negatively was the U.K. market. And unfortunately, it probably will be less compared to last year. Moving to another very important export area for us, which is Arab and GCC. And here, we have to speak of the Saudi market as well being the largest market in the region and the second in the world in consumption of rugs. We enjoyed almost 2 years of nonexistence of Turkish competition in 2020 and 2021. And this helped us to build a very solid consumer base and increase our market share, which, in turn, helped us to quadruple sales in KSA, increased our presence. Eventually, as Turkish companies started to come back by the middle of 2022 after the boycott has been lifted, the market was flooded with a lot of Turkish rugs and this created severe overstocking of goods among all major importers and distributors. Unfortunately, this has created a slowdown of shipping and sales in the first half and also created some kind of unneeded price competition. Additionally, we had some kind of slowdown in the middle of 2023, almost in the range of 30 to 40 days because there has been some major changes in the Saudi custom scheme that they had to stop all imports in the Kingdom for almost 30 to 40 days. And definitely, this has affected us as well. However, OW, which is a positive sign, has reacted by creating some action plans in Saudi market, including building up some strategic relations with major traders, developing new products and creating some loyalty programs with big customers. We expect that we will have a second half which is better than the first half in Saudi Arabia. And probably, we'll try to figure by quarter 4, how we are comparing to 2022. In other GCC countries, we also added some smaller accounts in Emirates, in Oman and Kuwait. And we also started resuming our business in Lebanon, after almost 2 years of complete stagnation. We have also to mention Africa as being, now the most booming region for us this year compared to 2022. We had made several nice breakthroughs in major markets in Africa, including countries like Tanzania, Libya and South Africa and these have been leading the growth we are having in Africa this year. We also added new clients in several African markets like South Africa, Kenya, Zimbabwe, Uganda, Rwanda. Finally, we shall -- we give a little bit highlight on the Far East and Australia. We did add some accounts in Asia as well in Australia. However, there are still smaller accounts compared to the size of our turnover. Australia has been facing some slowdown in the economy. But again, we are expecting to have better business in the second half of the year. As a conclusion, we see a lot of opportunities that have been created by adding new clients, going into new segments, working on promotion programs with some major retailers and also retrieving business with some inactive clients. All the new accounts we added are still kind of smaller accounts compared to the historically big accounts we used to deal with, like IKEA and some retailers in the U.S. So we have big belief that in the future, we will be able to grow these accounts. And so they can add more contribution to our turnover. Thank you.

Thank you, Hani. Mirna, we're done and we can open the floor for questions.

[Operator Instructions] We have a question from [ Noor Mahmood ] in the chat, She is saying that analyst dashboard expense sheet is not available on the website, when would be available. Yasmine, I think you're on mute.

Yes, sorry. As for the data sheet, management decided not to share on the website. So if you can drop me an e-mail any time, I am happy to share it upon demand.

We have another question from [ Mohammed Maher ]. Could you please repeat the figure of the export subsidy that you will be receiving this year and the renewed initiatives?

Okay. So we're expecting to -- we already actually received the EGP 300 million. You will see it in 3Q figures. And we're expecting another EGP 300 million that will come in the seventh initiative, which is in November. So the total amount will be around EGP 600 million, you will see in the second half as an export rebate in our financials. And the percentages will be similar to the ones you saw in fiscal year 2021. But adding to that number is the new 2% incentive of that for the OW trademark. I cannot quantify the amount that will be received for this incentive in specific but it will add to what you saw in the fiscal year of 2021.

The next question in the chat from [indiscernible]. Could you please clarify the reason for the increase in net debt?

Actually, net debt is the same. The level was EGP 2 billion this year and it was around EGP 2 billion last year at the closing of 2022. Actually, in foreign currency, the net debt is going down. It was in the level of $120 million, as of end of 2022. Now as we speak, it's around $90 million.

And compared to Q1 2023, is the net debt up compared to Q1?

Q1 2022, I don't have the figures to quote but I can revert back to you after the call.

Okay. The next question from [indiscernible]. Could you give us more color on your pricing strategy?

For the export market, we give discounts at the very beginning of the year before Hannover exhibition to account for the devaluation and the reduction in raw material prices. And then we're giving low prices on a case-by-case basis. But you can see that the price point is a little bit higher because we are trying to focus on higher margins products. And I don't remember they're -- everybody is familiar with IKEA [indiscernible], IKEA constitutes around 13% of our export sales. And we have with them a formula embedded in it the exchange rate and the polypropylene, so in other polypropylene prices, the prices are adjusted to reflect the increase. Where do export debates go and are we -- I'm assuming you mean on the financials, it's, we usually see it in other revenues. It's on cash basis. So when we receive the cash, you will see it in our financials.

[Operator Instructions] We don't have any other questions in the chat. So I think we can conclude the call. Thank you, everyone.

Mirna, just a quick thing. Anyone needs the excel sheet, the expense sheet requested, please drop me an e-mail anytime and I will share it with you. Sorry, go ahead, Mirna.

No, no worries. Thank you. Thank you, everyone, for joining. And thank you, Oriental Weavers' management for your time and this concludes today's call.