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

Hello, everyone. This is Nada AbouZeid from Beltone Holdings. I'd like to welcome you all to Oriental Weavers Third Quarter Results Conference Call. I'm pleased to have on the line Mr. Hanee Afia, Group CFO; Mr. Hani Amin, Export Director; Mr. Shehta Farouk, Group Financial Controller; Mrs. Radwa Kamel, Group Treasurer; and Mrs. Yasmine ElGohary, IR Manager. Now I'd like to hand over the call to Mr. Hanee Afia, who will start with a brief update, and then we will open the floor for questions. Please go ahead.

Right. So good evening, everyone. Happy to be with you in the call for the first time, and I'm a new joiner. So I'm happy I joined, happy I came along with good results. So let's start. Quarter 3 was actually a good quarter. We've scored a net revenue of EGP 4.5 billion. That is around 50% ahead of last year, ahead of quarter 3 2022. So this is basically driven by a multiple of factors. We had a volume growth all in all in local and in export business. We had price increases. And of course, we have a favorable impact from the EGP to USD foreign exchange. So that has boosted our top line and hence, the remaining of our profitability indicators have scored very much favorably. So if we start, for example, with our gross profit. Our gross profit for the quarter scored around 14.9%, which is significantly better than last year, which scored around 8.5%. Again, this is because of scale. And also it is because of other factors such as the favorable pricing that I was just mentioning, favorable raw materials. So we had a drop in the polypropylene prices this year versus last year. So that all helped in having this big impact in our GP margin. On the net profit level, we have recorded a net profit of around EGP 596 million. That is for the quarter. Just for you to note, this is almost the year-to-date figure for last year. So just in this quarter, quarter 3 2023, is almost equivalent to the whole year-to-date figure in 2022. That has translated into a net profit margin of around 10% versus 6% last year. We're quite benefiting from this [ cake ]. We're benefiting from the way we are managing our sales, look at the diversification and the business is really very much proven in this year and in this quarter in particular, diversification between having a very strong presence in the local market. We are by far the market leader the way we manage the local market through our diversified portfolio, our different price points that we are able to manage very nicely, along, of course, with being a top exporter. So this combination really provides a very, very nice level of diversification. And my colleague, Hani Amin, will tell you more about the export business, which constitutes around more than 60% of our turnover. If we have a little -- a quick look on the year-to-date as well. So not only on the quarter 3, but year-to-date, meaning the first 9 months. So our -- as I mentioned before, the quarter 3 has scored 50% growth over last year's quarter 3. On a year-to-date basis, we're around 36% ahead of last year. GP for this quarter is 14.9%. And on a year-to-date basis, it's 14.2%. So actually quarter 3 is very much a booster to our GP for this year. If I talk about net profit, net profit this quarter is sevenfold of last year's quarter 3 as well. And we are -- on a year-to-date basis, we are 146% in terms of net profit growth versus 2022. So having mentioned the year-to-date, we have a number of factors. In addition to the margins, we have export rebates. And we also had a slight favorable impact that came in quarter 1, from the sale of our assets. On a year-to-date basis, we scored net profit of around EGP 1.3 billion. So this is basically the main parameters for our quarter and a very, very quick also review for the year-to-date. And I think I'll leave the floor to Hani for exports.

Yes. Good afternoon, everyone. Thank you for joining the call. So briefly, we're going to discuss like what we did as exports in quarter 3. There has been like a lot of promising indicators that emerged for the first time this year in quarter 3, especially that we have seen a couple of markets, including major markets exhibiting improved performance. This is mainly coming from a big interest from different retailers to replenish their levels of inventory especially that after like a couple of research and meetings with these retailers, we have -- know that they started to [ leave ] with their stocks in 2023. So they will be ready by the beginning of next year to start accepting new inventory, which means definitely new orders coming during Q3 and Q4 2023. Second thing, we have been seeing our resilience of several new markets and customers with a solid business flow, including old customers and new customers. We have also been witnessing throughout the year a trend which still continues with us, which is basically better freight rates into different global destinations. And finally, also, we have seen a very nice indicator in the last 3 months, which has been a very good flow of customers, major ones and also new ones visiting us in Egypt and preparing programs for the new year. If we talk specifically about major geographic regions, if we start with Americas. Of course, the U.S. is a spotlight because it's the biggest market for carpets and also for Oriental Weavers. The impact of the high inflation that hit the U.S. economy has started to cool down. And this was reflected positively on the traffic trend we have seen in the shops and also for the e-commerce business. It seems also that, as I just mentioned, that different retailers have been liquidating their stock during 2023. And this has given a big opportunity for them to start discussion and the negotiation for new programs and promotions. And already, we have been seeing a lot of promotions being discussed in the pipeline going to major retailers in the U.S. like Walmart, Costco, Home Depot and others. So there are like positive signs in the U.S. economy and the corporate market generally in Q3. I think this will continue in Q4. Definitely, with export cycle, it will probably be reflected positively on Q1 in 2024. If we shift -- and still in the Americas, if we go to Latin America, Brazil being the biggest market in Latin America is still witnessing a lot of opportunities for us, especially that Egypt, as I have mentioned in the last call, is a member of the MERCOSUR agreement, which actually give us an edge over the competition because the customs on Egyptian rugs is decreasing every year by 10%. So this is really giving us a privilege against the Turkish competition and also the Belgian competition. We have seen a good flow of orders going -- coming in Q3 2023, which definitely, I think the number of orders we received in Q3 has been almost the total of Q1 and Q2 in 2023. Again, this is a very positive indication that we're going to start the year with a good flow of shipping and orders for Brazil. We are expecting also Mexico and Panama to pick up through our main partners in these 2 markets and also through new clients we added in 2023. Speaking about Europe, being the second largest geographic market for us. Still, there is a lot of like kind of uncertainty in Europe due to the conditions, the economic conditions that's still happening, their view to the main reasons we all know about the war and inflation. However, we have also seen some positive signs happening in Q3, including the still growing markets for us compared to 2022. Just to mention some of them, we are talking about markets like France, Sweden, Romania, Portugal, really have been like we have been achieving double-digit growth for these markets compared to 2022. Also, we have seen Germany being the biggest market in Europe for rugs has maintained its position. Although there has been a lot of difficulties and challenges from competition in Germany. However, through securing new promotions with major discounters like ALDI and Lidl, we have been able to shift the first half of 2023 to a more positive outlook in Q3 and Q4, already having some promotions going to these discounters that will be shipped in Q4 and Q1 2024. Going to the GCC region, again, another geographic area with a big wave of sales for Oriental Weavers. And talking specifically about the Saudi market being the largest market and the second largest market in the world for rugs. We have enjoyed a very nice privilege in the last 3 years, being almost dominating the market due to the boycott between Saudi and Turkey. However, we have witnessed some slowdown of sales after Turkey has started to come back to the market as the political relations started to improve between Saudi and Turkey. This has created a kind of saturation in the market, which is kind of transitional period because customers started to buy again from Turkey and also from Oriental Weavers, and with a slowdown that inflation a kind of overstocking started to happen. However, Oriental Weavers was able to react kind of by building some more relationships with the major wholesalers and the importers in Saudi Arabia through building loyalty programs. And through also introducing new, unique developments that helped it to move the market and give -- and create interest among these wholesalers to give more business, especially now we are planning for the Ramadan season in Saudi, which would be in March. Already, we have seen a very nice flow of orders during October and November from Saudi Arabia that probably will be in production starting December all the way until February. So this is, again, a very positive sign for the Saudi market. I think also we can talk about the other GCC, of course, like the size is less than Saudi, but also we have created and added new accounts in countries like Emirates, Oman and Kuwait. And also, we have started working in Lebanon after a couple of years of stagnation by adding 6 customers in Lebanon. Finally, also, we have been trying to focus on Jordan and through building a very long-term relationship with one of the major distributors, and this also has reflected on our shipping numbers in Q3 and Q4, also will be affected in 2024. Going to Africa as the last main geographic region that need to be discussed, Africa has a lot of potential for us. We have been experiencing a lot of growth rates in different African markets. This definitely includes on top of them, Libya, Tanzania and South Africa leading our growth. Also, we have started to gain market share again in Kenya. We had a kind of transitional period in Kenya because we were reevaluating our commercial relationships with some of the traders. And now we are working with 4 new clients in Kenya and gaining again our market share. And again, in East Africa, we have a good advantage because of the commerce agreement where we can export our rugs without paying any custom duties. We still have target markets in Africa that we think we can achieve more business in 2024, including markets like Zimbabwe, Uganda, Rwanda, Zambia and Mauritius. As a conclusion, it seems that some major markets are recovering from the stagnation that prevailed since 2022, like the U.S. and Germany specifically. A lot of actions and discussions have been taking place over the past few months, with a lot of focus on working closely with our both retail and wholesale clients. Such actions created several new opportunities that will be reflected on the sales performance in the last quarter of this year and definitely on the first quarter of the coming year. Besides the conservative recovery in U.S.A. and Europe, there are also plans to gain more market share in Saudi Arabia being one of the top 3 markets, and this includes giving more incentives for customers, reducing lead time and also introducing new products on a constant trend. The continuous drive to add new clients and markets, still a major part of our business plan for the coming year. And definitely also adding retailers to work directly with different retailers, especially in developed markets like the U.S. and Europe is one of our main goals for the coming year. Just to summarize, generally, the overlook for 2024 is more optimistic than 2023. And the plans are directed for higher sales, both in terms of value and volumes. Thank you.

Thank you, Hani. Perfect. Nada, I guess, we're open -- we've finished our management presentation, so we're open to Q&A.

[Operator Instructions] I have a question from my side. Given that more than 60% of your [ constants ] coming from imports and within the import restriction, how did this affect your supply? And were you considering going more to EPP than SABIC? And does this affect your cash conversion cycle, given that EPP might give you a more [ rapid ] credit facilities?

Actually in regards to the credit facility, SABIC is giving us better payment terms. In regards to the restrictions, I'm afraid I don't understand. If you're talking about securing the U.S. currency, we don't rely on banks. We do have access to foreign currency because we are a net exporter. So we have actually a surplus in foreign currency.

We [ have credit on ] SABIC more than EPP.

Okay. And just have another question concerning the ban on Turkish carpets. If -- I know that within 2026, there will no longer be ban on the Turkish. Would -- do you expect this will continue after 2023, there will be another ban? Or this will be as a go...

You mean on the local market, correct?

Yes, exactly.

We assume it will continue. And given the government direction to limit exports, they will definitely continue on limiting in the [indiscernible] -- it's a 5-year antidumping -- 5 years, and then they will renew it.

Okay. Understood. We have a question. Thanks for the presentation. I have a question regarding full year '23 guidance. Where do you see the year closing when it comes to growth and margins?

Yes. We're currently working on that. The revenue growth is associated to a number of assumptions, one of which is the exchange rate. So it will be pretty much dependent on the exchange rate, we're assuming and as well as the revenue -- sorry, the volume growth. It's hard to tell at this point, but we are expecting, of course, to have -- depending on the level of the expected devaluation that we're going to have versus the U.S. dollar. In terms of margin, we are definitely planning for improvement in our current margins. So if we're talking that this year, we're working at a 14% gross profit margin. We're working on improving that. We're going to be betting on scale and efficiencies. And it's going to be translated in the flow-through down to the net profit. In terms of revenue growth, as I said, it's going to be pretty much dependent on the exchange rate that we're going to define being a net exporter, as Radwa said. And this is a country -- this is currently -- the discussions are still on the -- is underway.

Okay. What is ORWE's market share in Saudi Arabia?

Our market share in ranges between 14% to 15%.

[Operator Instructions] Another question coming in. Do you expect any rebate in 4Q? If yes, how much? And you said that starting Q4, you will offer a discount to the German market. Will that affect your gross profit margin?

Okay. So we're not expecting further rebates in the fourth quarter. We had rebates of around a bit more than EGP 300 million in the third quarter. We're not expecting any more -- so in terms of closure of this year, because Yasmine just told me that the question -- the previous question was also referring to the closure of 2023. So we are expecting to maintain our margins. We are expecting to maintain a gross profit margin of 14% to 15% and still betting on having a double-digit net profit margin as well, which is 10% to 11% net profit margin. Will the discounts offered to the German market affect our gross profit margin? The amount of discounts that will be given to these markets are not going to be material at the group level. So we are not expecting to have an impact on the gross profit margin. And we always play our game of revenue management and margin management. So that shouldn't have any effect on our gross profit.

Also, I just want to add something regarding what we are offering for the German market for promotion. It's not only about discounts, but also about reengineering of the products. So actually, we are just offering entry-level products for the promotions with the normal price level that are being quoted by Oriental Weavers. When -- sometimes when we are not able to offer like material discounts like in pricing, we do some kind of reengineering of the product like some kind of technical procedure, so we can present the same product but with lower costs.

Okay. I just wanted to add a couple of comments to my colleagues. In terms of margin, Q4 margins would be better than the margins we saw starting from 2023. So you can see the progression in margin will continue in Q4. And as they mentioned, the small discounts that we give does not impact -- does not have an impact, given that our financials is in EGP. So you will see an improvement in volumes. In terms of rebates, we did receive the EGP 322 million in Q3, government had announced that they would have an initiative in November, but unfortunately, no news was said about this November initiative. So we are not expecting to receive any further rebates at the end of the year, any further rebates will be seen in 2024. And in general, as a general concept, you can take 7% of our export revenues as rebates for the year. On the polypropylene question, okay. So polypropylene in general, we have a 3-month inventory strategy that we keep intact. Our average now is currently $1,070 per ton. We expect this price range to continue till year-end, and this will impact our Q1 margins and figures given the inventory level. Up till now, it's difficult to forecast further than that. But previously, the market used to associate polypropylene with oil prices. We have seen that that's not happening so far, given that the polypropylene that we source is a specific type of polypropylene for the carpet market. So -- and given that the demand is not as it used to be. So we're seeing a slowdown in the polypropylene market in general. That's for the time being. So that's a comment on the polypropylene prices. Do you want to add something?

Okay. We have a question from [ Omnea ]. Thanks for the call and congrats on the very positive results. Thank you. I know it's a bit early to discuss, but I was wondering if we have guidance for the next dividend per share.

Look, the dividends per share, we're not expecting to be far from our trend in the past few years. So it is going to be in line with our trend in our non kind of dividend payout. That's the guidance I can give at this point.

A follow-up question on this and having already passed for Q'23. Can we have a guidance or a full year on both top and bottom line?

Yes, sure, of course. In terms of top line, we're assuming around 35% increase in revenues. And as Hani mentioned, that the gross profit margin that would be in the range of 14% to 15%. We're expecting bottom line after minority to be in the range of EGP 1.7 billion. That's given the [ 300 ] rebates and for no further rebates for the rest of the year.

[Operator Instructions] Another question. Dividend will be in line as dividend per share or payout ratio?

No, payout ratio, not per share, payout ratio.

Another question. So 1Q margin will have a slight hit from the higher polypropylene stock prices. And will the drop in polypropylene be passed to customers? How will that affect your margins?

Q1 margins will have slight hit from -- as I mentioned, the polypropylene prices in Q1 will be the prices that you see in Q4 of this year. So it's still low base. It's still in the range of $1,070. So no, there wouldn't be a higher stock price of polypropylene. And will the drop in PP be back -- passed to consumers? No, it wouldn't, given that we are already a very competitive price -- pricing [ unto effective ] margins. And in all cases, with the coming devaluation, this will benefit our margins. So if anything, now we will expect to see better margins next year starting from Q1.

Nada, I guess there's no further questions. You can go ahead and go conclude the call.

I would like to thank the management and will hand over for the concluding remarks.

Right. So thank you all for joining the call. We had a good quarter. We have had a good year-to-date results. We're hoping, and we're quite confident that we have very good closure for the year. And we're hoping that next year is going to be even better. We have the privilege of being good and strong exporters, this is our bet. And also very happy with the way we're diversifying our business. That should give us a lot of certainty to whatever we're doing. So again, thank you all for joining the call, and we're looking forward to meet you next quarter.

And I would like to thank the management team for their time and valuable input. We also want to thank you all for participating and attending the call. Have a great day, everyone. Thank you, and goodbye.