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

Good afternoon, everyone. Thank you so much for joining us today for Oriental Weavers 4Q 2023 Results Call. We are honored today to have from Oriental Weavers management team, Mr. Hanee Afia, Group CFO; Mr. Hani Amin, Export Director; Mrs. Radwa Kamel, Group Treasurer; and Yasmine ElGohary, Investor Relations Manager. We will start the call with a brief presentation from the management team and then it will be followed by a Q&A session. [Operator Instructions] Mr. Hanee, the floor is all yours now.

Good afternoon, everyone. Welcome to our session, our first session in 2024. So I want to take the opportunity to wish you all, your families and your businesses, all the best in 2024. So to give you a quick brief on the fourth quarter. So 2023 was a big year for us. We were happy to finally succeed in achieving the results that were completely in line with our guidance and our expectations. We've been focusing throughout the year on production efficiencies, on cash management, and definitely sales and margin management. Few other contributors, let's say, external elements that were quite favorable to us, given that we are an export-driven company, the ForEx was favorable, the raw material movement were favorable. So in general, I think we've had a very good year. So, to start bit by bit in talking about our results in the fourth quarter, our sales in quarter 4 were, I mean, it presented unprecedented numbers. We have achieved EGP 4.8 billion, which is in absolute terms the highest ever. And just to be quick, our figures in the fourth quarter of 2023, on absolute terms, are all the way starting from sales all the way to the net profit, in absolute, they were all-time records. So I'll be focusing on margins rather than the absolute figures. We have achieved 27% on average increase this quarter versus the fourth quarter in 2022. Basically the same revenue growth, be it in the Egyptian market or in our international market. Egyptian market grew by 26% and our international business grew by 28% with an average of 27%. As I've mentioned before, the impact of the local currency devaluation was present as well as the average price points were favorable given that we have managed in some markets to increase our prices, and of course, also the product mix was also favorable. On the profit side, the gross margins have improved, so we have achieved a gross profit margin of 15.2%. This is a huge, huge improvement versus prior year, which is around 7%. So we've gone back to our normal standards and we have also beaten our average by a bit in this quarter. This is also attributed to the factors that I've just mentioned. Selling prices were favorable, raw materials were favorable, as well as the ForEx impact. In terms of EBITDA and net profit, we've recorded an EBITDA of EGP 758 million in the fourth quarter. Again, that's 85% increase year on year. So we've almost doubled our EBITDA year on year, with a profit margin of 15.9% coming from 10.9% in 2022. Net profit, we have recorded EGP 444 million, and that is an increase of 40% versus 2022. Our net profit margin marked at 10.6% versus 9.6% in quarter 4, 2022. Noting that this is including the export subsidy. Now, we have achieved in 2023 a 10.6% net profit margin. We have not collected subsidy in this quarter. And if you compare it to the last quarter in 2022, the 9.6% was including a substantial amount in subsidies. So to us, the operating results in terms of profitability is quite significant. And the change year on year is really enormous. We expect that we maintain this strong momentum in our revenue growth, in our margin improvement in 2024. We are witnessing and we are keeping an eye on our markets, be it the local market or the international markets. If we take for example, the international market in the U.S. or in Europe, we see that there will be opportunities in the coming year or 2, they have more or less the same kind of situation in the U.S. and Europe. There is a deficit in housing, which creates sort of a pipeline that we're expecting that we're going to benefit from in the coming year as well as there is a big aging housing stock in these countries. So we believe once the economy starts picking up, this pipeline is going to be released and we'll have more and more opportunities to grow in these markets. And needless to say, the U.S. and Europe are main markets to us. Same thing for the Egyptian market. Despite the economic squeeze, however, the population growth, relying on new [ weds ] and so on, will continually give us the chance to grow. And being a market leader in the Egyptian market and a very, very clear market leader with our extended portfolio that addresses the high tiers, the low tiers, all sorts of product offerings that we could be giving to our market, I think we have an opportunity to grow our share and to grow exponentially our revenues. So 2024 is going to be a continuation of that momentum. We'll continue focusing on our cost, optimization of our cost...

Mr. Hanee, we lost you. We can't hear you right now. Can you double check your mute button please or your connection?

Hello?

Yes, we can hear you now.

I'm sorry, we've been cut off. So I was talking about 2024. We have our assumptions for the coming year. We are assuming that we will maintain our revenue growth. We're expecting to have a growth of 20% to 25%. We're expecting to maintain our margins, starting with the GP margin, all the way to the net profit margin. So our efforts is piling up. Momentum is there and we believe that 2024 is a very important year for us to continue this momentum to be fully ready. Once the economy starts picking up, I think we're going to be ahead of the game.

Perfect. Thank you, Mr. Hanee. I guess we're open for Q&A if anyone wants to share.

[Operator Instructions] Until we get some questions from our participants, I have a couple of questions on my own. There was a substantial drop in payable days during the fourth quarter in 2023. Is there a specific driver for that drop? And do we expect to witness a continuation in that situation?

All right, so, as you know, we used to source 2 years ago, or maybe till the end of 2021, we used to source all of our polypropylene from our sister company, EPP. This is no longer the case. We're now sourcing from different suppliers, from around 5 different suppliers, mainly from Saudi Arabia. So we're getting longer payment terms. And currently the whole management is working also on enhancing the supply payment terms with all other suppliers. So all this reflected positively on our payment terms. And they improved by around 20%.

Okay. We have a question from Omnia Saber. She wants to speak directly to management. Omnia, the floor is yours.

Hello, can you hear me?

Yes.

This is Omnia Saber speaking on behalf of the Saudi Egyptian Industrial Investments. Hanee, firstly, I would like to take this opportunity to congratulate you all on the results. This was a good quarter indeed, Hanee. And we look forward to even better, [ insha Allah ], this year. I have 2 questions, if I may. The first is regarding the export subsidies, because according to an earlier guidance, we knew that, or we were supposed to book like 600, I think, in 2023. But we managed to collect, we think, half of this amount so far. Can we understand the reason behind this?

Okay, let me just give you a background. Basically, the government announces an initiative based on a program, so it's purely a governmental decision. So given that macro picture and the political situation, no initiatives were announced from the government for the second half of last year. So we only collected on one initiative, which was in Q2. But heading into 2024, currently there is an initiative with the government, and we did submit our papers for that initiative that would include exports till June 30 of 2023. And we're expecting rebates to come in at Q2 of this year.

Q2 of this year, we are expected to do what? Sorry, Radwa, I couldn't hear you.

Receive rebates.

To receive the rebates. May we know the level of the backlog we are talking about?

We don't have clarity on that right now, but as soon as we get an amount, we will definitely share with the market.

All right, my second question is regarding, we know that we have a stake in EPP, and according to a note in the disclosure, based on the Board of the ORWE International level, that we are going to sell off our stake sometime soon. Is it correct?

No, that's not correct. We will not be selling, and so far, we will not be selling EPP stake. And just to highlight, it's only a 2% stake, so it's not significant. And it's owned through one of the subsidiaries, which is Oriental Weavers International. No decision has been made so far from the Board.

But it was already mentioned as a footnote that the Board has already agreed to proceed in the sale.

No, that's not true.

Okay.

Our position as we speak now is not to sell our stake.

All right. Maybe on the Oriental Weavers international level.

Oriental Weavers international level, the rewards are not disclosed. So I don't believe...

There was a decision in last May, as per the footnote. I remember. Let me open it, if I may read it well, it's in Arabic [Foreign Language]

So we have clearance to sell, but there are no intentions at this point to sell.

All right.

And as I mentioned, it's a 2% stake, so it's very minimal.

Yes, we can see it's booked already at the fair value so it's like EGP 612 million, right?

Yes.

We have another question typed in the Q&A tab from [ Kelly Dustri ]. How do you see the price trend of major raw materials in 2024? And why do you think the GPM will be maintained? Why not grow?

Okay, as you just mentioned, we see the trend of the raw materials going up starting the beginning of this year. So our plan is to maintain the margins because this is going to be offset hopefully by our production efficiencies and hopefully with the scale that is going to be generated through our top line. So we have 2 opposite forces. The force of the higher commodity prices that is going to partly be offset by the absorption capabilities by growing our top line as well as the cost optimization in our manufacturing overheads or our manufacturing costs.

Okay, great. We have another question regarding the EPP deal. But I guess that's cleared out now. I just have a follow-up question regarding the whole situation. If the government decided to sell indeed their stake in EPP, will Oriental weavers be affected in any way?

Wouldn't have any impact on us. EPP is just an investment for us. We're sourcing all our polypropylene from abroad, so it wouldn't have any impact. It's just an investment.

Okay, great. We have another question from [ Noor Al Tawilok ]. Do you have any plans to increase capacity? If not, are you planning on maintaining or improving your utilization rates?

The first step is obviously making sure that we're reaching the maximum utilization. We're working on increasing the efficiencies of our current capacities. So there is a possibility that we would grow our capacity. But it's not going to be after, #1, increasing our efficiency levels. 2, reaching the maximum utilization in our current capacity. And there are lots of details and lots of homework that is being undergone now in management to make sure that we're optimizing the usage of our current capacities.

Understood. We have another question, so follow up one, could you elaborate on the point you made regarding the international housing market where you mentioned there was a deficit and an aging housing market?

Yes, usually when we talk about the international markets, we speak about the housing as usually a parallel market to the floor covering market. Specifically, we are talking here about the U.S. and the European markets being the biggest consumers of floor coverings and carpets. Like Mr. Hanee said, there is currently a deficit in the housing market due to different restrictions under the current circumstances. We expect that by the end of this year and following 2025, there will be a recovery in the housing market that will automatically be reflected on the data for coverings, different floor covering types, including carpets and rugs. Generally speaking, the housing industry now is determined or it is influenced by different factors. However, I believe that these factors will change over the next year or so, and the change will positively affect the flooring and the carpet and rug market, hopefully in a full dimension by 2025.

We have another question. Can you provide an outlook on polypropylene prices, please? What range of poly prices are you using in your budget this year?

The average used in the budget is EGP 1,200.

Okay. And throughout 2024, do you expect it to climb again to the previous levels that we witnessed in 2022, or shall that number be maintained?

Based on the outlook that we're receiving, no, I think that prices would be higher, especially in light of the current disruption in supply chain. So, no, I don't think that we'll go back to 2022's level.

Okay. And as you've mentioned before, that you already expanded your network of suppliers, so that's why we witnessed higher payable days. With the current expectation that polypropylene prices will increase, do we expect to see inventory days climbing as well, to stock up on inventory with the cheap prices?

If the polypropylene prices are going to go up, the COGS as well would go up. So we expect the days on hand to be maintained. Actually, expect the payment terms to be enhanced more than that. So in terms of days on hand, I don't think that you should expect any deviation.

Okay. So we shall not expect stocking up of polypropylene at the current prices?

We are not going to stock up. I mean, after the incident that we've witnessed, mid of 2022, the management took the liberty not to increase the stock levels behind 3 months.

Okay, great.

I would like to highlight one thing that we explained several times. The polypropylene used in the rugs is a very special polypropylene. It's called polypropylene fiber. So it's correlated to the demand in the market. So if the prices would go up, it would mean that there is a demand. If there is a demand in the market, it means that we'd be capable of passing the price increase to the end customer. So we don't expect this to have a negative impact on our margins. So that's why Mr. Hanee mentioned that we're expecting the margins to be at least maintained.

Okay, great. [Operator Instructions] We have 2 more questions right now. Going into 2024, do you see revenue growth continue to be price driven or maybe this year volume driven due to housing market?

We're expecting both actually. We're expecting some volume growth and hopefully it's going to be coupled with the price increases that will address the increase in commodity prices. So it's just a matter of how much you can pass on these increases to the consumer and when. But yes, we are planning and expecting an increase on both sides, the prices and the volume as well.

I think also adding to Mr. Hanee's comment that we are focusing on increasing our efficiency and utilization. This should reflect on our volumes as well, beside the value.

Okay. We have another question from [ Noor ]. 26% of raw materials costs were polypropylene and nylon. Can you clarify the percentage each contributed to raw materials separately?

It's mainly polypropylene. The contribution of nylon is minimal, so you can assume 90% polypropylene and the rest is nylon.

I'm sorry, Yasmine, can you repeat again?

90% is in the polypropylene range and the rest is nylon.

Okay, perfect. We have another question. Do you have any planned CapEx additions or additions for 2024?

Okay. In terms of the CapEx plan, the management is very aware of the high interest rate environment. So they maintain cautious in terms of CapEx spending. But in general, we're assuming a $10 million CapEx plan and that would be mainly for digitalization and the 6 new showrooms in Egypt.

Perfect. [Operator Instructions] I have a question from my own before we move on to another question from the participants, I was wondering if for the export market in 2024, shall we expect price discounts to drive volumes a bit or we expect prices to be maintained? I'm asking this because if we do expect price discounts, I'm wondering if it will be enough to offset the devaluation effect. But that's the direction I'm looking at.

Yes, well, normally in the end of last year, we did some kind of price discount parallel to the decrease in raw material pricing. And I believe this has already given us a boost to its volumes starting 2024, I don't think we're going to have further price decrease in the near future, I believe we either going to maintain or hopefully try to increase a little bit, especially in high margin products.

[Technical difficulty] in terms of dollars. So we will definitely benefit from the devaluation.

Understood. So the discounts will not offset the devaluation effect at the end.

Exactly.

Perfect. [Operator Instructions] Okay, since we do not have any more questions so far, I would like to sincerely thank Oriental Weavers management team for being with us today and for giving us a deeper insight into the earnings and 2024.

Thank you very much for all the participants and wish you a very good year. 2024.

Thank you.

Thank you.