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

Hello, everyone. This is [indiscernible], and welcome to Oriental Weavers' First Quarter 2024 Results Call. I'm pleased to have on the call today from Oriental Weavers Hani Afia, Group CFO; and Yasmine ElGohary, IR Manager. We'll start with some initial comments from management, and then we'll open the floor for Q&A. [Operator Instructions] Please go ahead.

Right. Good evening, everyone. Good to meet you again. So we had a positive quarter. We had a very, very positive quarter. We have, as expecting -- as we were expecting, we have met our top line, bottom line expectations. We have volume growth versus last year, margin enhancement despite the fact that we did not get any subsidy this quarter; however, our results have been quite positive. Overall, the big highlights in this quarter definitely is the devaluation that happened to the Egyptian pound in the month of March. So towards the end of the quarter, we sold the USD to EGP moving from EGP 31 to $1 to around [ EGP ] 47 and has been stable since then. And traditionally, when the devaluation happens, and if we divide our business into 2 segments, the international business and the local business here or the Egypt market here, there are kind of 2 different dynamics. One is the dynamics that are related to the international business. So you would see the top line, moving exactly with the rate of the devaluation, which is, in our case, this time is around 52%. So you get a boost in your top line. And you also get the same kind of reaction, but on the cost side. But having part of our costs in local currencies than the international markets, in general, would see a positive impact when it comes to margins. So this is something that we've seen as many times as the devaluation has happened. We've seen it this time, and it has brought very positive results. But on the other hand, if we look at the Egypt market, we get the increase in the cost; however, it becomes to us as a company and our ability to pass on these cost increases to the -- to our selling price in Egypt. And that usually takes time. We're always trying to reduce the time lag between getting the cost hit and passing it on to the -- to our selling prices. Everybody was expecting the devaluation. Everybody was expecting that this would happen at a point in time. We were quite proactive to this point, and we already started beginning of the year to gradually increase our prices in the Egyptian market. That has helped us a lot. We've gained some mileage before the devaluation. Post devaluation, we're continuing to gradually pass on these increases to our selling prices, just to maintain the margin. By the time, what we expect is normalization, by time even the local component in our costs will start picking up. So the boost in our international market margin will start being diluted a bit by bit. And on the other hand, in the local side, the more we pass on this cost to the selling prices, the dilution that has happened upon the devaluation will start picking up and we recover and we become -- we regained the margin and total company will be back to normal. Perhaps we could be a little bit above the average, the historical average, maybe by 1% or so. And that is driven by our -- that we have grown our financial top line. We have grown our revenues. We work on a higher platform. And that, of course, helps us to better absorb the expenses and everything below the [ GP margin. ] So this is in a nutshell, our story in the first quarter when it comes to margins. So we have reached a gross profit margin of around 19%, which to us is a very positive thing. But one thing to be mentioned when it comes to the margins of the first quarter is that we've also carried the low inventories pre-devaluation. So this is something that we've enjoyed in the first quarter. We continue enjoying a little bit in the second quarter. But then once this inventory is depleted, then again, we start the journey of normalization and getting back to the normal levels of our margins. From below operating profit. So again, we have a gross profit of 19%. That is compared to around 14% last year. So this is around 5% growth in our profitability, 5 points. If we look at the operating profit, we are maintaining the 5%. In fact, we have an operating profit of -- profit margin of 15% compared to 9% last year. So we are kind of maintaining this kind of favorability versus prior year. It goes down to the OP -- below OP, then the dynamics are quite interesting. We have net financing cost positive. We have managed to manage our cash in a way that we've made money out of it. We did not get this quarter any subsidies from the government. So despite that, we have a very positive net profit margin of 11%, which is around EGP 558 million compared to last year, which was around EGP 400 million. Worth mentioning that last year, the EGP 400 million included the profit that came with the sale of our investments in China, which was around EGP 270 million to EGP 180 million, give or take. So we've almost -- if we normalized, we've almost quadrupled our net profit compared to last year. Big picture story is devaluation has helped us. The quarter results are quite positive. That is without the subsidies. So the subsidies will come hopefully on top of that. Margins will start being normalized from now until year-end. It is going to be normalized downwards, not upwards because the peak and the normalization that I just spoke about, will start happening in the second half of this quarter. Actually, it is happening now and maybe third quarter will show it better. But we are hoping to continue having the ability of passing on the costs to our selling prices. And we do have this kind of power in the Egyptian market being a market leader. And secondly, we're also hoping or actually aiming at continuing to grow in our revenue, which is something that we're very happy with, given that we've been quite stagnant in revenues in the past few years. We have seen this growth in revenue, especially in the Egyptian market. The tough segment has done extremely well in terms of volumes, in terms of profitability. And actually, this is one of the main contributors from the margin enhancement, the 19% in [ GP ] as well as our wholesale business in the woven segment has done also extremely well in the first quarter. We've seen a ForEx loss that definitely this is something that we were expecting with the devaluation decision. But again, it was offset by our cash management. We've done a good profit out of selling U.S. dollars through GDRs. So it kind of mitigated the offset that was coming from the FX loss.

I think we're good. Let's open the floor for Q&A.

[Operator Instructions]

Actually, we have a question from [ Noor Mohammad ] asking how much our subsidies expected to be this year and when they expected...

Okay. In terms of subsidies, we're expecting around -- from EGP 500 million to EGP 600 million to come in, in Q2 of this year. This is the initiative that the government already announced. We are hearing that there will be another initiative throughout the year, but no confirmation so far. So what we're guiding is the EGP 500 million, EGP 600 million for the first initiative.

[Operator Instructions]

Is there an updated guidance on top line and bottom line for the year that you can share at this point?

Yes. Look, in terms of top line, so far, we have achieved EGP 5 billion in terms of revenue in the first quarter. We are expecting that we will witness more growth in our revenue on an average basis and the rest of year, the 9 remaining months. And that is normal, of course, because we've seen the devaluation and the impact of revenue only towards the end of the quarter. So if we carry that kind of exit rate of the first quarter and we apply it to the rest of the year, we would be expecting a revenue of around EGP 26 billion, EGP 27 billion. And that should be coupled with a net profit margin of around 11.5% to 12%.

[Operator Instructions] There are no more questions at this stage. So okay, there's another question. Some questions are coming in through the chat. Question from [ Noor ] again. What is the reason behind the declining volume in the export market?

Okay. The export volumes are flat basically. It is a small decline. That is correct. There has been a softness around the -- on the global level. So it's not driven by a certain region. So it wasn't driven by, for example, the Middle East, Europe or the U.S. But if you focus on the U.S. and Europe, we have been seeing this kind of slowdown even during 2023 and the exit of '23. The slowdown is -- we're seeing that the markets are picking up. We are expecting the second half of the year, we'll start seeing some positive -- getting some positive news. We see the housing markets in the U.S. and Europe starting to move again. So we are quite optimistic with our international sales during the second half. The first quarter, of course, in addition to the slowdown, there is a major thing that we were seeing, which is the disruption in our business driven by the Red Sea problems. So we had shipping issues. We had delayed shipments. So we're hoping that we'll be able to pick that up in the second quarter and the third quarter, hopefully. Things are stable now in the Red Sea. We've suffered from that quite heavily in our sales in the Middle East, primarily in Saudi Arabia. So we're hoping to pick it up and compensate for that in the rest of the year.

And adding also to Hani, when we see our global competitors, the [indiscernible] and [ Target, ] all of them are reporting negative results or single-digit negative results on their top line and the lower volumes. So it's a global trend. Due to -- and just to take into account that inflation and interest rates play an important role in our industry. So inflation has been impacting the global consumer. But given the consensus, as Hani mentioned that by the second half, inflation rates and interest rates will be coming down. We're expecting a stronger consumer or demand, especially in U.S. and Europe by the second half of this year.

Question from [indiscernible]. How does the recent interest rate hike impacted Oriental Weavers.

Interesting. If you look at our financials, you'll find an interesting thing. You'll find that we are in a debt and cash position, almost same amount, which is quite huge, and we're making positive interest out of that. Our leverage is very, very low, if you look at it from a net debt point of view. So we weren't that impacted. Our net debt is almost 0; however, our investments in treasury bills, our investments in Eurobonds have been quite fruitful. Even our normal deposits, the pure operational/tactical kind of cash management has put us in a very positive position when it comes to financing.

There are no more questions at this stage. So I think we can conclude.

So you want to wait another minute or...

Yes, we can give another minute.

[Operator Instructions] Question from [indiscernible]. What is the budgeted polypropylene price in 2024?