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

Hello, everyone. This is Nada Abouzeid from Beltone Holding. I'd like to welcome you all to Oriental Weavers Second Quarter Results Conference Call. I'm pleased to have on the line Mr. Hazem Zifzaf, Group CEO and Margining Director; Mr. Hanee Afia, Group CFO; and Mrs. Yasmine ElGohary, Investor Relations Manager. Now, I'll hand over the call to Mr. Yasmine, who will start with a brief update, and then we will open the floor for questions.

Thank you, Nada. I'll start off by reading the disclaimer statement. Good afternoon, everyone. This is our customary disclosure statement. This earnings call is intended for analysts and investors only. Any media have accidentally gained access to this call, kindly hang up now. Certain information disclosed during this earnings call consists of forward-looking statements reflecting the current view of the company with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors should cause the actual results, performance or achievements of the company to be materially different from our future results, performance or achievements that may be expressed or implied by such forward looking statements, including worldwide economic trends, the economic and political climate of Egypt and the Middle East and changes in business strategy along with various other factors. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may materially vary for those described in such forward-looking statements. The company undertakes no obligation to republish revised forward-looking statements to reflect changed events or circumstances. And that ends the disclaimer statement, I will now hand the floor to Mr. Hazem Zifzaf, Group CEO and MD to give a brief overview of 2Q [indiscernible]. Mr. Hazem?

Thank you, Yasmine. Just checking if everybody can hear me well. Nada, can you confirm you can hear me well.

Yes, we can hear you very well.

Thank you, Nada. Thank you, Nada, and Beltone team for hosting the call, and thanks to all participants for your interest in the call. I joined OW in July '23 and took over officially April '24, and I'm happy to have my first earnings call with you. I'm part of the new management team brought to ensure OW legacy of 45 years continues beyond second generation. Since 2023, we have had 9 senior management appointees joining the company. Our goal as both new team and legacy team is to jointly solidify OW Global status. Being the only global Egyptian company with sales in 118 countries and the global leader in woven carpets. We are home to 20,000 employees roughly. We are a true national pride. We want to live up to the vision of the founder and the aspiration of [indiscernible]. To do so, we have 3-layer roadmap with strategic priorities. We have started in 2024 with our first one, labeled OW 1. OW 1 or OW 1.0, it's a mindset shift from the historical volume utilization-driven culture to utilization at maximum margins, thus improving ROIC and creating value to shareholders. Four priorities: number one, related to people, upskilling and aligning interests of our people. Number two, towards our customers, innovating, investing in the brand and improving customer offerings. Number three is directly to our investors, improving operational efficiencies, ensuring disciplined working capital and CapEx. And number four, to our community and to customers proactively progressing on the processes and product sustainability solution. Now moving on to today Q2 results. I'm not going to go through all the detailed financials because we already send those out with the earnings release and the investor presentation. But I'm going to give you an overview about our business in Q2. Our revenues were up EGP 5.7 billion, 35% year-on-year. It's a record quarter. In fact, it's the seventh consecutive Q-on-Q growth. This is a result of the devaluation translation of our international sales plus real growth of both volumes and prices in Egypt. We'll give you more insights on sales and market performance as we go on. Let me start with the international markets. International markets represent 64% of our Q2 revenue, of which USA represents around 54% and was up 33% year-on-year. While volume was flat in this challenging market of the U.S., that started in Q1 and continuing into Q2. The challenges comes from demand being heavily penalized by inflation and rising mortgage rates, which restrains discretionary consumer spending and have led to sharp reduction in new construction and renovation projects. These have directly correlated with our industry. The long term of the U.S. remains key and promising, given the aging home supply, low housing supply deficit and the fact that new construction and remodeling once the interest rate comes down will reignite the consumer spending. Moving on to Europe. Europe represented 32% of our international revenue and was up 31%, while also volume was a challenge. The source of challenge here was driven more by key accounts, and that was due to product range replacement [indiscernible] and shift in promotional calendar. That should be compensated and made up for in the second half of the year. Similarly to the U.S., it also -- the market has some challenges related to interest rates, a slowdown in cost of construction and renovation projects. In the second half, we expect improvement in the sentiments in Europe due mainly to the way we -- our nature of business with our key accounts. So we'll have more on the promotional side in the second half, and we'll have new introductions in some of these key accounts. In both USA and Europe, average selling prices declined in USD terms as the flooring demand weakened and buyer shifted to lower-priced products. This was supported with the excess capacity and lower raw material cost. And hence, our average selling prices were slightly down. GCC represents 7% of our international revenue, it grew by 23% in Q2, but we had a sharp drop in volumes almost to 30%. That was more of a choice that we took. It's consistent with our strategy since the GCC market, primarily Saudi, tend to be low-margin business with very long credit terms. We are shifting our strategy to go to more e-commerce and furniture stores in order to improve profitability and recover some of the volumes lost. Overall, in the international markets, we expect the second half to be better than our first half. Back to home, Egypt. Egypt is 36% of our revenue and we had a very strong volume and price performance in Q2, amounting to 49% year-on-year. Strong brand, extensive channel penetration and 3 consecutive price increases amounting to 32%, coupled with fear of further devaluation helped fuel these growth numbers. Balance of the year, we should remain positive in Egypt, driven by our new collections and seasonal promotions. On and on, we think from a top line point of view and volumes point of view, we expect a better second half than we did in the first half. Our gross profit margins, adjusted gross profit margin were at higher levels of 17% compared to an average of 14% in 2023. Higher prices and smarter volumes despite the inflationary cost pressures and [indiscernible] disruptions have delivered these numbers. Our full year guidance for adjusted gross profit remains between 16% to 17%, which is better than previous year and the year before. The reported gross margin, however, as you may have seen is lower and that has been driven by the inventory write-down in our OWA business, that's our U.S. subsidiary. Given the softness of the market demand, it impacted our inventory levels and the aging of these inventories, and we took a write-down of EGP 271 million, which was reflected in our COGS and hence, the impact on our gross profit margin. We also still anticipate further write-downs in our U.S. operation that can go up to EGP 400 million in the second half of this year. However, despite that, we are still committed to both our top line and bottom line guidance that we gave at the beginning of the year. Top line guidance remains between EGP 23 billion to EGP 24 billion, an all-time record and bottom line net income at EGP 2.7 billion. And again, as I said, both would be a record numbers for OW. So our overall outlook for the balance of the year is, we should have a good second half, driven by operational improvements, working capital focused, ongoing commercial efforts in terms of range renewal, new product launches and focus on profitable segments. I'm done with my statement and happy to take your call or take your questions.

[Operator Instructions] We have our first question from Nada. She is asking about your guidance on your local tufted volume and OW USA volume guidance.

Okay. I would like to defer that question to later on the call, so I can extract the numbers for you. So if you can go to question 2, and then we'll be back to it.

Yes, sure. A question from my side. I just wanted to clarify in which part in the COGS did you record the inventory write-down? Is it under the selling or others?

It's under the selling number in the COGS breakdown.

I'll give you the answer to your question on the tufted and OW volumes.

The tufted local volume, if I understand correctly, you're asking about the local business of Egypt business in tufted. We're expecting to have a 15% year-on-year growth by the end of the year, which is roughly around 8 million square meters. Second is the U.S. U.S. also, we're talking about 10 million square meters, which is more or less in line with last year, maybe we're talking about 3%, 4% below last year.

[indiscernible] is asking about the guidance for group's bottom line for the full year.

Yes. As I mentioned, we're aiming at EGP 2.7 billion.

And [indiscernible] is asking debt are in USD and euro. Guidance regarding the -- the use of these debt, for example, upcoming CapEx plan.

Upcoming CapEx -- using debt for upcoming CapEx -- using debt for upcoming CapEx.

Yes. Yes, we are going to use further debt with CapEx, it's going to be a mix, obviously, of both debt and equity. We are towards enhancing our ROIC and definitely the trade-off between equity and debt is going to be the exercise. So we are expecting to use more debt within the CapEx spend that we're having in there, not only for the rest of the year, but in the coming couple of years.

Okay. And just a follow-up on this question. How much do you see CapEx for the full year?

For full year CapEx, we're planning to be in the range of $10 million. It's divided upon digitalization, maintenance costs. We have capacity expansion in one of our -- in the export arm, the non-woven segment. So -- and overall, for the full year, it's a $10 million number. Consistent with our previous figures last [indiscernible], previous years.

Yes. Understood. [indiscernible] asking where do you see international sales volume trending in the upcoming period, especially in the U.S. market.

I think we just answered the U.S. volume targets, right?

And what about the whole international sales volume?

The whole international sales volume, we see it at a slight decline versus last year. We're expecting to have a small decline of around 4%, 4% to 5% versus last year. That is at the group level.

Ali is asking, is there any update on the new export rebate program? How will it be compared to last program?

Okay. So in terms of the export rebates that we collected just to give the rest of the audience background story, first of all, the rebate is a part of our business model. So we don't consider it as a one-off, it's an essential part of the model. We received around EGP 528 million that was for exports done until 30th of June 2023. So we have a backlog with the government, but the EGP 528 million figure is for the first half of last year, and this is under the seventh government initiative announced. There is another initiative announced. We're expecting another initiative to be announced by the government by the end of the year, but we don't have any clarity on the actual figure that we might be receiving or we cannot confirm the figure right now. But so far, the EGP 500 million is above the EGP 300 million figure that we received last year. In terms of the program announced by the government, they have not announced any new government that would be new program that will be applied from the first of July 2023, so we don't have exact figures on the percentages used for the new program, but we're expecting it to be in the same range of the previous program, that's percentage wise.

And what about the rest of the year? Are you expecting any further rebate for the rest of this year?

We might receive another tranche by December, but it's not confirmed and it's not included in our figures, but what we're hearing that there might be another -- a smaller figure compared to what we took, but nothing is confirmed.

And Nada is asking do you see any risk of the government stopping the rebate in the future?

So far, with the government announcements, they shouldn't. They are emphasizing on supporting exporters and we're not assuming that they will touch the rebate in the short term.

Mohammad is asking, you mentioned that the company achieved record profits mainly due to the recent EGP devaluation and pricing and volume growth. My question is, what do you expect to to be the driver in top line growth for the rest of the year, given that there is no further devaluation.

The numbers are going to come, as I mentioned, there is part of it that's coming from our volumes, both internationally and local that's also coming from the operational efficiencies that we are executing in the business.

We usually also report our figures in year-on-year performance. So year-on-year compared to the last year's dollar [indiscernible] or year-on-year the [indiscernible].

And [indiscernible], given the inflationary pressure we have on ground in Egypt and the increase in prices, local prices, what do you think is driving the demand. So why don't we see a drop in volumes? Why do we keep seeing growth in the local volumes?

Well, demand is in general grows with the population growth and GDP growth. This is -- carpet is an essential item in all marriages. Every year, there's about 1 million marriages in Egypt. And so there is always a continuous demand that we have seen. Sometimes you get spikes like when devaluation was happening because people tended to buy ahead of their purchase cycle just to caution against higher prices going up in future. So it's the large consumer base that is fueling the business in Egypt. Egypt is a big market for carpets worldwide. We're like the seventh largest market in the world. So that is a big and key market with a big population base with growth in both GDP and population. So that should support the long-term growth of the carpet industry.

[Operator Instructions] Ali is asking, I just want to make sure the gross profit margin guidance of 17% is not taking into consideration the write-down costs, right?

The 17% guidance is an adjusted number. I don't know if you heard me or not, Ali, the 16% to 17% guidance is the adjusted gross profit number. Nada, are we having any more questions?

No, there seems to be no further questions. I'll hand over the call to management for final conclusion.

First of all, I want to thank everybody for joining in this call. OW is a great company. It's a great brand, 45 years of legacy and history, global world positioning. It is tough in terms of the macro environment and its impact on the industry. But I think the brand is strong enough, and our teams have good ideas in terms of how to launch new introductions for the balance of the year that can help us navigate the market until the macro environment improves, hopefully next year, and then it will be good news for the whole industry. Thank you for the call and see you in Q3.

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