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' Third Quarter 2024 Results Conference Call. I'm pleased to be joined today by Hazem Zifzaf, CEO and MD; Hanee Afia, Group CFO; and Yasmine El Gohary, IR Manager. We will first start the call with a quick update from management, and then we'll open the floor for the Q&A session. Yasmine, please go ahead.

Thank you, Mirna. I will start off by reading the disclaimer statement. Good morning and good afternoon, everyone. This is our customary disclosure statement. This earnings call is intended for analysts and investors only. If 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 could cause the actual results, performance or achievements of the company to be materially different from any 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, 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 provide incorrect, actual results may materially vary from those described in such forward-looking statements. The company undertakes no obligation to republish or revise forward-looking statements to reflect changed events or circumstances. And that ends up the disclaimer statement. I will now hand the floor over to Mr. Hazem Zifzaf, Group CEO and MD, to give a brief overview of 3Q performance. Go ahead.

Thank you, Yasmine. Thank you, Mirna and the EFG team for hosting the call. Thanks to all the participants for your interest in the call. I'm going to talk to you about the business and what happened in Q3. Our revenues were up 44% year-on-year, reaching EGP 6.4 billion. This is the eighth consecutive Q-on-Q growth. This is a result of growth in actual volumes, higher prices in Egypt and the valuation translation of our international sales. International markets represented 69% of our numbers in Q3, growing by 53% year-on-year. This is good news for us. The U.S. is our largest market, represents around 51% of international revenue. It was up 40% year-on-year, helped by the devaluation. Actual volumes grew 28% Q-on-Q, driven by big placements from Walmart and Costco. The U.S. market, however, remains a very challenging market. The consumer spending remains constrained in the U.S. Higher interest rate reflects on higher mortgage rates, which also impacts housing market, which is directly related to our business. This continues on the short term. However, on the medium to long term, we anticipate that this should improve as interest rates come down. Moving on to Europe. Europe represents 36% of our international revenue. We delivered a solid performance with a 67% booster revenues year-on-year. This was a reflection of our sales efforts in capturing some volumes from closures of EU-based competition. In addition, we witnessed 23% year-on-year increase in volumes driven by migration in the promotional calendars from Q2 to Q3. Although market activity remains sluggish on the short term, we see long-term potential in Europe even brighter because of the significant pent-up consumer remodeling demand and aging housing market. Selling prices in both U.S. and Europe were under pressure versus last year, but we managed to compensate that with volumes. Closer to home, GCC represents 6% of our international revenue. It grew by 31% year-on-year, but we have drops of volume of 10%. We already referred to that in our previous call last quarter, as we are actively making a choice of not pushing a lot of volume in GCC due to lower margins and longer credit terms that can sometimes reach 180 days. We're being very selective in the GCC. Medium term, we are changing our approach to the market in Saudi, the most important market in the GCC, focusing on e-commerce, furniture stores, and expanded presence in profitable volume areas. Egypt, representing 30% of our total revenue, was up 27% year-on-year, supported by higher pricing and volume from our tufted segment, which grew by 23% versus a year ago. This is the result of consumers trading down to more affordable substitute as their spending power is challenged. Our woven volumes were down 11% year-on-year. Our total volume was declining by 3% year-on-year. The diversification which we have, which we are probably the only player in Egypt with such diversification, is allowing us to capture some of the volumes when we lose it from the woven segment into the tufted and the nonwoven parts of our business. We see the short term in Egypt remains challenging, but we're trying to get creative around it through marketing activities and promotional calendar in the season of Christmas and Thanksgiving. Moving into financials. I want to hand it over to Hanee Afia, our CFO.

Right. Good evening, everyone. So we've mentioned that this quarter we've hit EGP 6.4 billion of sales. Our gross profit recorded 14%, 14.1% versus 15% last year despite the fact that this year, our contribution margin is higher. So the thing is it's a phasing story quarter-on-quarter. So versus last year, contribution margin were better off. If you look at the numbers on a year-to-date basis, actually, our year-to-date gross profit is higher than last year. So it's the other way around. Our year-to-date actually is 15% versus 14%. So it's a reverse of this quarter, just the phasing of spending issue. Our SG&A ratio has declined to 3.5% coming from 4.2% in 2023. And this is primarily driven by the boost in our top line, driven by the devaluation, which is actually boosting the impact of the economies of scale. EBITDA margin is in line with last year, 15.6% versus last year, 15.5%. So we are maintaining our profitability when it comes to EBITDA. Net income this quarter recorded EGP 701 million, which is 8% above last year, which was actually carrying EGP 323 million of export subsidies. So if we were to compare apples-to-apples, we wouldn't be 8% increase quarter-on-quarter, we would be actually 38 -- sorry, we'll be actually 11% increase if we adjusted to the export subsidies. In terms of cash, we have a cash conversion cycle of around 175 days as of September, which is showing an improvement versus last quarter, which recorded 180 days. We're improving our payables days, our terms with our suppliers, as well as the continuous effort to manage our inventories. Net debt recorded EGP 745 million. Majority of our debt is in foreign currency and the net debt-to-equity ratio is 0.34. So this is basically the summary of our financials for this quarter.

Okay. Thank you, Hanee. Thank you, Hazem. We'll open the floor for Q&A.

[Operator Instructions] We have a question from Ali in the chat. What is the remaining balance of OWA inventory that is still expected to be written down? And when do you plan to record this adjustment?

So in quarter 4, we're still working on evaluating the impact of the write-down. We are expected to have around EGP 250 million additional provisions in Q4.

[Operator Instructions] The next question is from Nour Mahmoud. By how much will the export rebate as a percentage of exports decrease? And when will the changes apply retroactively? Will the company raise prices to offset the removal of export rebates?

Okay. So on the export rebate topic, to date, we have not received any official communication from the government. So it's all media leakage. However, based on our current understanding, we anticipate minimal impact on 2025 figures due to the settlement of our existing backlog, and we expect an effect to start to materialize by 2026. So we currently have a backlog with the government that we would be taking in 2025 and will give us a buffer in that year. Actual figures have not been officially communicated to us.

Thank you. We have a similar question from [ Sahar Saloni ] again on the export rebate news. And are you expecting to book any rebates in Q4 2024?

Possibly, yes. We might be collecting in December. But still nothing confirmed at this point.

We have another question from Nour Mahmoud. Can you give us a color about 2024 figures and your expectations for 2025?

Okay. In terms of 2024 figures, we're still on track regarding our guidance of EGP 23 billion to EGP 24 billion in top line, and adjusted gross profit margin remains in the range of 16% to 17%. And our net income of around EGP 2.7 billion. In terms of our target for 2025, so far, our initial guidance would be a 15% to 20% growth on both the top line and bottom line versus 2024 outlook.

[Operator Instructions] Yasmine, I think we've covered all the questions in the chat. So back to you if you have any concluding remarks.

Perfect. Thank you. I'll hand over the floor to Hazem for a closing statement.

Thank you, Mirna, and thank you for everyone. We really appreciate your time on this call. We look forward to meeting you again as we close the year, and I think the next call will be in February of next year. See you then.

Thank you. Thank you very much for your time, and thank you, everyone, for joining. This concludes today's call.