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

Hello, everyone. This is Salma Abdelhay, Al Ahly Pharos Consumer Sector Lead Analyst. Thank you all for joining us today in Oriental Weavers' full year '24 Results Call. It's our pleasure to be having from Oriental Weavers management, Mr. Hazem Al Zifzaf, MD and CEO; Mr. Hanee Afia, CFO; and Mr. Ahmed Abdelmeguid, Investor Relations Manager. With no further delay, now I would like to hand the call to the management for a quick comment on the results. Then we will open the floor for the Q&A. Mr. Ahmed, please go ahead.

Thank you, Salma, and thanks to Ahly Pharos for hosting this quarter's conference call. 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 has accidently gained access to this call, kindly hang up now. Certain information disclosed during the earnings call consists of forward-looking statements reflecting the current view of the company with respect to the 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 prove incorrect, actual results may materially vary from those described in such forward-looking statements. The company undertakes no obligation to republish, revise forward-looking statements to reflect change of events or circumstances. I will now hand the floor to Mr. Hazem Zifzaf, Group CEO and Managing Director, to give a brief overview of full year 2024 performance. Mr. Hazem, please go ahead.

Thank you, Ahmed. I want to check if everyone can hear well? Thank you, Salma, and thank you, Ahly Pharos for hosting the call and Ramadan Kareem to everyone. Let me start with giving you some quick note on our fourth quarter performance. There were some positive points and some negative points about Q4. On the positive side, the revenue increased by 48% year-on-year, reaching EGP 7.1 billion. This marks our ninth consecutive quarter of growth. The growth in volumes was a very good achievement in this quarter. It was up 4% and was driven mainly by another good story, which is international volumes, which grew 13% Q-on-Q and 21% year-on-year. This was the highest volume mix we've achieved this year in favor of international approaching 67% of our sales volume. That helped to offset softened market in Egypt which we have witnessed throughout the entire last trimester of last year. Gross profit margin was compressed to 7.5%, mainly due to the EGP 300 million inventory write-down that we took in -- mainly in the U.S. with some amounts as well in Egypt, but mainly in the U.S. This was a strategic decision that we took this year as new management to clean up any inventories of finished goods that was not sold and to revalue them at the market value. Adjusted gross profit margin reached 11.7% when you account for the EGP 300 million of write-down. Net profit margin was 5.2% and when looking at the adjusted net profit was 9.4%. Typically, Q4 for us is the lowest margin quarter due to the promotions and the discounts that we do towards the end of the year. This happens both at in Egypt and abroad. Looking at the full year of 2024, revenues were up 38%. We reached a record EGP 24.3 billion in sales. This was driven by international growing at 42% and Egypt growing at 28%. In terms of volume, year 2024, was the first year since 2021 where we don't decline in volumes. We actually had a mild increase of around 1%. To us, this was a positive change and was driven mainly by international markets, which is, again, for us is a positive story to tell. Let me give you some more details by market. U.S., our largest market, representing around 50% of international revenue was up 38% year-on-year, mainly supported by the devaluation impact in addition to the growth in woven and nonwoven volumes sold out of Egypt to the U.S., which was up 21%. We could have even done better than that, if we didn't see lower demand and lost orders from big box retailers in the U.S., which are still suffering from the slowdown in the U.S. consumer market. We are growing more positive about the U.S. market. judging by the last couple of months performance in our numbers. So we are a bit more optimistic about 2025 that we should continue our growth story in the U.S. Moving on to Europe. Europe was a star market for us this year. We managed to deliver a solid performance across many markets and many segments growing at 57% year-on-year. Europe represented 34% of our international sales in 2024. Key markets for us like Germany and Scandinavia did very well, and we had a 22% growth in volumes overall. The growth was seen across the board. And we also benefited from a lot of promotional business that we did to some of our key customers in Europe. Generally, we see still a long-term good picture in Europe due to the pent-up consumer remodeling demand with aging housing and persisting shortage of singular multifamily housing. GCC, on the other hand, which today accounts for about 7% of our international revenue. Volumes were down 17% year-on-year. This was an intentional decision from us because Saudi and GCC becoming a very competitive market, very low margin business with very long-term credit terms. We're choosing to downplay our business there until market condition improves. We are working on changing our business model in these markets, focusing on products with high margin and focusing on getting closer to the end user by selling into furniture stores, trying to open a retail store in Saudi, trying to increase our business in the e-commerce channel. These are all offer better margins in Saudi. Egypt overall represented 34% of our revenue, was 28% up year-on-year driven by tufted volumes, which maintained growth throughout the year at 21% as consumers traded down from the woven to the tufted. And being positioned on both segments, we managed to capture some of that trading down that happened in the marketplace. Egypt started the year very solid. That was because of expectation of higher devaluation, both trade and consumers were buying ahead of demand, stocking just to make sure the prices do not keep going up. As the story of the valuation softened, so did the demand. So that affected our last trimester business. We have to come down in pricing and volume also was suffered. We did better on the retail channel, the stores that we own than we did in the rest of the channels. The retail channel for us represents 44% of our Egypt business. We do better than pricing, we do better margins in this term. Going forward, we continue to focus on building our retail footprint. We want to do that through the franchise model. So we don't have to be CapEx heavy as we do it. But we see that as the future of building our business in Egypt. That finishes the sales story and the overall business context. And I want to hand it over to my colleague Hanee to take you through the financials.

Thank you, Hazem. Good evening, everyone. Happy to have you in the first call in 2025. Hopefully it will be a good year, even better than 2024, which is to us, was a record-breaking year. In our financials, we've recorded gross margin -- gross profit margin of 12.8%. And this is actually due to the inventory write-down of EGP 0.5 billion. Part of it came in Q4. And as you know, the first half of the year, witnessed the other half. So adjusted gross profit would reach 15%, showing a percentage 0.6 percentage point increase year-on-year. And this is mainly driven by the exchange rate and also a favorable mix between international sales and Egypt sales given that we realized better margins in our international sales. Our EBITDA grew by 29% year-on-year to reach EGP 3.5 billion, while the adjusted figure would be EGP 4.1 billion with a strong margin of 16.7% and this is coming through from all the way from the top line to gross profit flowing through the EBITDA. The net profit is EGP 2.5 billion unadjusted, while the adjusted net profit would record EGP 3.1 billion with a margin 12.7%. Again, it is a flow driven by a favorable devaluation impact and better or strong cost control as well as an income coming from -- the currency income coming from the interest income and some profits that came out from some financial investments around EGP 0.4 billion. So that's, in summary, our financials for 2024. And I think I'll leave the ground for any questions.

[Operator Instructions] We have a question from Nour Give us a color on 2025 figures in terms of revenues, volume, prices, margins, CapEx plans and export rebates.

Nour is the one who placed this question. Actually, it covers basically everything in 2025. So we're anticipating to have a revenue growth of around 15% and that is also subject to the ForEx movement since we're quite sensitive to foreign currency and exchange rates. So we've assumed an exchange rate of 53.5. Based on that, we would assume that our revenue will grow hopefully by around 15%. And in terms of bottom line, we are estimating that we will have around the EGP 3 billion, EGP 3.1 billion, which is a margin of 11%, which is more or less our norm in terms of net profit margins. Volumes, we are planning for a slight increase. As Hazem has said, this year, I mean 2024, we were happy to see the reverse of the trend of decline in volume. We have grown slightly by 1%. We are hoping to see another increase in volumes in 2025. For export rebates, we will -- of course, we will see how the government will move. The new program is put already in effect which reduces our export subsidies by 70%. But again, we still have some dues in the pipeline before the new program. Currently, we do not have clear visibility on how much would be collected in 2025 and this is how we get our subsidy figures in our P&L since we recorded on cash basis, not on accrual basis. So we have reduced our assumptions in 2025 compared to 2024 but again, we are still waiting and see how the government will be able to manage the disbursement of the subsidy. For the CapEx, we have a budget of around $20 billion and it is spread over different activities, operations, having the big chunk, IT and digitization is another bucket and the third is sustainability. So we are planning to invest mainly in these 3 areas, of course, in addition to the commercial side, not necessarily associated with our growth in our retail. But for the regular CapEx that is done as maintenance CapEx for our retail network.

Okay. We have a question from Marina. She is also asking about the situation with the new export rebate system, but she's also asking about the -- if there is any backlog?

Yes, there is a backlog, yes. So -- and this is why we did not reduce our export subsidy expectations for 2025 as strong as 70% because we have this backlog. But again, we're waiting to see how the government will react with the backlog.

Okay. Omnia is asking, I'd like to ask about the nature of the EGP 5.4 billion recorded as FX translation and the other comprehensive income, please?

Okay. Just for all of us to know, we have -- in our consolidation, we have 7 companies, 7 legal entities, 4 of them are offshore, be it the U.S. entity in the U.S.A. or we have here in Egypt, 3 companies that are in the free zone area. Free zone companies are having their books in U.S. dollars. When we consolidate in Egyptian pounds, the figures of the assets -- I'll take assets as an example, gets translated in EGP with a foreign exchange difference. So in a year of devaluation like 2024, all our assets in the free zone entities were translated in Egyptian pounds, realizing a big gain. This gain does not pass through our income statement. It goes directly to the equity side as a translation difference in other comprehensive income. That's all in the equity side.

We have a question from my side.

Sorry, can we get back? Just the OCI part because for those of you who are using, for example, ROIC would be beneficial that you see both scenarios if -- and your denominator when you have equity and debt, you should account for the OCI because it's really nonoperative. So this is what we do here in management. We look at both. We look at ROIC, and we look at the adjusted just to see the true translation of the business.

[ Mustafa Saida ] is asking what is the expected gross profit margin in 2025?

2025, I think with the elimination of the inventory write-down, we will get back to the normal levels of around 14%, 15%. That's how we anticipated.

A question from [ Ahmed ] does other comprehensive income include current assets?

It does include current assets. However, the normal realized and unrealized that we see in the P&L is not in OCI. So we translate the whole balance sheet into our consolidated financials. And we account for the currency difference. And net-net, it is quite positive. On accumulated basis, it's even much higher than EGP 5 billion.

He's asking if you can -- if you know the breakdown of other comprehensive income, If we can...

It's primarily the translation difference.

Okay. There's a question from [ Ali ]. I'm not sure if you said it earlier, but what is your budgeted export rebate for 2025?

No, I think we've tackled that.

Sorry, I didn't hear you.

Yes, I think we've already spoken about the export rebates.

A question from [ Christine ]. Could you please share similar insights for volumes and cost breakdown for this quarter as you used to share?

Actually, we are not sharing the analyst dashboard moving forward. However, in our earnings release, you will find a good breakdown of the volumes divided into segments and what is local and what is international and you can easily get more data from some calculations, easy calculations. And if you have any other further requirements, you could go back to us, and I will provide you with everything. As we are now working on the redesign on the analyst pack, that's the point.

Ahmed is asking again if you can give them the breakdown of the other comprehensive income?

Okay. Can we move on and then we get back to Ahmed?

Okay, sure. A question from [ Nina ]. Hi, could you please shed light on the status of demand in Europe, given the ongoing dire situation across many European countries and potential dumping from China to counterbalance restrictions in other markets?

European market remains very competitive, but we have managed to do very well with some of our key customers in Europe. So we believe that we can continue to do so well with these customers. We don't see any short-term issues at all with our targets in Europe even despite the competition. China tends to compete a lot more on the tufted business than it does on the woven business. But we have managed to secure a niche within that business with our key customers, particularly on the promotional calendar and a very long-term relationship with these customers. So we see the competition continuing. We see in the short term European economy not doing very well, but we also see that we will continue to execute our agenda in Europe in 2025 building on our focus on some key countries in Europe and key customers that we have very long-term relationship with.

A question from my side. Will we see another round of price increases in 2025 without compromising the sales volume?

In which countries?

A local market.

Yes, pricing in Egypt has been very tricky in the last 5 or 6 months. So that's a good question. We are seeing it very difficult to take pricing up in Egypt at the moment, except in the retail channel. In the retail channel, we have been able to take pricing up better than we have been able to do so on the wholesale channel. We are trying to come around this by introducing new products with better margins rather than increasing pricing on existing product line. So we are trying to shorten the product cycle and introduce new variants, new variants come with a higher price point. We have found out that this is a better way to manage pricing than to actually increase pricing on existing stock. So we're managing this very, very carefully, but we don't see us having the same capacity to take pricing as we did a year ago when the market expectation of devaluation was driving a lot of the demand. Also, there is an overall condition in Egypt, which is consumer purchasing power is under a lot of pressure. So not very favorable to taking pricing. We are focusing on international markets that we can use our diversification to our advantage to capture a lot of the business there. We do better margin in international markets today and using international -- using new introductions to launch product with higher margins. That's our way to handle the pricing in Egypt.

Okay. So what is your current production capacity and utilization rate?

I think we keep being asked this question in every call. Just a point on utilization in our industry, there's no really fixed number because it all depends on what type of carpets you're producing, what size you're producing, what sort of colors, what sort of materials. But in general, we're running at around 80% utilization as an ongoing rate with all the trickiness of that question, as I mentioned, depending on the variation of what you're producing.

Okay. I believe there are no further questions.

Just for the OCI, the translation difference between '23 and '24 grew by EGP 4.9 billion. And just as a note, in 2024, total translation is around EGP 12.8 billion and this is out of EGP 18.5 billion total equity or net equity. In fact, it's 20.6% equity that is including the controlling and the noncontrolling shareholders.

We have a question from Christine. Could you provide an insight on the notice decline in the blended average price in USD this quarter?

Yes. Christine, as we said, this is the quarter of holidays and seasonal promotions in general. So all across our retail network were on end of year promotions. November, Black Fridays, the Christmas, these are period where we usually run a lot of promotions. Also in the international markets, this is also a time where our customers run promotions. So our product mix tend to go with a lower ASP. And that always makes Q4 for us go through the lower relative average pricing, lower relative margins as well.

We have no further questions at the moment. So Mr. Ahmed if you would like to say a concluding remark?

Well, first of all, thank you all for joining the call. It's been a tough year with all the geopolitical situations around us, affecting shipping, raw material cost, the valuation effect in purchase power, global struggle with higher interest rates. We think we did well managing all these circumstances to land at record numbers. If you look at our adjusted numbers, we have improved in almost every category of our numbers versus previous year despite all this, and some of them are record numbers, and record margins as well. We are happy with what happened in Q4 with international markets where we're recording very good growth in volumes in U.S. in some of the key European markets. This is for us a very, very positive signal in our ability to focus on critical markets and doing well in these critical markets with big customers. And that's important for us to manage any softness that may happen in Egypt by recovering that in a higher margin context in the international markets. That's for us, very, very positive. The retail store in Egypt is also positive. We'll continue to play this. We want to expand retail stores more because we're able to get closer to customer, capture a lot more of the margins across the value chain. So that's the direction where we're trying to also exploit and grow. Where we are not able to have exercise pricing power as we like, we are resorting to introductions of new variants and new products. So making innovation our way to improve our average margins when our pricing cannot be taken as we like. The cleanup that we did is a very courageous cleanup in a single year to take on $12 million of inventories in the U.S. with all the effect that it may have on our numbers. But as new management, we want to work with a transparent picture as far as our numbers and our investors. And whenever we found something that needs to be addressed, we took it on a head on. So this for me is also promising because we're working with the clean plate. And I like how my team is confident and not worried about the outcomes of taking tough decisions. 2025 is not going to be an easy year, but with all these good signs on the international markets, the retail and the management team that we have, I'm optimistic that we will manage to navigate this year as well. So we look forward to 2025. We look forward to seeing you guys in our next call [Foreign Language] And I wish you all a Ramadan Kareem and thank you all for joining the call.

Thank you all. This concludes our call for today. We would like to thank Oriental Weavers management for their valuable time and input. I'd like to thank Mr. Hazem for this insightful call. Thanks, everyone, for attending. Have a nice day.