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 First Quarter 2025 Results Conference Call. I'm pleased to have on the line Mr. Hazem Al Zifzaf, Group CEO and Managing Director; Mr. Hanee Afia, Group CFO; and Mr. Ahmed Abdelmeguid, Investor Relations Manager. I'll now hand over the call to Mr. Ahmed, who will start with a brief update and then to Mr. Hazem. Please go ahead.

Thank you, Nada, and thanks to Beltone Holding 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 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 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 in events or circumstances. Now let's start by giving a brief on the operational overview of the company during the first quarter of 2025. It was a challenging quarter for us, witnessing a drop in volume, difficulties in pricing and higher input costs. However, recognized revenue increased 27% year-over-year to report EGP 6.4 billion, mainly attributable to the currency devaluation, which, on the other hand, was the main reason for raw materials to increase by 46% year-over-year. Also, the manufacturing overheads increased by 27% year-over-year. All those factors caused gross profit to drop by 18% year-over-year to report EGP 786 million with gross profit margin decreasing to 12.3%. Coupled with the decrease in the gross profit, SG&A increased by 6% year-over-year, representing 4% of sales, both lowering EBITDA by 16% year-over-year with a margin of 13.6%. Nonoperationally, export rebates and better cash management during the quarter generated income, offsetting operating profit shortfall and resulting in 20% year-over-year higher net attributable profit of around EGP 0.5 billion. Total volume during the quarter decreased 6% year-over-year, affected by the soft market conditions in Egypt, which decreased 18% year-over-year, while witnessing a minor support by 3% increase in the international market. Woven continued to be the largest contributor to our sales, increasing 29% year-over-year, reporting EGP 5.1 billion. Woven volume grew 6% year-over-year across the international markets during the first quarter, although there was a global slowdown and consumer spending headwinds. On another note, our export flow continued in Europe and the U.S., which are our key markets in addition to successful growth of exports to KSA during Ramadan season. ASP in USD terms remained almost flat year-over-year, while in Egyptian pound terms, were up 40%, benefiting from the foreign currency translation. In Egypt, woven sales volume continued its pickup momentum of Q4 2024 to show an increase of 8% Q-over-Q despite the soft market conditions. However, on a yearly basis, volume dropped 19% year-over-year compared to Q1 2024 that witnessed a surge driven by wholesalers rushing to maximize their stock levels ahead of the currency devaluation in March. However, we successfully managed to pass on successive waves of price increases of 26% year-over-year, but was not enough to absorb the drop in volumes. Moving on to the tufted segment. It showed an increase of 14% year-over-year to report around EGP 950 million in the first quarter. Tufted did not perform very well in international markets as most of the shipments in Q1 2025 were artificial turf, which are, by nature, lower ASP products and having lower marginality. However, the currency devaluation caused ASP to increase by 23% year-over-year, offsetting the 5% drop in volume and resulting in a 17% international tufted revenue increase. Tufted revenue in Egypt was up by 7% on higher ASP to offset the market soft conditions reflected in lower stores' traffic. Finally, the nonwoven revenue increased 63% year-over-year to report EGP 385 million during the quarter. It's worth noting that we faced some manufacturing bottlenecks in the first quarter in the nonwoven segment. We decided to temporarily give more weight of production to the international markets. Consequently, international sold volumes increased by 12% year-over-year in addition to a slight increase in ASP that is coupled with the currency devaluation. Total revenue from international and nonwoven increased by 72% year-over-year. In Egypt, nonwoven ASP increased to offset the softer market conditions, resulting in a 53% year-over-year increase in revenue. Now I will leave the floor open for the Q&A session.

Thank you, Mr. Ahmed. [Operator Instructions] Before we start, can we start from a question from our side. Can you shed more light on the export rebate program. I've known that you now currently have 2.5%. Is it effective from Q4 last year or Q1 this year? And what is your expectation for the full year of collection?

Let me handle this. First of all, we are currently waiting for the new program that will start from July 2026 up forward until June 2028. They didn't mention the percentage change for that program. Currently, we are having a 3% granted export rebate for our export revenues, which is divided as follows. We are expecting around EGP 426 million to be recognized during the year in addition to around EGP 200 million that must be recognized from the government from the backlog of the last year. What we have recognized during the first quarter is around EGP 55 million. So we are currently waiting for another EGP 626 million to be recognized during this year.

Ahmed, I think the new program starts July '25, not July '26.

Yes, July '25.

Because I think you said '26. So just to note, the new program starts July '25.

Yes. Understood. Our next question comes from Nuron. Could you please share your guidance for 2025 in terms of revenue growth and its volume or price-driven margin and CapEx? And how do you see raw material costs evolving in 2025?

Right. So we still see that at full year level 2025, we will see around the 15% revenue growth at an absolute of EGP 28 billion. So we still hold to that, and we see it happening. It is, as Ahmed was mentioning, it is quite challenging the market conditions and so on. But at this point, we see it happening. We're expecting to have to maintain the 11% profit margin. And when it comes to raw materials, so far, the raw material prices have been flat, no major changes. Some signs of a reduction in oil prices. But however, there is always a lag between the oil price changes and our specialty petrochemical components. So there is a bit of impact lag. So we expect to have our raw materials for the rest of the year unchanged based on our expectations. And this is basically the driver of maintaining our guidance of the full year.

Our next question comes from Nuron Ahmed. Could you please restate the revenue breakdown?

Okay. Actually, for the time being, we are still remodeling our analyst dashboard. So the revenue breakdown that we can share for now is the international market and Egypt market. So in the international market, we have sold almost 16.5 million square meters during Q1. And in Egypt, we have sold almost 10.7 million square meters during Q1.

At a total of EGP 27 million.

Our next question comes from Marina. Well, you still haven't witnessed any recovery in export volumes, how will this issue be tackled? And what are the reasons for that.

First of all, thank you, Nada, and thank you, everyone, for joining the call. Let me give you a big picture first on how the markets are behaving, and then I'll give you a specific answer to your question. Globally, we see the challenging conditions globally continuing from 2024. House remodeling, a key driver in North America and Europe is still very slow. Consumer confidence is low and added to that confidence confusion as well following the tariffs and what's going on in the U.S. Industry-wide, there has been higher input costs and pricing pressure in Q1, and we see it continuing in Q2, although we think there could be some relief in Q2 versus Q1. Now when we looked at the Turkish exports, when we look at the peers earning releases, they all confirm the same finding that we're finding. So this tells us this is the general condition globally. So this will keep the market under pressure. This will keep pricing under pressure. If you look at our business in exports, the Woven segment have done well. We have done better than last quarter. We have done better than last year. We have good momentum. We think we're gaining market share versus the Turkish alternatives despite all what's going on in the U.S. and Europe. And a lot of that has been through a lot of work with customers coming up with new products and winning promotional contracts with our customers. Where we have not done as well was in the nonwoven segments -- in the tufted and the nonwoven segments. Tufted is a lot more challenging because given what's going on in the U.S., the Chinese turned the heat in Europe and focused a lot in Europe, and that caused damage to us through their pricing, their capacity, their economic efficiencies. However, that should change as the U.S. tariff equation stabilizes because we have been already approached by a lot of customers seeking us to give them options and products versus the Chinese in the tufted segment in the U.S. So we think it's short term, and we anticipate in the second half that we should see a pickup. In the nonwoven, we also had some product allocation issues and manufacturing bottlenecks in Q1. We're seeing this being relieved in Q2. And we're also adding capacity in that business that should kick in, in the latter part of the year. So we think the export business as well should benefit in the nonwoven towards the end of the year. So overall, I think despite a weak start and still not fully clear picture in Q2, we remain optimistic towards the end of the second half of the year because we think the tariffs should help us in relative terms versus Chinese alternatives. We think with our relationship with our customer, we can leverage it more to push our tufted and nonwoven business through our core customers in the Woven segment. And that's why my colleague, Hanee has said, despite the slow start, we're still holding ourselves and our teams to the same guidance that we gave earlier. It just will get a lot more skewed towards the second half of the year.

Our next question comes from Mr. Murad. He is on the line. Murad, can you hear us.

I think Murad has just typed his questions in the QA box.

Okay. He's asking if you could shed the light or advice on the dashboard for full year 2024 and the benefit of change of tariffs in the U.S.

For the dashboard, we think we can start publishing the dashboard again with its new shape starting from the second quarter of 2025. As we mentioned before, we are currently working on remodeling the items included in the dashboard to make it easier for you to use and make a better use of it. That's for the dashboard.

And the benefits of change of tariffs in the U.S.A.

Yes. Let me just comment. I think if you have any specific question or information that you need, I recommend that you get in touch with Ahmed. He can provide you with any information that you need in building your models or making your estimates until the dashboard is live. But let me talk about tariffs a bit. So the short-term impact of tariff and then some long-term impact of tariffs. Short term, we have some financial impact because some of our U.S. customers have went back to us and said they would like us to share some of the 10% increase or the 10% tariff that was imposed by the U.S. government. The sharing ranges between 30% to 50% of the tariff amount. We estimate the impact of that in Q1 to be between 300,000 to 500,000 reduction in revenue as a result of this sharing. Beyond that, we are pricing everything assuming the tariffs in place. So there should be no net effect on the margin for us. And there should be an upside for us because we -- a lot of the customers switching from Chinese product are coming to us as an alternative to diversify their sourcing even if all the tariffs are removed on China, they want to hedge the rest. And if the tariffs are maintained in China, we provide a very convenient option to these customers to source from us. So we believe we should come out of this as net gainers if the tariffs continue in the direction it's going or even if the direction are rolled out because of the diversification request by our customers.

Thank you. And then Sal was saying, could you please repeat full year '25 guidance in terms of margin and expected price increase in local markets?

Year '25 guidance, as I was saying earlier, we will continue to expect a 15% revenue increase, leading us to EGP 20 billion with around 11% net profit margin, which is around EGP 3 billion or EGP 3.1 billion of net profit.

And then Marina is asking, historically, how do we usually benefit from EGP devaluation due to export. Currently, with the slowdown witnessed in export, will the current strengthening in EGP be beneficial for or we -- will the usual equation be reversed with the current conditions?

First of all, as I said, we are a bit more optimistic than you guys in terms of how we see the second half of the year turning around in our international business. And we have shown that in how we progressed in the Woven segment, our largest segment from Q4 and Q1. We continue to have strength in building business there. So we see that as more of a short term that hopefully absorbed in Q2 and then second half, we should see ourselves back again in terms of gaining grounds on the international side. So that's just a comment on the export side of the business. Devaluation in general, tends to be favorable for our business. So when that doesn't happen, we do have some effect. But as far as we are looking at the numbers today and what's happening in the last couple of weeks on the currency, we see marginal change to our guidance as a result of what's going on with the relative price between the pound and the dollar for now.

Thank you. Nada is asking, sorry, can you please repeat updates on rebates? And if there are any potential interest from investors or merger and acquisition? And if there is any change in the polypropylene given lower Brent?

Okay. For the rebates, again, we are expecting EGP 200 million as a delayed backlog from the government to be recognized this year in addition to around EGP 426 million from the current program. What we received so far was EGP 55 million, and we are waiting for the remaining part to be recognized this year.

Ahmed, sorry to interrupt, but the EGP 200 million you were talking about the backlog, are they all the backlog you have with the government? Or is it only part of the backlog that you have?

Actually not. We are having around EGP 800 million of total delayed backlog with the government. It will be paid 50% in cash over 4 years and the other 50% will be discounts on some governmental obligations like taxes, customs and more. So what we are expecting this year is EGP 100 million in cash and EGP 100 million from the government burden. That's the breakdown of the EGP 200 million.

Yes. Okay. And then Nada is asking if there is any potential interested investors or mergers and acquisition?

Mergers and acquisition, no. For the time being, nothing on the table being discussed. And if you mean a big investor, no. We're continuing to have institutional investors who entered the stock and some stay for short term, some stay for long term, but none of significant levels that we can speak about.

And any change in polypropylene given lower Brent?

As Hanee said, there's a lag period between when the oil prices go down and then PP prices go. But so far, the direction seems to be favorable on the midterm, which is good for us. I mean when you look at -- we haven't spoken about this. Maybe this is a good opportunity to speak about it. We're speaking about market condition and what we're doing commercially, but we're also taking some initiatives to help our numbers and navigate the tough times we're going through. And these are not the first time we go through tough times. We've been there for over 40 years. We have seen a lot of ups and downs in markets, and we managed to navigate all these events. But we have a big program to cut costs across the board in the group. And part of that relies on raw materials coming down in certain parts of the business. Some of it is about OpEx. So we are targeting a minimum of EGP 500 million of cost-cutting initiatives that should materialize this year. We're looking at simplifying our SKUs, a lot of operational efficiencies. And some of our CapEx is going through improvement of equipment efficiencies and helping our margins through increasing capacities in yarn production in certain segments of the business. That should also improve our margins. And then another important step we're doing is historically, the group, we had a lot more independence of the different segments of the business, tufted and nonwoven and woven. We have a lot -- done a lot more integration this year when it comes to going to market with these businesses, and that should give us some upside. So there's a lot more integration, for example, in Egypt in the retail channel, putting all the lineup in stores. There is migration between the different retail outlets that belong to different companies into one platform. And even abroad, some of our woven customers, which are big customers are now being -- cross-selling between the different segments of the business, which we think with the backdrop of tariffs should help a lot our tufted business and nonwoven business. So these are 3 big blocks of initiatives that I think will help us navigate the tough times, cutting costs on a number of platforms, whether it's efficiency simplification or raw material cost control, looking at cross-company efficiencies. And we are using new product launches that means to increase our prices without saying it's a price increase. So we look at component mix, specification of rugs, we work with that and introduce products to replace existing products at higher margin. And that we think the 3 items, that's what give us confidence that we can help navigate these tough times until the housing cycle and the consumer confidence comes back and then the market kicks in again. All what's been happening in the last couple of years in terms of softness, that's a backlog. That should cause a pent-up demand recovery for this industry. So we remain really still optimistic about the potential of this market on the mid- to long term.

Thank you. Murad is asking, can you please restate your vision for sale growth in 2025? Is it price driven or volume driven?

Well, it's not a simple question like this because we operate in 118 countries in multi-segments, multichannels. So there is no really a statement like that. There is a mix of things you do depending on markets and businesses. But what I will tell you is we watch very, very much the margin story. It's very important for us that we maintain on the long run, healthy margins and healthy return on invested capital. So if we ever have to trade in general terms, we will prioritize margin, but it's never as simple. So it depends on country, customer context, long-term potential.

Aymen is raising his hand.

This is Aymen, Edam Oso Holdings. Actually, the dashboard that we used to have from the side of Oriental Weavers was very satisfying to our needs as an analyst in a lot of years now. So I can't believe that we will stay in the next, it's from the start of the year to 6 months without any kind of deep information like what we used to have till the restating of it. So could you please just provide us with the old one till you have the new vision of dashboard.

Thank you for letting us know your interest in the dashboard. But Aymen, it's not about the 6 months. You can check the earnings release of the full year, where you can find all the breakdown of the numbers in volumes and in revenue, and its breakdown geographically as well. I think that could help for the numbers of the full year. For Q1, yes, you can get back to me with any of your inquiries, and I can help with the numbers until we publish the dashboard again.

Yes. It's important, Ali, we tell you, this is part of the bigger initiative we're taking across the company on digitalization. So there is a lot of data cleansing and data reorg as we implement new upgraded systems across the company. We're doing SAP/4HANA across the group. It's a big initiative. And that's put some pressure on the data and how we represent the data. I understand your frustration. But as I said, in the short term, please reach out to Ahmed or come over for a visit, and we can help you with any data that you need until the system is up and running.

Our next question from Nada. What's the impact of gas on you? Any cuts in gas.

Gas is not really significant for our business. So no worries.

And from Ali, what's the current utilization rate? And how much will the new expansion added to your total capacity? And if Chinese producer shed away from U.S. market, will you be able to meet the resulted pent-up demand there, assuming that Europe's imported volume got recovered again.

Right. So let's divide and conquer here. So we have 3 lines of business. We have OW, the woven part, we have tufted and we have the nonwoven. If we're referring to utilization, for the China and the tariff issue, let's put aside woven because China is a main competitor in tufted rugs and in nonwoven. So what we've done here is that we have allocated, we have actually put in some more in our CapEx budget for the Tufted segment for new machineries and new capacities just to cater and to break any kind of bottlenecks to have a decent capacity increase, anticipating the increase in demand. For the nonwoven part, we've already contracted and we've signed a contract for an expansion. Currently, the nonwoven part of our business is working at full capacity. We are expecting in quarter 3 to have a new line installed with an increase of around 30% in our total production capacity. That is also a line of business which competes with China. And even before the tariff we have a very, very good reputation in our Nonwoven business, and we have high demand. So we're putting this in this year, and we'll see what happens next year where we could be anticipating for a further capacity.

Can you give us an insight or guidance of the CapEx for the full year?

We're currently working on a CapEx plan of around $25 million to $30 million, depending on how fast our supplier and the process will materialize. So as I was saying earlier, on the total group level, we have quite an ambitious plan in our digitization. So we have a big amount allocated to that. We also have plans in our sustainability, we have projects addressing the needs of some of our customers and definitely part of our vision is to put sustainability as one of the main elements. Now if you're talking about core business, a big part is for manufacturing and manufacturing we're talking about new lines like what Hazem was mentioning earlier, we're increasing our capacity in yarns production, which is basically the upstream side of our production facility. So we're increasing the capacity there. We're increasing the capacity of our finishing lines because that was a bottleneck historically, and it's quite clear now that we need to invest in that. And in general, we are pursuing a very aggressive overhauling program in addition, of course, to what I was telling you earlier about our tufted business and the nonwoven where we actually need to increase our capacity to accommodate for the expected migration from Chinese sourcing to us, hopefully.

Thank you so much. I'll now hand over the call to Mr. Hazem for closing remarks.

Thank you, Nada. So let's just wrap things up. So Q1 challenging on the top line, volume soft globally, pricing under pressure because of competition globally because of consumer sentiment and confidence both globally and in Egypt, coupled with higher input costs due to inflation, devaluation squeezed our margins in Q1. Q2 will still remain challenging. We should see some improvement versus Q1. Hopefully, the tariff story clears up. we remain targeting the same guidance we have given you. This is what we are working with as management and our teams. In this next quarter's call, we'll have a lot more clarity on how the second half will turn, but we are more optimistic about second half based on the customer calls we have been getting, based on how customers are looking to diversify away from China. Until that happens, we are taking some measures internally. The number one is cost driven on a number of fronts, efficiencies, simplification, cutting costs on different levels, whether it's raw materials through negotiation or benefiting from global directions or from overheads as well. We're looking at a much better cross-group cooperation and cross-selling to support the nonwoven side of the business. And we're also looking at new product introduction to replace old ones at higher margins as an indirect means of increasing our prices without having to actually increase our prices. So we navigate these tough times with confidence with some initiatives on our hand without losing our ambition. And we look forward to meeting you guys in Q2 with hopefully better global condition versus what we have today.

Thank you, and that concludes our call. Thank you, management, for your time and valuable input, and thank you all for attending the call. Have a good day, and goodbye.