Earnings Release 2Q / 1H 2016

Transcription

1 Earnings Release 2Q / 1H 2016 Oriental Weavers reports impressive growth in 2Q2016 operating margins, with bottom line growth of 39% Y-o-Y CAIRO, 2 nd August, 2016 Oriental Weavers Carpet Company [ORWE EY; ORWE.CA], one of the world s largest machine-made rug and carpet manufacturers, reported today its financial results for the second quarter of Q 2016 v 2Q 2015 Sales EGP 1,549 mn 1% EBITDA EGP 250 mn 16% Attributable Net Income EGP 159 mn 39 % Gross Profit Margin* 15.3% 322 bps EBITDA Margin 16.2% 280 bps Net Profit Margin 10.3% 282 bps * Gross profit margin includes depreciation expense 1H 2016 v 1H 2015 Sales EGP 3,006 mn 1% EBITDA EGP 480 mn 8% Attributable Net Income EGP 262 mn 0.5% Gross Profit Margin* 14.2% 163 bps EBITDA Margin 16% 109 bps Net Profit Margin 9% Flat *Gross profit margin includes depreciation expense 2Q 2016 Earnings Release Page 1

2 1,541 1,549 2,982 3,006 A MESSAGE FROM OUR FOUNDER, MR. MOHAMED FARID KHAMIS, TO SHAREHOLDERS: As the second quarter of 2016 draws to a close, it has been one marked both by local growth and infrastructure improvements, and a concerted drive towards securing more of the international market through traditional business partnerships and our embrace of innovative online sales models. Net Sales (EGP mn). We continue to perform relatively well on both local and export fronts. Current local market dynamics and conditions are boosting our growth potential, with local sales up 4% in 2Q In early May and mid July, we were able to partially pass on the higher USD costs to consumers, whilst impact on demand remains neutral, since imported products are subject to the effects of EGP devaluation. On the export front, the US remains a key international market and one that is pushing our performance to even higher levels this year, enhanced by new product development and the underlying quality of service and product we offer our customers. As we look to expand our international market even further, we have managed to secure growth opportunities with a number of major retailers and agents in Europe, Asia and Australia. 2Q15 2Q16 1H15 1H16 Embracing the potential of the online market remains a priority and, in keeping with the global burgeoning of internet shopping, our own online business in the US continues to expand. In Egypt, meanwhile, we have launched online with souq.com, and are also close to securing partnership deals with online portals in both France and Italy. It is also very pleasing to report that our tufted division managed to make up partially for the decline that took place in the first quarter of 2016, with sales in 1H 2016 down 23% y-o-y vs. the 36% decline in 1Q Continuing our success in the hospitality arm, OW Hospitality has been featured in the Hospitality Design June 2016 edition, and we have also completed the refurbishment of various hotel chains in Egypt, the US and the UAE. This was reflected in a 13% y-o-y growth in 1H2016 sales of axminister. In terms of infrastructure growth, we have recently acquired four new Gobelin looms to enable us meet huge order backlogs from GCC countries and Southern Europe. They come in addition to two new weaving machines, two new yarn production lines and two machines for the non-woven segment. 2Q 2016 Earnings Release Page 2

3 ,348 1,438 Finally, we are finalizing the necessary procedures to merge one of our subsidiaries, Rosetex, with Oriental Weavers Textiles in a transaction that should add almost 2 3% to our earnings and, in the longer term, will enable further expansion initiatives. As we look to the future to the continued engagement of international and online markets and the growth of our local business it remains our number one priority to maintain the underlying quality of product and service that defines Oriental Weavers and forms the foundation of our business strategy. GROWTH IN LOCAL SALES, WHILE EXPORTS RECOVER Our net sales grew almost by 1% compared to 2Q 2015, to EGP 1,549 million. This was primarily driven by 4% y-o-y growth in local sales which helped offset the 3% y-o-y decline in exports. Sales by Destination 1H 2016 Accounting for both quarters, 1H 2016 saw total sales increase by 1% compared to 1H Local sales grew by 7% while exports declined by 4%. It is important to highlight that in June 2016 we finished the 8-month-long task of reconstructing the building of one of our Egypt-based factories, which targets mainly the local market. The staggered halt of six looms was necessary at every phase of the building reconstruction, which impacted our sales volumes in the local market. Local Sales Our local net sales grew 4% in 2Q 2016 compared to the same period last year, reaching EGP 763 million, in spite of a 2% decline in volumes. In 1H2016, local sales figure grew 7% compared to last year, with sales volumes up 4%. 52% Local Sales 48% Exports In early May and mid July, we were able to partially pass on the higher USD costs to consumers by raising our selling prices by almost 7% on our entire range of products, whilst impact on demand remained neutral, since imported products competing for the market are subject to the effects of EGP devaluation. Local Sales (EGP mn) A closer look at our locally produced outputs our woven, tufted and nonwoven products showed 9%, 8% and 27% growth in sales value, respectively in 2Q2016. This quarter, showroom sales reported growth of 3% y-o-y, whilst wholesale figures grew only 1%, mostly because of seasonal impact; namely, exam time, coinciding with the holy month of Ramadan. We need to highlight that MAC wholesale figures were impacted negatively by the effects of traders stockpiling goods in 1Q 2016 ahead of May price increases. 2Q15 2Q16 1H15 1H16 2Q 2016 Earnings Release Page 3

4 ,634 1,569 We have also seen 15% growth in sales value of Grade C to the local market this quarter, as a result of the acquisition of market share in Grade C imported products from Saudi Arabia and Jordan. During the quarter, the Government of Egypt has imposed strict procedures on rug importation along with other 49 commodities, which we believe limited the flow of imported rugs to the market. During 1H 2016, Oriental Weavers partially halted production in one facility that targets the local market, as noted above, which drove us to efficiently allocate our capacities to meet the bulk of the local market mid-to-low end demand. The hospitality segment reported significant growth of over 270% y-o-y in 2Q2016 as a result of the refurbishment of 7 mosques ahead of the holy month of Ramadan including Al-Hussein Mosque in Cairo, and likewise a number of hotel chains in Cairo, Alexandria and Sharm El Sheikh. The upturn in real estate construction is expected to be the key driver behind increased demand for our products for the remainder of 2016, supported by our diverse client base and ability to cater to varying demographics and income groups. We also intend to continue moving ahead with plans to expand our showroom network across Egypt to reach an even wider client base. So far this year, we have added three new showrooms to an existing 230 outlets and aim to add at least two more before the year ends, mostly in the densely populated regions of the Nile Delta and Upper Egypt. Export Sales Export revenues reported 3% decline from 2Q 2015 levels to stand at EGP 786 million. Had it not been for the 37% decline in sales of yarn, and discounts offered to our customers, our export performance would have been better. We have implemented successful initiatives within the exports division of the group, which we believe should enhance our export performance in the coming quarters. ExportSales (EGP mn) The woven segment (70% of 2Q exports) reported a 3% export growth, prompted mostly by the US arm, which managed to outweigh the decline resulting from lower exposure to one of our key European customers. Through a closer look at export by grade, the growing contribution in the second quarter of 2016 from sales of Grade C is evident, connected to the increasing popularity of outdoor products. Our US sales division recorded 18% growth in its revenues. The US remains a key international market and one that is pushing our performance to even higher levels this year, enhanced by new agreements secured with major homefurnishing stores for the supply of indoor and outdoor rugs, in addition to 2Q15 2Q16 1H15 1H16 2Q 2016 Earnings Release Page 4

5 growth in online business, product development and the underlying quality of service and product we offer to our customers. In other successes, the tufted segment managed to partially recover the over- 45% y-o-y decline in its exports in 1Q 2016 with only 16% export decline this quarter and 33% decline in 1H2016. This came on the back of approaches to new customers in the Far East, Central and Eastern Europe, Africa and Australia, along with the introduction of new outputs such as artificial grass and PVC products. Similarly, the non-woven segment (3% of exports) recorded 40% y-o-y growth in its 2Q exports, driven by the introduction of new product mixes. 1H 2016 Revenue Performance by Region* 25% by OW USA 9% 26% Russia & China 15% Africa 7% 34% GCC 11% Asia *Blue shaded areas denote the three key markets of Egypt, the US & Canada, and Europe. Political and economic instability experienced by some of our export markets, such as Libya, Yemen and Iraq, continued in the meantime to impact our export figures to the GCC in 2Q Our exports to Europe witnessed a 9% y-o-y drop in sales in 1H Successful efforts to grow our European customer base by approaching new clients in Italy, France and Greece have helped to partially offset the 17% decline in revenues recorded with our main European customer. We are also seeing signs of gradual economic improvement in some European countries. The company s exports committee has launched an action plan to combat challenges faced on the international front, with a concerted attempt to diversify 2Q 2016 Earnings Release Page 5

6 our client base in Japan, Australia and Indonesia, in addition to entering new markets such as Nepal and Kazakhstan. Simultaneously, we remain dedicated to expanding our presence in existing markets, through marketing campaigns and also by introducing new, niche-market products to our customers. Management is confident that our diversified and high-quality product mix, and our strong and reputable brand, place us in a prime position to capture growth in the coming period. Fibers and others segments slowed by 37% y-o-y as most of the fibers produced were internally utilized. Table 1: Product Mix in Terms of Volume (SQM 000) 2Q Q 2015 Change 1H H 2015 Change Woven* 13,538 14,511 (7%) 27,960 28,247 (1%) Tufted 8,627 11,381 (24%) 16,064 22,920 (30%) Non-woven felt 3,723 3,162 18% 7,303 6,493 12% Total 25,888 29,054 (11%) 51,327 57,660 (11%) Table 2: Product Mix in Terms of Value (EGP '000) 2Q Q 2015 Change 1H H 2015 Change Woven* 797, ,266 2% 1,576,940 1,507,457 5% OW USA 223, ,477 18% 479, ,446 25% OW China 21,338 16,385 30% 35,369 26,604 33% Total Woven 1,042, ,128 6% 2,092,240 1,919,507 9% Tufted 257, ,715 (10%) 438, ,224 (23%) Non-woven felt 52,880 39,624 33% 100,042 80,570 24% Other 195, ,478 (15%) 375, ,986 (9%) Total 1,548,765 1,540,945 1% 3,006,432 2,982,287 1% *Produced at Egypt-based facilities Segment Contribution to Sales Volumes in 2Q 2016 Segment Contribution to Sales Revenues in 2Q 2016 Contribution to COGS in 2Q % 3% 13% 19% 33% 52% 17% 67% 23% 12% 46% Woven Tufted Non-Woven Felt Woven Non-Woven Felt Tufted Others Raw Materials Selling Exp. Industrial Exp. Others 2Q 2016 Earnings Release Page 6

7 LOWER RAW MATERIAL COSTS, EGP DEVALUATION AND NOVEL PRODUCT MIX SEE GROSS PROFIT MARGIN GROW 322 bps Y-O-Y Gross profit margin recorded an impressive growth of 322 bps y-o-y in 2Q 2016 to 15.3%, on the back of mainly lower raw material costs, with raw materials contributing 46% of total COGS in 2Q 2016 vs. 51% in 2Q Polypropylene, 27% of total costs, saw its prices down 22% y-o-y in 1H Furthermore, EGP devaluation added to our margin improvement, as did newly introduced product mix. Gross profit margin improved across most of our divisions with the woven segment (67% of revenues) recording 240 bps improvement in margins, and the non-woven segment (3% of revenues) improving 640 bps, whilst the tufted segment remained flat. EBITDA for the quarter came in at EGP 250 million, 16% higher than last year s figure of EGP 206 million, whilst EBITDA margin grew 280 bps to 16%. Selling, general and administrative expenses as a percentage of sales remained generally stable y-o-y at c. 0.7 %. Despite the FX losses of EGP 50 million recorded in 1Q 2016, the company realized EGP 1 million in FX gains during 2Q This resulted mostly from stable EGP vs. USD exchange rates during the quarter. Oriental Weavers treasury team managed to ensure a naturally hedged position by matching Euro assets with Euro liabilities, which resulted in a slight FX gain of EGP 1 million on the back of the decline in the Euro vs. USD. Also thanks to the efforts of the treasury team, interest and treasury income grew 49% y-o-y through efficient utilization of our cash balance via investments in time deposits and highly profitable instruments, such as treasury bills. Despite the 2% increase in EGP borrowing rates that took place twice in 1H 2016 by the Central Bank of Egypt, financing expenses grew by only 15% y-o-y in 2Q Collectively, net interest expenses grew slightly by 1% during the quarter. Collected export rebates quadrupled in 2Q 2016, reaching EGP 59 million on regular disbursement of delayed subsidies by the export subsidy fund related to the period prior to December We recorded EGP 12 million provisions mostly for tax settlements. Driven by the above, pre-tax earnings reported a significant y-o-y growth of 49%, reaching EGP 215 million in 2Q Effective tax rates grew 300 bps to 17%, mostly on growth in earnings contributions of taxable subsidiaries. 2Q 2016 Earnings Release Page 7

8 ATTRIBUTABLE EARNINGS UP 39% Oriental Weavers managed to make up for the 29% decline in 1Q 2016 attributable earnings, with earnings growing 39% in 2Q 2016 to EGP 159 million, implying a 282 bps net margin improvement to 10.3%, up from 7.4% in 2Q For the period of 1H 2016, as compared to 1H 2015, net profits remained flat at EGP 262 million. Net profit margin for the same period stands at 9%, flat against the comparable figure from last year. RECENT CORPORATE DEVELOPMENTS. In late June 2016, Oriental Weavers Carpets announced that it is finalizing the necessary procedures required for the merger of one of its subsidiaries, Modern Rosetex for Spinning & Weaving (Target company operating under the law no. 8 for 1997), with Oriental Weavers Textiles (Acquiring company operating under the private free zone regulations for the law no. 8 for 1997). By virtue of this merger, Oriental Weavers Textiles is expected to become one of the subsidiaries of Oriental Weavers Carpets with an ownership stake of 65%. Brief profiles of the two companies follow: Oriental Weavers Textiles Oriental Weavers Textiles was established in 1997, located in a private free area with a core business that initially focused on towel manufacturing for the export market. As a result of underperformance, however, top-management decided to shift the business focus to the weaving of area rugs for the export market. Oriental Weavers Textiles (located in Tenth of Ramadan City) owns a vast area of land with an approximate total size of 120,000 sq. m., with only 28% of the land currently utilized. This should allow the group to use the remaining vacant land for future expansions of the woven segment. In this regard, the company has recently established the first phase of its expansion plan by adding a new building with only three new looms added, which should allow for any further expansion initiatives. Modern Rosetex for Spinning & Weaving In late 2011, Oriental Weavers Carpets acquired Modern Rosetex for Spinning & Weaving for the sake of expanding warehousing capacities, since the latter owns 65,000 sq. m. of land adjacent to Oriental Weavers International. This merger should add the following to Oriental Weavers Carpets consolidated statements: 2Q 2016 Earnings Release Page 8

9 1. Oriental Weavers Textiles will become one of the subsidiaries of Oriental Weavers Carpets. 2. The merger should add 2 3% additional attributable net earnings with no expected additions to top line revenues, given the intercompany transactions between Oriental Weavers Textiles and the subsidiaries of Oriental Weavers Carpets. 3. Increasing consolidated assets by EGP 354 million, while consolidated liabilities should increase by EGP 142 million. 4. Oriental Weavers Textiles should provide room for any future expansions. The Group s Expansion Plan Management is optimistic about the company s prospects and potential as we enter the second half of The increasing reliance on new, more advanced manufacturing technology is expected to help increase productivity, enhance quality, and reduce waste, in turn contributing to profitability and margin improvement. In this regard, we expect to spend around EGP100 million in Capex in Should the merger of Rosetex with Oriental Weavers Textiles (OWT) take place during 3Q 2016, the purchase of 7 new looms (expected to be added in OWT) will be reflected in the consolidated Capex during the 2H 2016, with total expenditures of USD 14.5 million and an additional capacity of 4.2 million sqm. We have recently received one weaving loom in Egypt and another in the US factory, each with a capacity of around 400,000 sqm. Given the growth in orders for our Gobelin products, four Gobelin looms were added recently as well, bringing 67,500 sqm of capacity each. On the group level, we added 2 new yarn production lines in Egypt and the US, with a Capex on average of EUR 600,000 each to increase our yarn self sufficiency. Furthermore, our US division has started operations at its new one-million sqm warehouse, with a Capex of USD 2.8 million spent. This warehouse is designed to meet the growth in online business 20% of US revenues and the need for sufficient storage capacity to ensure timely delivery of customer orders. EFCO added two new machines this year with Capex of EGP 15.5 million, which should enable the company to introduce new product mix to meet market demand. 2Q 2016 Earnings Release Page 9

10 We are directly tackling challenges on the international front by identifying and targeting new markets, reflected in the successful recent expansions of our client base in Europe, Asia and Australia. Building on the continued growth of online sales in the US, our recent partnership with online sales platform souq.com in Egypt and work towards deals with online retailers in key European markets will open pathways to further increase both local and international sales. Moving forward, we will continue to direct our efforts towards product innovation, operational excellence, and sales execution, whilst jointly investing in the growth and future of our business. We also intend to focus on optimizing the management of our central supply chain, in addition to developing a new lead-time system that reduces the days on hand of our raw material inventory and improves our overall efficiency. INVESTOR RELATIONS CONTACTS For further information, please contact: Farida Khamis Vice President Oriental Weavers Carpet Company fkhamis@orientalweavers.com Ingy El Diwany Investor Relations Manager Oriental Weavers Carpet Company ieldiwany@orientalweavers.com Tel (Direct) : +2 (02) Fax : +2 (02) STOCK SYMBOL ORWE.CA CAPITAL Issued and Paid-In Capital: 450 million EGP Number of Shares: 450 million shares Par Value: 1 EGP per share SHAREHOLDER STRUCTURE 57% Khamis Family 38% Institutions 5% Retail 2Q 2016 Earnings Release Page 10

11 Income Statement (EGP million) Three Months Ended June 30 Six Months Ended June Change Change Net Sales 1,549 1,541 1% 3,006 2,982 1% Less: COGS -1,312-1,355-3% -2,579-2,607-1% Gross Profit % % Gross Profit Margin* 15.3% 12.1% 321.7bps 14.2% 12.6% 163bps Less: Selling & Distribution Expenses % % General & Administrative Expenses % % Provisions & impairment NA % Sum % % Net Income from Operation Activities % % Operation Activities Margin 10.7% 8.6% 206.2bps 9.6% 9.2% 42.96bps Add / Less: Investment Income 0 0 0% % Interest Income/ Treasury income % % Other Revenues % % Capital Gain 4 4 4% % Financing Expenses % % Foreign Exchange Differences % % Sum % % Net Profit for the Period before Income Tax % % EBT Margin 14% 9% 448.9bps 11% 11% 22.5bps Add / Less: Current Income Tax % % Deferred Tax % % Income Tax for the Period (37) (20) 80% (59) (45) 31% Net Profit for the Period % % Net Profit Margin 12% 8% bps 9% 9% bps Attributable to: Equity Holders of the Parent % % Non-Controlling interest % % *Reported figures include depreciation expenses 2Q 2016 Earnings Release Page 11

12 Balance Sheet (EGP million) 30-Jun Dec-15 Long Term Assets Fixed Assets (Net) 2,631 2,577 Projects in Progress Investments - Available for Sale Goodwill Total Long Term Assets 3,257 3,118 Current Assets Inventory 1,663 1,588 Trades & Notes Receivable 1, Debtors and Other Debit Accounts Cash on Hand & at Banks Total Current Assets 3,653 3,340 Current Liabilities Provisions Banks - Credit Accounts 1,227 1,153 Long Term Liabilities - Current Portion Suppliers & Notes Payable Dividends Payable 49 8 Creditors & Other Credit Accounts Deferred Tax Liability Total Current Liabilities 2,142 1,965 Working Capital 1,511 1,375 Total Investment 4,769 4,493 Financed as Follows: Shareholder's Equity Issued and Paid Capital Reserves 1,544 1,525 Unrealized Profits from Available for Sale Investment 0 0 Retained Earnings Net Profit for the Period Exchange Differences Arising on Translation of Foreign Currency 1, Treasury Stocks (15) (15) Total Equity Attributable to Equity Holders of the Parent 4,200 3,858 Minority Interest Total Equity 4,593 4,238 Long - Term Liabilities Long Term loans Housing and Development Bank Loan 0 0 Creditors - Purchase of Fixed Assets 0 0 Deferred Taxes Liabilities Total Long Term Liabilities Total Shareholder's Equity & Long Term Liabilities 4,796 4,492 2Q 2016 Earnings Release Page 12

13 Statement of Cash Flows (EGP million) Cash flows from Operating Activities: Period Ended June Net Profit for the Period before Income Tax Adjustments to Reconcile Net Profit to Net Cash Provided by Operating Activities Fixed Assets Depreciation Provisions other than Deprecations 32 5 Financing Expenses Interest Income Capital Gain -4-5 Exchange Differences Arising on Translation of Financial Statements Investment Income Operating Profits before Changes in Working Capital Change in Working Capital (Increase) in Inventory Decrease (Increase) in Trades & Notes Receivable and other Debit Accounts Decrease (Increase) in Suppliers & Notes Payable and other Credit Accounts Cash Flows Provided by Operating Activities Interest Incomes 8 11 Paid Financing Expenses Tax Payment Net Cash Flows Provided by Operating Activities Cash Flows from Investing Activities Payments for Purchase of Fixed Assets and Projects in Progress Proceeds from Sale of Fixed Assets 5 9 Payments for Purchase of treasury bills 116 Net Cash Flows (used in) Investing Activities Cash Flows from Financing Activities: Proceeds (Payment) from Banks-Credit Accounts Dividends Paid & Payments to Non-Controlling Interest (Payment) Proceeds in Long Term Liabilities Net Cash Flows (used in) Provided by Financing Activities Net Change in Cash and Cash Equivalents During the Period Cash and cash equivalents at beginning of the period Cash and Cash Equivalents at End of the Period Q 2016 Earnings Release Page 13

14 ABOUT ORIENTAL WEAVERS CARPET COMPANY Oriental Weavers is a global player in machine-woven rugs and carpets; the company is renowned for superior product design and quality, as well as technological innovation. Today, the company is one of the largest producers of machine-made woven rugs in the world. It is management s vision to build a state-of-the-art, internationally-competitive carpet and home textile company characterized by a sharp focus on its customers, and driven by marketing- and export-oriented strategies. ( FORWARD-LOOKING STATEMENTS Certain information contained in this document 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 and the Middle East and changes in business strategy and various other factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in such forward-looking statements. Recipients of this document are cautioned not to place any reliance on these forward-looking statements. The Company undertakes no obligation to republish revised forward-looking statements to reflect changed events or circumstances. # # # 2Q 2016 Earnings Release Page 14