Earnings Release 4Q 2014

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1 Earnings Release 4Q 2014 Strong Performance in 2014 is Offset by Accounting Adjustments; EBITDA Margin Reports Strong Improvement CAIRO, March 17, 2015 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 quarter ending 31 December FY 2014 v FY 2013 Net Sales EGP 5.7 bn 3% EBITDA EGP 772 mn 11% Attributable Net Profit EGP mn 6% Gross Profit Margin* 11.2% 95.6 bps EBITDA Margin 13.6% 105 bps Attributable Net Profit Margin 6% 2bps Proposed Dividend per Share of EGP 0.4, implying a dividend yield of 3.3% Full year figures of Modern EFCO, a 47% indirectly-owned subsidiary by Oriental Weavers, were not included in the consolidated figures for FY 2014 following the merger of Modern EFCO and EFCO in late December 2014 (subsidiaries of the non-woven segment). Should we adjust 2014 figures for Modern EFCO, Net Sales for FY 2014 would have recorded a 5% year-on-year increase to EGP 5.8 billion (up from the reported 3% increase year-on-year). Meanwhile, EBITDA Margin and Attributable Net Income would have recorded 13.9% and EGP 379 million respectively. Adjusted Net Sales EGP 5.8 bn 5% Adjusted EBITDA Margin 13.9% 130 bps Adjusted Attributable Net Profit EGP 379 mn 9% 4Q 2014 Earnings Release Page 1

2 A MESSAGE FROM OUR FOUNDER, MR. MOHAMED FARID KHAMIS, TO SHAREHOLDERS: I would like to open our earnings release for the final quarter and full year of 2014 by personally thanking each and every member of the Oriental Weavers team for the outstanding performance we have achieved this year. Our growth in FY 2014 is a clear indication of the depth and breadth of the dedication and teamwork that our talented team exhibited this year. Reported Net Sales (EGP bn) The effort exerted on behalf of the ORWE group is demonstrated by our financial performance in 2014, which saw revenues up 3% to EGP 5.7 billion. Top-line growth was driven both by the steady, continuous improvement in export operations and the stellar performance of the domestic market Our home market of Egypt has emerged strengthened by the tumultuous post- Revolutionary years and continues to offer significant growth potential for Oriental Weavers. The country s real estate market saw a return to booming growth in 2014, and is currently characterized by a growing supply of new housing being offered by major real estate developers, including high-end units as well as affordable housing for mid- and low-income families. This, together with the country s favorable demographic structure and increasing marriage rate, will all drive demand higher for our products. 4Q 4Q FY FY We seek to meet this demand through increased supply and the active growth of our nationwide network of showrooms, to which we added 10 new stores in 2014 and have planned a further 10 showrooms to be opened in These new showrooms target all income brackets and are expected to be well-received. Even as we continue to grow our sales and distribution network in Egypt, we are also focused on broadening our exposure to key export markets. Oriental Weavers is a widely-recognized brand and our reputation for quality put us in a prime position for export growth. Also fairly promising was the footfall at the January 2015 Domotex Hannover, which indicated that global demand is recovering, in general, with the US market in particular showing strong signs of growth. Orders were satisfactory and feedback on our new collection at the fair was very positive; we continue to introduce new innovative designs and a diverse product mix. Turning now to costs and the bottom line, it is notable that raw material costs have been falling for some time, but this has yet to ease our COGS line item. In fact, we do not expect to see a positive impact from falling raw materials prices on our financial performance until late in the first quarter of This delay 4Q 2014 Earnings Release Page 2

3 between the start of raw material price decreases and their reflection on margins is typically a long-term process, and our experience this time is no exception. In 2015, we do expect this to reflect positively on our profitability margins despite the necessity of making price adjustments in key export markets. Overall, margins and the bottom-line were boosted by management s continuous cost rationalization waste reduction efforts in EBITDA margins, in particular saw very strong growth, raising 105 basis points to 13.6%. The bottom line saw a 6% increase to EGP 367 million, a gratifying improvement given lowered net profits in the fourth quarter made necessary by accounting adjustments. From an operational standpoint, 2014 was a successful year, as we have made progress in our strategy to adopt the latest technology in the industry. Over the course of the year, seven of the 11 looms we ordered were installed and the remaining four will be delivered throughout the coming few months. These looms are expected to add 13% to our woven capacity owing to their state-ofthe-art embedded technology as well as their wider width (5 meters). Notably, our upgraded manufacturing technology will not only increase productivity and capacity but also reduce waste and improve quality, key management goals for the coming period. As we move forward into 2015, our focus remains firmly on product innovation, operational excellence and sales execution. To achieve these goals, we will continue investing in our business to lay the groundwork for present-day success and future growth. In closing I would like to once again thank our excellent, top-notch team and assure each of my fellow shareholders that Oriental Weavers is poised to capitalize on the boom years that we anticipate are before us. 4Q 2014 Earnings Release Page 3

4 LOCAL SALES REPORT 7% INCREASE IN FY 2014 ON IMPROVED DEMAND, PRODUCT MIX In 2014, the top line recorded 3% growth y-o-y to EGP 5.7 billion despite a 5% decline in volumes. The uptick comes on improved pricing power due to a shift in consumer preferences to the high-end products of each segment. It is worthy to note that in late December 2014, Modern EFCO, a 47% indirectly owned subsidiary of Oriental Weavers, was merged with its parent company EFCO as its 10-year tax exemption period has expired. Consequently the 2014 income statement does not include the full year figures for Modern EFCO. Adjusting for the EGP 147 million in 2014 revenues of Modern EFCO, whose earnings were classified in the reserves as a result of its merger, the top-line would have reported a growth of 5% to EGP 5.8 billion in the full year. Sales by Destination,4Q % Local Sales 44% 0% Exports Similarly, while reported 4Q14 revenues show a decline of 12% to EGP 1.36 billion, adjusting for Modern EFCO figures shows revenues revised up to EGP 1.46 billion, down only 2% year-on-year. The small drop in adjusted revenues in the quarter comes on the back of an EGP 9.8 million increase in domestic sales being insufficient to offset an EGP 38 million decrease in export sales. Reported Local Sales (EGP mn) Local Sales Local market turnover in 4Q 2014 was largely driven by improved pricing power as our customer base continued the trend of shifting demand toward highend segments of each product line and the local real estate market continues in its upward momentum. Adjusted Revenues in the local market were up 2% y-oy in 4Q and 8% in FY 2014, driven in particular by strong improvements in tufted sales Q 4Q ,135 2,285 FY FY Throughout 2014, the company continued with its push to open new showrooms in under-served neighborhoods and targeting all income groups. The fourthquarter launch of six additional Oriental Weavers showrooms brought the group s total new outlets to 10 in 2014, and total network to 230. An additional 10 are planned for Reported Export Sales (EGP mn) Export Sales In the fourth quarter, adjusted export sales dropped 4% on lowered non-woven felt volumes to Sudan in addition to politically disturbed export markets,such as Libya and Iraq. Furthermore, following the onset of the June 30 revolution, a temporary port closure caused a delay in 3Q 2013 export orders which consiquently were shipped in 4Q 2013 causing the period s figure to be inflated. On a full year basis, adjusted export sales rose 3% on stronger performance earlier in the year. Total export volumes were steady y-o-y in 4Q although they dropped 5% in the full year, on an 11% decline in tufted sales volumes owing to a fire in 1Q14 which led to a significant bottleneck in production Q 4Q ,385 3,382 FY FY Q 2014 Earnings Release Page 4

In the key North American markets of Canada and the United States, the company once again reports strong growth in revenues of 6%, driven in large part by our successful Pantone Universe and Tommy

5 In the key North American markets of Canada and the United States, the company once again reports strong growth in revenues of 6%, driven in large part by our successful Pantone Universe and Tommy Bahama lines as well as a general recovery in the US home-remodeling market. The Pantone and Tommy Bahama partnerships are expected to continue their positive contributions to the top-line in In Europe, meanwhile, adjusted sales remained quite strong recording growth of 7% despite a 12% decline in the EUR:USD exchange rate. The growth comes on the back of increased orders from existing large Europe-based clients. FY 2014 Adjusted Revenue Performance by Region* 6% 7% 9% Russia & China 12% Africa 8% 8% GCC 6% Asia *Blue shaded areas denote the three key markets of Egypt, the US & Canada, and Europe. FY 2014 FIGURES SHOW GROWTH ACROSS THE BOARD; ADJUSTMENTS TO 4Q FIGURES TO ACCOUNT FOR MERGER OF MODERN EFCO & EFCO IMPACT PERFORMACE Woven sales were steady y-o-y at EGP 1,009 million in 4Q 2014 even though volumes dropped slightly compared to 4Q 2013, as consumers continued to gravitate toward higher-value products in each segment. Likewise, woven sales rose 11% in FY 2014 to EGP 3.9 million, up from 3.6 million in FY Notably, sales rose in FY 2014 in all three product segments Grade A, Grade B and Grade C in the domestic and export markets, offsetting weakened Non-Woven Felt sales in the export markets in 4Q. 4Q 2014 Earnings Release Page 5

6 Net sales of the tufted segment were up 1% in 4Q 2014 to EGP 264 million, although they fell 3% to EGP 1,032 million in the full year on lower production volumes. Adjusted Non-woven felt in the consolidated statements dropped 47% y-o-y in 4Q to EGP 44 million and 9% in FY 2014 to EGP 224 million on the back of slower exports. However, it is worth noting that 4Q 2013 figures included EGP 18 million in additions to the non-woven segment related to settlement of intercompany transactions. Sales of yarn (reported as Others) rose 7% in 4Q 2014 to EGP 145 million although they declined by 5% in the full year as most yarn production was used internally to meet the group s growing needs. Table 1: Product Mix in Terms of Value (EGP 'mn) 4Q Q 2013 Change FY 2014 FY 2013 Change Woven 1,009 1,010 0% 3,945 3,569 11% Tufted % 1,032 1,060-3% Non-woven felt (adjusted) % % Non-woven felt (reported) (103) 83 NA % Other % % Total (adjusted) 1,462 1,490-2% 5,811 5,521 5% Total (reported) 1,315 1,490-12% 5,664 5,521 3% Table 2: Product Mix in Terms of Volume (SQM '000) 4Q Q 2013 Change FY 2014 FY 2013 Change Woven % % Tufted % % Non-woven felt % % Total % % Segment Contribution to Sales Volumes in 4Q 2014 Contribution to COGS in 4Q 2014 Segment Contribution to Adjusted Sales Revenues in 4Q % 14% 3% 10% 38% 50% 26% 52% 18% 69% 8% Woven Tufted Non-Woven Felt Raw Materials Selling Exp. Industrial Exp. Others Woven Non-Woven Felt Tufted Others 4Q 2014 Earnings Release Page 6

7 STRONG PRICING POWER AND EFFECTIVE EXPENSE CONTROLS LEAD TO STRONG MARGINS IN FY 2014 For better illustration purposes, we include a table that compares reported and adjusted figures Three Months Ended December 31 Full Year Ended December 31 EGPmn (Reported) (Adjusted) (Reported) (Adjusted) 2013 Net Sales 1,315 1,462 1,491 5,664 5,811 5,521 y-o-y change -12% -2% 3% 5% EBITDA y-o-y change -23% 5% 11% 16% EBITDA Margin* 9.1% 11.1% 10.4% 13.6% 13.9% 12.6% Net Profit for the Period y-o-y change -29% -1% 2% 8% Net Profit Margin 4.2% 5.3% 5.2% 6.7% 6.9% 6.7% Attributable to: Equity Holders of the Parent Minority Interest (3) Reported EBITDA came in at EGP 119 million in 4Q 2014, down 23% as a result of the accounting adjustments; however, should we include the EBITDA of Modern EFCO, consolidated EBITDA would be EGP 162 million (+5% y-oy) and EBITDA Margin would stand at 11.1% for 4Q Similarly, reported EBITDA climbed 11% in FY 2014 and adjusted EBITDA was up 16% as a better product mix and a successful company-wide emphasis on efficiency and cost control throughout the year saw good results outpacing the 17% increase in G&A expenses on incentives given to workers. Accordingly, EBITDA margin was up by 130 basis points over FY 2013 to 13.9%. Compared to the 16% growth recorded in adjusted EBITDA in 2014, adjusted EBIT reported slower growth of 12% as a result of the EGP 50 million in provisions booked for goodwill impairments of EGP 40 million and contingent liabilities of EGP 10 million. Moving down the Income Statement, adjusted attributable earnings after minority interest in 2014 reported only a 9% growth despite the EGP 24.3 million gain on sale of investment recorded in 4Q 2014 related to the sale of the company s stake in Oriental Petrochemicals Company. The company incurred a two-fold rise in FX losses to EGP 40.8 in 2014 as a result of the devaluation of the EUR vs. the USD. In addition, the company was also taxed at a higher effective tax rate of 22% compared to 13% the previous year mainly due to the following: 1. The new increased tax rate of 30% for taxable subsidiaries which was implemented retroactively starting 1Q Q 2014 Earnings Release Page 7

8 2. Revaluation of the assets of MAC, a 58%-owned subsidiary of ORWE, following the merger with Oriental Weavers Fibers that took place in 2013 where the tax authority used a lower depreciation figure to calculate the income tax expense. 3. The EGP 50 million in provisions booked in 2014 Reported Attributable Net Income accordingly dropped 19% in 4Q while reported Attributable NPM was somewhat steady during the quarter at 4.4%. In the full year, however, reported Attributable Net Income rose 6% to EGP 367 million and Attributable NPM stood at 6.5%, up 19 bps year-on-year. Reported Net Profit for the Period (EGP mn) OUTLOOK Our outlook for 2015 is quite optimistic, driven by ongoing signs of economic growth in our home market of Egypt, as well as solid sales at Domotex Hannover typically an excellent bellwether of our performance for the year Management has also freed up capacity as exposure to one of our top export clients is reduced and the unutilized capacities will be diverted to the local market in addition to seeking exposure to new markets such as France in addition to increasing allocation to GCC, US and South America Q 4Q FY FY We continue to target the local and international growth potential in the hospitality segment. There is currently strong demand for this segment in the local market as the tourism sector begins its rebound. This, in addition to growing regional demand, should drive the contribution of this segment of the business higher. RECENT CORPORATE DEVELOPMENTS On 27 January 2015 the company implemented a five-for-one stock split. Oriental Weaver s paid-in capital now stand at EGP 450 million divided over 450 million shares (up from 90 million) with a par value of EGP 1/share compared to the previous EGP 5/share. 4Q 2014 Earnings Release Page 8

9 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: 450mn EGP Number of Shares: 450 million shares Par Value: 1 EGP per share SHAREHOLDER STRUCTURE 57% Khamis Family 37% Institutions 6% Retail 4Q 2014 Earnings Release Page 9

10 Income Statement (EGP '000) Three Months Ended December 31 Full Year Ended December Change Change Net Sales 1,315,314 1,490,831 (12%) 5,664,332 5,521,302 3% Less: COGS 1,222,207 1,372,637 (11%) 5,027,724 4,953,549 1% Gross Profit 93, ,194 (21%) 636, ,754 12% Gross Profit Margin* 7.1% 7.9% (84.94bps) 11.2% 10.3% 95.59bps Less: Selling & Distribution Expenses 9,099 11,208 (18.8%) 40,355 41,171 (2.0%) General & Administrative Expenses 37,281 24,698 51% 139, ,099 17% Provisions & impairment 20,450 20,481 0% 50,450 20,481 0% 66,830 56,386 19% 230, ,751 27% Net Income from Operation Activities 26,277 61,808 (57%) 406, ,003 5% Operation Activities Margin 2.0% 4.1% (214.81bps) 7.2% 7.0% 16.36bps Add / Less: Investment Income 24, NA 24,325 - NA Interest Income 3, % 8,077 3, % Other Revenues 43,175 32,314 34% 154, ,913 3% Capital Gain 3,088 33,683 (91%) 3,748 35,299 (89%) Financing Expenses (19,074) (21,264) (10%) (88,319) (112,852) (22%) Foreign Exchange Differences (2,931) 1,308 NA (40,815) (22,994) 78% 51,609 46,552 11% 61,983 53,543 16% Net Profit for the Period before Income Tax 77, ,360 (28%) 468, ,546 6% EBT Margin 6% 7% (134.69bps) 8% 8% 28.81bps Add / Less: Current Income Tax (18,963) (17,891) 6% (97,525) (59,366) 64% Deferred Tax (3,666) (12,762) (71%) 6,720 (12,058) NA Income Tax for the Period (22,629) (30,654) (26%) (90,805) (71,424) 27% Net Profit for the Period 55,257 77,706 (29%) 377, ,122 2% Net Profit Margin 4% 5% (101.12bps) 7% 7% (2.14bps) Attributable to: Equity Holders of the Parent 58,395 72,426 (19%) 367, ,488 6% Minority Interest (3,138) 5,280 NA 10,392 21,634 (52%) *Reported figures include depreciation expenses 4Q 2014 Earnings Release Page 10

11 Balance Sheet (EGP '000) 31-Dec Dec-13 Long Term Assets Fixed Assets (Net) 2,663,344 2,753,447 Projects in Progress 62,181 57,485 Investments - Available for Sale 81,674 81,674 Goodwill 366, ,791 Total Long Term Assets 3,173,438 3,366,396 Current Assets Inventory 1,631,748 1,523,335 Trades & Notes Receivable 1,028, ,669 Debtors and Other Debit Accounts 201, ,849 Cash on Hand & at Banks 591, ,866 Total Current Assets 3,453,073 3,005,720 Current Liabilities Provisions 14,491 35,848 Banks - Credit Accounts 1,323,047 1,388,216 Long Term Liabilities - Current Portion 93,617 89,138 Suppliers & Notes Payable 740, ,424 Dividends Payable 11,648 8,152 Creditors & Other Credit Accounts 232, ,310 Total Current Liabilities 2,416,751 2,352,087 Working Capital 1,036, ,633 Total Investment 4,209,760 4,020,030 Financed as Follows: Shareholder's Equity Issued and Paid Capital 450, ,000 Reserves 1,504,783 1,413,413 Unrealized Profits from Available for Sale Investment Retained Earnings 707, ,192 Net Profit for the Period 367, ,488 Exchange Differences Arising on Translation of Foreign Currency 503, ,119 Treasury Stocks (14,597) (14,597) Total Equity Attributable to Equity Holders of the Parent 3,518,430 3,308,615 Minority Interest 398, ,130 Total Equity 3,916,928 3,665,745 Long - Term Liabilities Long Term loans 131, ,725 Housing and Development Bank Loan Creditors - Purchase of Fixed Assets - - Deferred Taxes Liabilities Total Long Term Liabilities 292, ,284 Total Shareholder's Equity & Long Term Liabilities 4,209,760 4,020,030 4Q 2014 Earnings Release Page 11

12 Statement of Cash Flows (EGP '000) Cash flows from Operating Activities: Full Year Ended December Change Net Profit for the Period before Income Tax 468, ,546 6% Adjustments to Reconcile Net Profit to Net Cash Provided by Operating Activities Fixed Assets Depreciation 314, ,947 10% Provisions other than Deprecations ,481 Financing Expenses 88, ,852-22% Interest Income (8,077) (3,177) 154% Investment Income (24,325) 0 Capital Gain (3,748) (35,299) -89% Operating Profits before Changes in Working Capital 885, ,350 8% Change in Working Capital (Increase) in Inventory (110,413) (66,406) 66% Decrease (Increase) in Trades & Notes Receivable and other Debit Accounts (80 954) (90,380) -10% Decrease (Increase) in Suppliers & Notes Payable and other Credit Accounts 100,616 41, % Cash Flows Provided by Operating Activities 795, ,371 12% Interest Income 7,346 2, % Paid Financing Expenses (88,319) (114,330) -23% Tax Payment (56,338) (30,385) 85% Net Cash Flows Provided by Operating Activities 657, ,535 16% Cash Flows from Investing Activities Payments for Purchase of Fixed Assets and Projects in Progress (99,380) (58,094) 71% Proceeds from Sale of Fixed Assets 38,064 46,602-18% Proceeds from Sale of Investments NA Net Cash Flows (used in) Investing Activities (36,991) (11,493) 222% Cash Flows from Financing Activities: Proceeds (Payment) from Banks-Credit Accounts (65,172) (212,490) -69% Dividends Paid (230,046) (181,467) 27% (Payment) Proceeds in Long Term Liabilities (74,240) (88,196) -16% Net Cash Flows (used in) Provided by Financing Activities (369,457) (482,154) -23% Net Change in Cash and Cash Equivalents During the Period 251,358 71, % Cash and cash equivalents at beginning of the period 324, ,682 41% Exchange Differences Arising on Translation of Financial Statements 15,164 22,251-32% Cash and Cash Equivalents at End of the Period 591, ,821 82% 4Q 2014 Earnings Release Page 12

13 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 producer 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. # # # 4Q 2014 Earnings Release Page 13

Oriental Weavers Reports Revenue and Net Profit Growth, Strong Margins in Q1 2013

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