Lecico Egypt (LCSW.CA) announces its consolidated results for third quarter of 2013.
Highlights
3Q 2013
• Lecico revenue up 27% to EGP 378.0 million (49.2% from sanitary ware)
• Sanitary ware revenue up 24% to EGP 186.1 million, driven by a 10% increase in volumes to 1.36 million pieces (58.5% exports)
• Tile revenue up 27% to EGP 182.7 million, driven by 15% increase in volumes to 8.39 million square meters (25.2% exports)
• Brassware revenue EGP 9.2 million driven by sales volume of 25,831 pieces
• EBIT up 79% to EGP 59.3 million, margin up 4.6 percentage pts to 15.7%
• Net profit up 72% to EGP 17.5 million, margin up 1.2 percentage pts to 4.6%
9M 2013
• Lecico revenue up 18% to EGP 1,109.9 million (50.0% from sanitary ware)
• Sanitary ware revenue up 20% to EGP 554.9 million, driven by 12% increase in volumes to 4.25 million pieces (52.4% exports)
• Tile revenue up 13% to EGP 523.8 million, driven by 1% increase in volumes to 24.2 million square meters (23.9% exports)
• Brassware revenue EGP 31.2 million driven by sales volume of 102,432 pieces
• EBIT up 41% to EGP 165.5 million, margin up 2.5 percentage pts to 14.9%
• Net profit up 55% to EGP 67.4 million, margin up 1.5 percentage pts to 6.1%
Lecico Egypt Chairman and CEO, Gilbert Gargour, commented “The third quarter continued to deliver strong growth in sales volumes, revenues and profitability over the same period last year in sanitary ware, tiles and brassware. This was our second best quarter in terms of sales, profitability and margins in over two years despite the seasonal effect of Ramadan and political events in Egypt.
“While sales in Egypt continue to be the main driver of growth, this is the first quarter in which we have seen strong growth in exports primarily from the UK and Libya.
“Sales in Egypt and Libya benefitted from the additional capacity of our new tile expansion in the second half which also helped to pull more sanitary ware sales in Egypt and regionally.
“Although our quarterly numbers are continuing to show an accelerating year-on-year improvement, we need to work very hard to return to the profit levels seen in prior years.
To achieve this Lecico took the decision to exit our operations in France. Unfortunately, despite the best effort and will of our staff and executives in France and Egypt, we have not been able to rescue this business. This closure will cause a large write off in 2013. In light of the fact that we were unable to find a buyer for Lecico France and are going into bankruptcy we now estimate – in consultation with our external accountants – a write off of around EGP 130 million. However, the elimination of our losses in France will vastly improve our cash flows and profitability in years to come. If we take 2012 as an example, not carrying the losses of France will improve our operating profit by EGP 15 million and our net profit by EGP 20 million.”
Taher Gargour, Lecico Egypt MD, added, “The third quarter is seasonally the most challenging for Lecico with Ramadan holidays reducing our productivity significantly and limiting demand in our regional markets. This year the holiday slowdown was compounded by political unrest in Egypt and the introduction of a curfew which
effectively prolonged the Ramadan month slow down for an additional several weeks.
“The result of this is a quarter-on-quarter drop in financial performance as expected.
However, more positively the results for the quarter show the strongest year-on-year improvement of any quarter this year and remain significantly stronger than the first quarter through the operating profit line despite the impact of Ramadan.
“The Egyptian pound strengthened against the dollar during the quarter on the back of strong financial support for Egypt from some of the Gulf states which resulted in a foreign exchange loss for us in the quarter compared to strong gains in the first two quarters of this year and the third quarter of last year. Despite this I am proud to report our best year-on-year growth in quarterly net profits so far in 2013.
“Our net debt position deteriorated slightly over the course of the quarter as we finalised our capital expenditure on the new tile line. Net debt is still slightly down over the start of the year and we expect this to improve again in the fourth quarter as we benefit from limited capital expenditure and the full utilisation of our new tile line. It is still our goal to continue reducing debt year-on-year which will in due course help us reduce interest expenses to deliver more of our operational growth to our bottom line.
“Although the results in the fourth quarter will be distorted by the impact of exiting our French operations, I am optimistic that our core operations will deliver strong year-onyear improvement excluding these exceptional charges. I am also optimistic that this will continue in the year ahead, assuming that the political change and uncertainty in Egypt and the region do not significantly impact demand in those markets.”
3Q 2013: Revenue growth and improving gross margins in all segments
Lecico saw 27% year-on-year growth in revenues for the quarter driven by revenue growth in all segments on the back of volume growth in Egypt, Lebanon and better average pricing in domestic and export markets.
Sanitary ware sales rose 24% year-on-year on the back of better pricing and a 10% growth in volumes driven by the Egyptian (3%) and export (13%) markets.
Tile sales rose 27% year-on-year driven by 15% increase in volumes mainly Egyptian market (24%).
Gross profit increased by 39% to reach EGP 110.0 million. The company’s gross profit margin improved 2.7 percentage points to 29.1% with year-on-year improvements in sanitary ware, tiles and brassware.
In absolute terms, distribution and administration (D&A) expenses increased by 24% to EGP 53.4 million.
Proportional D&A expenses were down 0.3 percentage points to 14.1% of net sales compared to 14.4% in the third quarter of 2012.
The Company also reported EGP 2.7 million in net other operating income compared to EGP 2.7 million in net other operating expenses in the same period last year.
EBIT increased by 79% to reach EGP 59.3 million for the quarter with the EBIT margin increasing 4.6 percentage points year-on-year to 15.7% compared to 11.1% in the third quarter of 2012.
Financing expenses were up 61% year-on-year during the third quarter of 2013 to reach EGP 33.1 million compared to the same period in 2012 as a result of EGP 4.6 million in foreign exchange loss in the quarter compared to an EGP 2.9 million foreign exchange gain in the third quarter of 2012. By excluding foreign exchange effect from third quarter financing expenses were up 22% instead of 61%.
As a result of strong operational improvement and growth in margins, profits before taxes and minorities (PBTM) increased 87% year-on-year to reach EGP 26.5 million with the margin increasing 2.2 percentage points to 7.0%.
Lecico recorded a tax for the quarter of EGP 2.0 million due to deferred tax charged to some subsidiaries.
Employee profit participation increased by 56% to reach EGP 6.6 million. As mentioned in the last newsletter, this increased rate of employee profit participation reflects the increases in pay and profit participation accorded to our staff over the past few years and is expected to increase with salary increases in the future. Compared quarter on quarter the amount is unchanged.
Net profit increased 71% year-on-year to reach EGP 17.5 million with the net margin improving 1.2 percentage points to reach 4.6% compared to 3.4% in the same period last year.
9M 2013: Increased sales and improved gross margin drive net profit growth
Revenue was up 18% year-on-year in the nine months of 2013 to reach EGP 1,109.9 million with growth in revenues for all segments.
Gross profit rose 25% to reach EGP 318.6 million and the gross profit margin improved by 1.7 percentage points year-on-year to reach 28.7%. Sanitary ware, tiles and brassware all showed improvement in margins with better pricing offsetting higher production costs.
In absolute terms, distribution and administration (D&A) expenses increased by 20% to EGP 155.5 million, proportional D&A expenses up 0.2 percentage points to 14.0% of net sales compared to 13.8% in the nine month of 2012.
Net other operating expense was an EGP 2.4 million income compared to a EGP 7.5 million expenses in the same period last year due to the capital gains resulted from the sale of land in Cairo amounting to EGP 4.2 million. This land was initially purchased to develop as a showroom and represents a one-off exceptional gain.
EBIT rose 41% year-on-year to reach EGP 165.5 million for the first nine months of 2013, with the EBIT margin up 2.5 percentage points at 14.9% compared to 12.4% for the same period of 2012.
Net financing expenses up 9 % year-on-year during the first nine months of 2013 to reach EGP 69.1 million compared to EGP 63.4 million despite EGP 9.8 million in foreign exchange gain compared to EGP 2.1 million gain in the same period of 2012.
Net profit was up by 55% to reach EGP 67.4 million, with the net profit margin increasing 1.5 percentage points to 6.1%, compared with 4.6% in the same period last year.
Financial position
The value of Lecico’s assets increased 17% at the end of September 30, 2013 to reach EGP 2,365.7 million. Total liabilities were up 24% at EGP 1,452.4 million. Net debt to equity improved 6% to reach 0.69x compared to 0.74 times at end of 2012 and net debt was reduced 1% to EGP 627.6 million compared to EGP 632.9 million at the end of 2012.
Recent developments and outlook
EGP 130m Lecico France bankruptcy write-off will improve results from 2014 – Lecico Egypt, in reference to its press release dated 21 October 2013, has confirmed that Lecico France has been unable to find a buyer for its companies on a going-concern basis and will therefore proceed with bankruptcy proceedings of all its companies, consisting of Lecico France, Lecico Distribution and Sarreguemines Bâtiment. Negotiations will
continue with third parties to buy and continue the businesses under terms to be agreed with creditors.
Lecico France is the parent of Sarreguemines Batiment, an industrial business, which manufactures branded Fine Fire Clay products. It is also the parent of Lecico Distribution, a commercial business, which distributes the manufactured product as well as products imported from Egypt, and to a lesser degree outsourced from China.
Since Lecico bought Sarreguemines Batiment out of bankruptcy in 2006, the business has continued to suffer significant losses. Several management changes and restructuring actions have significantly reduced costs but without restoring profitability as difficult market conditions have eroded sales volumes partially offsetting the cost savings.
Given the continued difficulties in France and the relative uncertainty of the situation in Egypt, which has restricted the ability of Lecico to fund the operations with the necessary foreign currencies, Lecico is not in a position to support these operations any longer.
Sustained efforts have been undertaken for the past several months to overcome the problem, which included identifying investors able to take over the business.
On October 31, 2013 Lecico France and its subsidiaries started the process of bankruptcy proceedings of all its companies, consisting of Lecico France, Lecico Distribution and Sarreguemines Bâtiment. Lecico France and its subsidiaries therefore officially declared ‘Cessation de Paiement’ and filed with the ‘Tribunal de Commerce’ to approve the commencement of reorganization proceedings (Redressement Judiciaire) under the management of a court appointed administrator. The works’ council of the French entities has been duly informed and consulted in respect of the process. Lecico France, Lecico Distribution and Sarreguemines Bâtiment will continue to trade during this period. Upon receipt of the approval from the Tribunal de Commerce, Lecico surrendered the management of these companies to the administrator appointed by the court. Ownership
of these companies and balances due from them will be written-off. Management, in consultation with its external accountants, now estimates that the total write-off will be approximately EGP 130 million upon finalization of the formalities.
The objective of Lecico, in these difficult times, has been to reduce overall risks at the cost of a significant write-off. However, there would be a positive effect on earnings in future years by excluding the losses in Lecico France. Based on 2012 results, this would be an annual improvement of around EGP 15 million in operating profits and EGP 20 million in net profits.
Outlook for 2013 and 2014: The third quarter showed solid growth despite political instability in Egypt. Overall demand for Lecico products has been very strong in Egypt and across the Middle East while growth in Lecico-branded sales in the UK has helped offset shrinking sales across the rest of Europe and in our OEM business.
All indications are that this strong demand will continue in the fourth quarter and into next year.
However, ongoing political events in Egypt and the region and the continued economic uncertainty and weakness across Europe remain a risk to the company’s activities. Lecico hopes to see a significant growth in tile sales volumes and revenues in the last quarter of the year and in 2014 with the full utilization of the last tile expansion in its Borg El-Arab tile plant which became fully operational in the second half of the year.
On the cost side, the company is confident that it can realize significant economies of scale in all segments in this benign demand scenario and is confident that the efficiency of its sanitary ware unit will continue to improve over the rest of the year and in 2014 as our product rationalization and focus on simplifying production continue to yield results.
However, these improvements in production will be partially offset by cost inflation pressures with increases in energy costs likely and expected continued inflation on inputs and services combined with higher financing costs and higher tax rates as the government in Egypt continues to try to manage a slowing economy while improving and expanding social welfare programs.
Despite the political and economic challenges faced by most of Lecico’s markets in 2013, the company has seen a good improvement in demand and profitability compared to 2012 and this trend looks likely to continue over the remainder of the year.
Lecico’s exit from operations in France – and the subsequent shedding of the losses from that business – will significantly reduce costs in 2014 after a significant write-off in the 4th quarter which is expected to result in a loss for 2013 as a whole.
The business expects to continue to grow revenues and margins year-on-year in 2014.
However, this positive outlook for Lecico’s performance in the months ahead is not without risk as political and economic uncertainty looks likely to remain a feature of most of the company’s markets for the foreseeable future.
