R.A.K. Ceramics P.J.S.C. (RAKCEC) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the RAK Ceramics First Quarter 2022 Earnings Conference Call. This is Thomas Haidar from Arqaam Capital, and we are joined today by Mr. Abdallah Massaad, Group Chief Executive Officer from RAK Ceramics; and Mr. PK Chand, Group Chief Financial Officer from RAK Ceramics. Over to you, Mr. Abdallah.

Thank you, Hamad, and good afternoon, everyone. Welcome to RAK Ceramics' First Quarter 2022 Earnings Conference Call and Webcast where I'll be taking you through our company's key business updates and first quarter financial results. I'm pleased to report that RAK Ceramics posted strong first quarter results despite continued challenges, including spike in energy prices and trade challenges, in addition to, most recently, Russia-Ukraine war in February 2022. In the first quarter 2022, performance was supported by key strategic initiatives, enabling the company to remain focused on driving further growth, strengthening profitability and improving liquidity position. We continue to solidify our positioning as a global provider of premium ceramics lifestyle solution by increasing brand perception, introducing differentiated products and raising brand awareness. From a sales standpoint, we were successfully able to increase selling prices to customers to partly offset increased incurred costs. We adopted a differential pricing approach catering to each end market while maintaining a balance between market share and profitability, yet still to be in line with market practices. From our operational perspective, we worked towards improving production efficiencies and capitalization, optimizing logistic costs and warehousing operations, installing energy-saving instruments and tightening collection policy to mitigate impact of rising challenges. The first quarter 2022 also featured RAK Ceramics announce the signing of the sales purchase agreement for the 100% acquisition of KLUDI Group, including 49% of KLUDI RAK joint venture. The acquisition is anticipated to complement RAK Ceramics' suite of products and grow its sanitaryware offering, enhancing, as such, RAK Ceramics' positioning in projects and strengthening its status internationally as a fully integrated lifestyle solution provider. We are currently working closely with the KLUDI team to satisfy all closing conditions by the 31st of May 2022. In numbers, total revenue for the first quarter 2022 increased by 8.3% year-on-year and 4.1% quarter-on-quarter to reach AED 783 million driven by strong growth trajectory across sanitaryware and tableware. Total gross profit margin for the first quarter '22 improved by 2% year-on-year, reaching 37% despite the imposition of 12% customs duty in Saudi Arabia. Increase in GP margin was recorded mainly on the back of improvement production efficiency and production line optimization across all our plants in UAE, India and Bangladesh. Our EBITDA stood at AED 129.7 million compared to AED 127.1 million last year. Freight costs weighed in on margins, which decreased by 0.9% year-on-year to reach 16.6%. Our reported net profit stood at AED 69.7 million versus AED 62.7 million in the first quarter of 2021 due to higher revenues and gross profit margin. In the first quarter also, our net profit margin is 8.9%, net profit after minority in the first quarter was AED 56.6 million compared to AED 60.7 million last year. Like-for-like net profit increased to AED 70.8 million versus AED 63.5 million last year. Like-for-like net profit margin dropped slightly year-on-year to 9%. Our net debt level remained stable quarter-on-quarter at AED 975 million in spite of payment of dividends. Moving on to more deeper view on our first quarter 2022 strategic updates. The U.A.E. market recorded resilient growth driven by an increase in brand exposure and a strengthened brand positioning, most notably through the launch of our e-commerce platform. In Saudi Arabia, the company's strategy continued to yield results despite the imposition of 12% customs duty. Quarter-on-quarter growth was recorded as RAK Ceramics focused on expanding footprint and solidifying brand positioning as a premium provider in the Saudi market. In 2022, we were planning to grow further our retail presence in such market by opening further showrooms. European markets posted growth in top line. However, surge and shipping freight weighed in on profitability. Despite increased transportation challenges, we continue to position ourselves as a trusted solution provider aiming to expand distribution network and tap into e-commerce. In line with our strategy, we are looking forward to the opening of our London design hub showroom this month, which is expected to increase our customer bases. India's performance remained stable year-on-year supported by an expanding dealer network presence in an additional 12 districts. Despite high energy prices, minor price adjustments were applied across the local ceramics industry as per the guidance from relevant authorities. As such, we remain in line with peers and focused on preserving market share. Bangladesh. Our operation in Bangladesh recorded a resilient top line despite price adjustment. We anticipate further price increase in the second quarter 2022 as energy prices are expected to increase for local production following news about rationalization of gas supply in Bangladesh. We continue to closely monitor the situation and remain in contact with the local authorities, ensuring no disruption in business and preservation of market share. The tableware business posted robust growth across core market, and profitability improved as production was increased to meet demand. The first quarter 2022 featured the introduction of our new tableware segment, Bone China, an increasingly popular range of products for the HoReCa business. Further projects are scheduled to be launched in 2022, such as ELIE SAAB tableware collection. In order to develop further our faucets business, we announced in March this year the signing of the share purchase agreement of 100% acquisition of KLUDI Group. This is a key milestone to our business as it presents the opportunity for our company to spearhead expansion and strengthen its core business across Europe markets. KLUDI is anticipated to complement our suite of products, enhancing, as such, RAK Ceramics' positioning globally as a fully-integrated lifestyle solution provider. We aim to support KLUDI to expand from a European-focused player to a global innovative fittings manufacturer while still preserving its name and identity. Concerning recent economic development, global manufacturing players continue to face challenges weighing in on input cost and profitability, moreover, in some instances, affecting course of business. RAK Ceramics was capable to withstand the rising challenges as well as record growth in top line and increase in profitability. Surge in inflation, energy price hikes and freight cost increase are mainly the key challenges our business is facing, not to mention the impact of the most recent event between Russia and Ukraine. We remain focused to identify rising risks and to actively work towards mitigating the impact and possibly creating opportunities for such risks. I will now hand over to PK Chand, our CFO. Please, PK.

Thank you, Abdallah, and good afternoon, everyone, and thank you for joining us. Abdallah has already briefly summarized operational highlights, regional performance and strategy update for the first quarter of this year. I will take you through the financial highlights with details on revenue, gross profit margin and the balance sheet. We will start from Slide 13, financial highlights. Total revenue increased by 8.3% year-on-year and 4.1% quarter-on-quarter to reach AED 783.1 million. Tiles revenue remained stable year-on-year at AED 516 million supported by price increases to consumers to partly offset increased costs while preserving market share. Overall, tiles revenue remained stable despite lower revenue year-on-year by 5.9% in U.A.E. and 24.4% in Saudi Arabia markets. However, quarter-on-quarter, tiles revenue increased by 5.3%. Sanitaryware revenue increased by 13.1% year-on-year to AED 155 million supported by price increases. Now let me go through the market performance for total tiles and sanitaryware segments. In U.A.E. market, revenue was stable year-on-year and grew by 6.3% quarter-on-quarter to AED 164 million supported by wholesale and retail businesses. In Saudi Arabia, revenue got impacted by 24.2% year-on-year due to lower sales in wholesale business on account of implementation of the customs duty effective 1st July 2021. However, our quarter-on-quarter revenue increased by 19.8% to AED 123 million. India's performance has remained stable year-on-year with revenue growth of 3.4% to AED 99.5 million supported by minor price adjustments to offset the increased inputs and energy costs. In Europe, revenue increased by 8.8% year-on-year to AED 108.9 million supported by increase in selling price to partially offset the increased freight costs. Bangladesh market recorded a strong growth with revenue increase of 13.9% year-on-year to AED 85.5 million. Tableware revenue decreased by 15.8% quarter-on-quarter to AED 75.7 million while still outperforming year-on-year levels by 84.3% as the market situations across all our core markets have gradually improved. Total gross profit margin in the first quarter of 2022 increased by 200 basis points year-on-year and by 340 basis points quarter-on-quarter to 37.0% despite higher inputs and logistic costs and also the imposition of customs duty in Saudi Arabia. Tiles margin increased by 210 basis points quarter-on-quarter to 35.3% while it is lower by 40 basis points year-on-year due to imposition of the Saudi customs duty. Sanitaryware margin increased by 230 basis points year-on-year to 38.6% supported by increases in productivity. Tableware margin improved by 18.6% year-on-year to 48.8% due to increased revenue and profitability. The reported net profit is AED 69.7 million in the first quarter of this year compared to a net profit of AED 62.7 million in the last year. Margin is 8.9% in the first quarter compared to 8.7% in last year. EBITDA is AED 129.7 million compared to AED 126 million in last year. Margin is lower by 90 basis points at 16.6% mainly due to higher freight costs. Net debt remained stable at AED 975.2 million on March 2022 compared to December 2021 despite payment of dividend amounting to AED 112 million supported by healthy working capital. Net debt to EBITDA decreased from 1.94x in December 2021 to 1.93x in March 2022. In March 2021, net debt-to-EBITDA was 2.79x. On the cash front, capital expenditure for the first quarter has been only AED 23.9 million. CapEx for 2022 is expected to be in the range of AED 300 million to AED 350 million, excluding the cost of acquisition of the faucets business. Now we will turn on to the working capital cycle. In absolute terms, overall working capital decreased by AED 33 million to AED 1.26 billion quarter-on-quarter due to decreases in trade receivables. In terms of days, it decreased from 175 days in December '21 to 167 days in March 2022 mainly due to a decrease in trade receivables days and inventory days. Trade receivable days decreased from 94 days in the fourth quarter 2021 to 88 days in the first quarter 2022 due to tightened collection policy. Inventory days decreased by 2 days quarter-on-quarter at 215 days. Trade payable days remained stable quarter-on-quarter at 62 days. We continue to take the necessary measures to manage our liquidity position. The next slide shows the share price movement of RAK Ceramics, which has increased from AED 1.92 to AED 2.78 in the last 12 months and trading at a P/E multiple of 11.4x on an LTM basis. Now we will turn to Slide 19 where we can see that for our Bangladesh entity listed on Dhaka Stock Exchange, the share price has significantly improved from BDT 30.9 to BDT 47.6 per share, an increase of 54% in the last 12 months. The current market capital of our Bangladesh entity is $235 million, which contributes nearly 31% to the group market capitalization, while the revenue contribution from Bangladesh entity is around 11% to the group revenue. RAK Ceramics paid a final dividend of AED 99.4 million, 10 fils per share in March 2022. The dividend policy has already been revised, which is to place a minimum dividend payout of 20 fils per share for the year 2022 to be paid on a semi-annual basis and also provides for a commitment to pay a minimum dividend of 60 fils per share over 3 years, that is, 2022 to 2024. Now I will turn back to Mr. Abdallah for his final comments before we answer your questions.

Thank you, PK. Going forward, we aim to strengthen RAK Ceramics' position as being a fully-integrated lifestyle solution provider. We continue to align our priorities accordingly for 2022, focusing on protecting and growing our market share, expanding our production capabilities and differentiating our brand with the use of technology and in terms of offerings while operating efficiently and sustainably. We prioritized our short-term initiatives, concentrating on finalizing the KLUDI acquisition as the first step to ensure smooth onboarding in parallel. And in terms of operation, we are working to finalize the terms for production extension and growing our offerings to include further ranges of products. From a tech aspect, we are working to further develop our e-commerce platform and to incorporate technological advancements into our processes and our offerings. Finally, we are revisiting our internal ESG strategy, building necessary foundations to improve daily practices and allows the company to operate in a more sustainable manner. As a closing remark, it is important to highlight that through the current challenges, we have been actively monitoring and taking necessary actions to mitigate rising risks. The future still remains uncertain and unstable, however, the company remains adamant to navigate through challenges and emerge stronger by always thinking forward and being one step ahead. Thank you for your time. Now I would like to hand over the call to the operator and open the line to questions.

[Operator Instructions] We've received a question from Sameer Kattiparambil of EFG Hermes.

I have a question on the Saudi market. I can see that that's the only market which is down year-over-year and by a significant amount of 24%. Could you give some color on how the Saudi market is doing lately? Are they back to normal after the construction slowdown led by the new building code? And my second question is on the Bangladesh market, which is experiencing some shortages of gas and electricity. So are you expecting any kind of operational disruption? And was there any gas price increase in Bangladesh last quarter?

Thank you, Sameer. Let me start with the second one with the Bangladesh. Still now, we did not get a gas price increase, but we are expecting that the government will increase the prices in the next half of this year. Regarding the disruption in gas and electricity, we did not have really a disruption as of today. Going back to the first question, Saudi Arabia. Honestly, the first quarter, Sameer, it was difficult for us to find trucks, trailers. And the price of transportation costs increased because suddenly, also in the Saudi border, there were changes from a FIFO basis, meaning any trailers that come, they can get in at a FIFO basis to booking a slot. A new system came, and this created a lot of backlog and queue in the border. Fortunately, in March, this decision has been revised and, therefore, I will say, in March, was increased. Going back to the market, the market is good. There is good demand. For us, with the increase in custom duty by 12%, also, we increased our prices. We opened our new showroom, and we're trying to differentiate ourselves. I think in the second quarter, we'll be better. Even though, as of volume, we are a bit cautious because we are working also on the margin, and we need to maintain the margin we have.

Yes. One follow-up question is on your Saudi expansion plan. We've been talking about it for quite a long time. Any further update on that?

Sameer, I agree with you, it's really a long time, that's why I did not mention it. We are waiting. The land with gas allocation, unfortunately, for the time, we did not get in any of the industrial zones land with available connection to gas. So we have lined up several meetings with the authorities. Our plan is still there. We are only trying to get the land allocation.

Understood. And last question from my side on your KLUDI acquisition, could you give me more color on it? How is the margin profile? How big is it in terms of the market share? Is it entirely in Europe? And what kind of valuation did you pay ?

Sameer, KLUDI was established in 1926, so it's a 100-year company. We bought it from the family business, so it remains until now as a family business. So their focus is mainly Europe as a market. In 2006, 2007, we had our joint venture, KLUDI-RAK, established here in the U.A.E., and we have a very successful business model from top line and a very healthy bottom line. Honestly, KLUDI, we were talking to them since many years. And finally, the owner, the family, decided to sell. And we are very excited with this acquisition as it makes a lot of sense for us as RAK Ceramics complements this suite of business. We'll have a very clear business with 4 divisions: tiles, sanitaryware, the tableware and the faucets business. So the top line of this company is EUR 120 million. In terms of margin, it's a very tiny margin. It's not a big margin. That's why we feel that we can add a lot of value and we can make a turnaround and make it multinational by itself. So therefore, the price which we paid, it was EUR 19 million plus -- so EUR 39 million in total, as a company.

And Sameer, just to add what Mr. Abdallah said on the KLUDI acquisition. Since we already own 51% of KLUDI-RAK, so we are not consolidating KLUDI-RAK line by line in our current financials, only the 51% profit of KLUDI-RAK is getting accounted for in our books as equity invested. So to that extent, the profit of the full KLUDI-RAK will come. As Mr. Abdallah explained, this top line growth will come, which is about EUR 120 million, on a yearly basis.

Understood. Wish you all the best.

Thank you, Sameer.

[Operator Instructions] We have a question from Albert Momdjian of SOKOTRA Capital.

Thank you very much, again, for the very good quarter. You're spoiling us as investors, so thank you very much. A follow-up question to PK on the issue of the consolidation. Can you clarify again what you just said on, I think, the consolidation of the acquisition? And what is the impact going to be exactly, I think, in the following quarters? And does this impact, by any chance, the overall leverage of the company or not? And how was this acquisition made? I've seen the 1.93x net debt to EBITDA. Do you expect this to continue to be at this level or to come down? That's the first question. And second question, the strategic one is, obviously, turning the unfortunate events in Russia and Ukraine into an opportunity for RAK, any plans to be positioned for the reconstruction phase that people are estimating to be very significant, in hundreds of billions of dollars, for RAK to be well positioned should the situation stabilizes or improves in the future?

Thank you very much, by the way. And we are doing our job, as you see, with -- when the war started, it really put the pressure on us in terms of logistic cost and energy prices as well as the raw material. A lot of disruption happened, especially Ukraine is an exporter of ball clay, which all of us use. Fortunately, for us, we have another formula which we are able to run without the Ukrainian ball clay. And now this turned into -- even though we are paying a lot of high freight costs to all of Europe because of the increase in gas and the disruption of raw material, and while we are known as a serious, reliable supplier, we were able to pass on the prices to the market. I agree with you now we are all hearing about the reconstruction, but hopefully, this starts by the end of the war. I believe, by that time, everybody will be beneficial. For sure, we are positioned -- with our position globally, with the range we have, with the brand as well as the range we have, we hope if the reconstruction starts, we will have a part of it.

Now as far as the consolidation of KLUDI Group is concerned, Mr. Abdallah had mentioned that we are targeting 31st of May as the closing date for the transaction. Now the KLUDI Group, including the KLUDI-RAK, the turnover is around EUR 120 million on a yearly basis. Now currently, there is no consolidation line for line. So on a yearly basis, the revenue of RAK Ceramics will definitely go up around EUR 120 million. Now as far as the profitability is concerned, we already own 51% of KLUDI-RAK. And if you see our financials, around AED 15 million is coming as a share of profit in equity accounting invested on a yearly basis. So the balance, 49%, will also come to our financials. And since the KLUDI Europe, as such, currently, the profitability is either plus or minus side, it is not significant. So currently, what is going to happen is that the balance, 49%, profitability of KLUDI-RAK will get accounted for in our financials on a yearly basis. The next question you asked is about the funding of the acquisition. As Mr. Abdallah mentioned, the funding cost is around EUR 19 million, which is not significant. So we have funded it from our funds. And then there is an existing loan of about EUR 21 million in KLUDI Europe, so that also, we will be taking over. Now to that extent, our net debt will increase but some profitability will also improve, and we are working on various synergies. So all this will come into play.