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

Hello, everyone, and welcome to the RAK Ceramics Q4 and Full Year 2022 Earnings Call and Webcast. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions]. I will now hand over to your host, Mohamad Haidar, from Arqaam Capital to begin. Mohamad, Please go ahead.

Hello, everyone, and welcome to RAK Ceramics Fourth Quarter and Full Year 2022 Earnings Call and Webcast. This is Mohamad Haidar from Arqaam Capital. And as usual, we are joined today by Mr. Abdallah Massaad, Group CEO, from RAK Ceramics; Mr. PK Chand, Group CFO, from RAK Ceramics; and Mr. Nadine Nasr, Head of Investor Relations, from RAK Ceramics. Over to you, Mr. Abdallah.

Thank you, Mohamad, and good afternoon, everyone. Thank you for joining us today, and welcome to RAK Ceramics Fourth Quarter and Full Year 2022 Earnings Webcast. I'm delighted to share with you our company's performance for the year 2022. RAK Ceramics reported record high full year performance for 2022 despite macroeconomic conditions, with a total revenue increase by 22.9%, reaching AED 3.5 billion and reported net profit increased by 19.8%, reaching AED 340 million when compared to 2021, successfully achieved on the back of growth across all our core businesses. We continue to operate in a volatile environment with ongoing challenges affecting several markets, industries, not to mention ceramics players. High inflation remains waning and on pricing, stimulating further interest rate hikes by central banks. Energy crisis persist despite recent corrections, sparking exponential rise in energy bills and in some instances, supply shocks as seen in Bangladesh. Economic slowdown continued to raise increased worry about a global recession, reflecting in devaluation across several markets. However, also realizing freight rate drops. To our advantage, our home countries remain resilient, yet even showing growth, showing strong signs of growth given its strong market fundamentals, enabling a stable operating environment for local manufacturer and allowing companies to withstand macroeconomic headwinds. Today's regional environment continued to fuel competition amongst players. However, we remain confident in our position, leveraging on our brand positioning, our value proposition and our operational capabilities. For this quarter and in terms of initiatives, we grew our retail footprint, adding and refurbishing further showroom across the United Arab Emirates, Saudi and India, and solidified brand perception in the ceramics industry, having earned several recognition awards for our design and innovation capabilities. We continue to sustain gross profit margin despite disruption faced in Bangladesh on the back of improved efficiencies and increased utilization. In terms of expansionary plans, we have advanced quite well across all UAE projects launched. Additionally, for greenfield projects, we continue to push through with obtaining relevant clearances and approvals for projects in Saudi Arabia and Bangladesh. In KLUDI, we have launched the value creation plan, focusing on the turnaround of the brand and leveraging on cross-company synergies. As for our tableware business, we have reached 92% stake in RAK Porcelain, following a series of minority acquisition launched earlier 2022. Finally, and in line with our dividend commitment to our shareholders, and following our strong performance for the year, the Board proposed the distribution of a cash dividend of 10 fils per share for the second half of 2022. Moving on to a deeper view on our fourth quarter 2022 business highlights and starting with market updates, the United Arab Emirates market recorded strong performance supported by growing demand and increased visibility. For our retail business, we have completed in this quarter the refurbishment of alliance showroom and launched in our store and online promotion schemes boosting our sales strongly. Additionally, we participated in Dubai Design Week, introducing our newest collection developed using the latest technological processes. RAK Ceramics performance in Saudi Arabia saw an impact on the fourth quarter '22 top line, especially from the wholesale business, given rising global competition and price wars. The focus remains on offering premium products, securing megaprojects and expanding the retail footprint. In India, the company saw a rebound in the fourth quarter '22 top line on the back of further dealer network additions. 2 showroom openings and promotion schemes, especially on a nonmoving inventory, bottom line performance, however, was hindered by rising energy costs and currency devaluation. In Bangladesh, our operations experienced major disruption in production through most of the fourth quarter following shortage in gas price -- gas supply. Additionally, macroeconomic conditions and the devaluation of the currency weighed in on top line growth affecting further performance. In European markets, economic slowdown was reflected on the fourth quarter 2022 top line. However, we see today hints of recovery in the bottom line, given exchange rate correction and drop in transportation costs. Tableware recorded a robust revenue growth, supported by strong demand and the launch of differentiated products. Performance remained solid in the fourth quarter 2022 despite high input prices with room going forward for improvement. Business remains focused on strengthening brand presence and investing in innovation and design. Finally, faucet performance throughout the year has seen major impact given high input and energy costs following market turmoil and geopolitical instability, especially the Eastern European region, we remain keen on ensuring the proper implementation of the turnaround strategy identified for KLUDI. In terms of strategic milestones, we have recorded advancement across multiple expansionary projects. In the UAE, the tiles enhancement project is in progress and production is set to begin in the first quarter 2023 for 5 million square meter of gres porcelain tiles. The sanitaryware capacity enhancement has been completed and production has commenced with full utilization of additional capacity estimated for the third quarter 2023. The tableware capacity expansion is still underway with commercial production estimated on the third quarter 2023 for additional 10 million pieces. In Bangladesh, following board approval of a greenfield project in the second quarter 2022, the land acquisition, title ownership and registration process has been completed along with obtaining most recently approved from municipal body. Today, the team is working on shortlisting consultants and preparing the factory design layout for the faucet projects. In Saudi Arabia, an application has been filed to transfer the previously obtained gas allocation approval. The team is preparing the factory layout plan and seeing relevant environmental clearance and approvals. Finally, RAK Ceramics reached 92% stake in RAK Porcelain as of 31st of December 2022, following the addition of further 1% stake in fourth quarter 2022. Separately, RAK Porcelain acquired a 9% minority position in RAK Porcelain Europe, fully consolidating its subsidiary. In terms of challenges, and as I mentioned, the macroeconomic environment remains volatile, adding increased pressure as we go. On operations and performance, not to mention restricting top line growth in some markets, from high inflation, increasing interest rate, energy crisis, economic slowdown and trade challenges. We see global manufacturing players jointly facing such challenges, realizing substantial losses in some instances and halting operations in others. That being said, throughout this year, RAK Ceramics was able not to just mitigate risk and limit the impact of such challenges, but also to record strong growth in top line and increase in profitability to a never seen before level. Our diversified approach in terms of both production and sales, our brand equity and our increasing effort to preserve a healthy market share in key focus markets and invest furthermore in regions outperforming the market, enabling us to withstand market turbulence and emerge in growth. We are monitoring the economic environment closely, and we remain focused on executing our growth strategy and delivering value to our shareholders. I will now hand over to PK Chand, our CFO. Please go ahead.

Thank you, Abdallah. Good evening, everyone, and thank you for joining us. Mr. Abdallah has already briefed on operational highlights, key markets and strategy update for the fourth quarter of 2022. I will take you through the financial highlights with details on revenue, gross profit margin and the balance sheet. We will start from Slide 12. RAK Ceramics achieved a record performance in the full year of 2022 with highest revenue since 2009 and recorded an all-time high net profit. The year has been a successful year, supported by strong operational capabilities despite navigating through challenging macroeconomic conditions, like higher input costs due to inflation, Ukraine and Russia conflict, extraordinary freight rates, currency devaluation and shortage of gas in Bangladesh. We recorded growth in revenue in both tiles and sanitaryware in all our core markets, except Bangladesh, where productivity was impacted due to disruption in gas supply during the fourth quarter. Tableware business had a robust performance, supported by increase in demand. However, KLUDI Europe business post acquisition effective 1st June 2022, has been slowed down due to drop in demand as a result of geopolitical and economic challenges, and therefore, performance has been impacted during the year following higher input and energy costs. Total revenue in the fourth quarter of 2022 increased by 19.7% year-on-year to AED 900.7 million. KLUDI Group consolidation has added AED 114.5 million of revenue. Excluding KLUDI Group consolidation, revenue is higher by 4.5% year-on-year. In the full year of 2022, revenue increased by 22.9% year-on-year at AED 3.52 billion, highest since 2009. In 2009, revenue of AED 3.77 million, including revenue of AED 1.35 billion from noncore business was recorded. KLUDI Group consolidation effective June 2022 has added AED 276.5 million to revenue. Excluding KLUDI Group, revenue increase is 13.3% year-on-year. Considering currency exchange rate of last year, the full revenue increased by 28.2% -- 28.1% year-on-year. Tiles revenue is higher by 8% year-on-year at AED 529.4 million in the fourth quarter of 2022, driven by increase in selling price to partially offset increase in production cost and transportation cost. In full year of 2022, tiles revenue is higher by 11% year-on-year at AED 2.17 billion. Sanitaryware revenue is lower by 2% year-on-year at AED 123 million in the fourth quarter of 2022, mainly due to lower offtake in European markets and lower productivity in Bangladesh. In full year of 2022, revenue is higher by 4.1% year-on-year at AED 551 million. In tableware, revenue increased by 9% year-on-year at AED 98 million in the fourth quarter of 2022. And in full year, revenue increased by 38.9% year-on-year at AED 353.2 million following a post-pandemic economic recovery, boosting volumes and an increase in selling price. Faucets revenue is AED 306 million in full year of 2022, out of which AED 276.5 million is on account of KLUDI Group consolidation effective 1st June 2022. Revenue from other units increased by 25.4% year-on-year in 2022 to AED 139.3 million, mainly driven by increase in our ceramic raw material trading business. Now we will go to Slide 15 onwards covering the end market performance in the fourth quarter and for full year of 2022 for the tiles and sanitaryware segments. In UAE market, revenue in the fourth quarter of 2022 increased by 30.8% year-on-year at AED 191.8 million, and in full year, it increased by 19.7% to AED 668.1 million supported by wholesale and retail business. In Saudi Arabia, revenue in the fourth quarter of 2022 increased by 30.5% year-on-year at AED 134 million, mainly driven by project and retail business. In the full year of 2022, revenue increased by 9% at AED 586 million. However, quarter-on-quarter, revenue has been lower mainly in wholesale channel, giving rising competition and 12% custom duty. Our focus remains on offering premium products, securing mega projects and expanding the retail footprint. In India, quarter-on-quarter revenue increased by 13.9% for additions to dealers network and opening of 2 new showrooms. In the fourth quarter of 2022, revenue is lower by 13.4% year-on-year at AED 102 million. In full year of 2022, revenue increased is 2.9% year-on-year at AED 400.4 million, while in local currency, the revenue increase is 9.3%. In Europe, revenue in the fourth quarter of 2022 increased by 5.1% year-on-year at AED 86.2 million. Quarter-on-quarter revenue decreased by 11% in the fourth quarter due to slowdown in economic activity and holidays. In full year of 2022, revenue increase is 3.5% year-on-year at AED 408.7 million. However, in local currency, revenue growth is 14.5% year-on-year. In Bangladesh market, revenue in the fourth quarter of 2022 decreased by 28.6% at AED 61.4 million due to macroeconomic conditions, currency devaluation and gas supply shortage. In full year of 2022, revenue decreased by 1.2% year-on-year at AED 292 million, while in local currency, revenue is higher by 8.8%. In Middle East, that is excluding UAE and KSA, revenue continued to grow by 22.2% year-on-year in full year of 2022 at AED 153.3 million, mainly due to brand exposure and expanding the distribution network. Now we will turn to Slide 17. The total gross profit margin is 34.2% in the fourth quarter of 2022, recording an increase of 50 basis points versus last year. In full year of 2022, margin remained stable at 36.1% in spite of higher input costs, energy challenges and higher incidence of 12% customs duty in Saudi Arabia. Tiles margin in the fourth quarter of 2022 increased by 590 basis points year-on-year to 38.9% and 140 basis points at 38% in full year. The sanitaryware margin decreased by 40 basis points, both in the fourth quarter of 2022 and in full year at 27.2% and 33.7%, respectively. Tableware margin decreased by 3.7% year-on-year at 46.4% in the fourth quarter of 2022. However, in the full year of 2022, margin increased by 6% year-on-year to 48.7%, supported by increase in revenue and productivity. KLUDI Group consolidation has been effective 1st of June 2022, and the margin stood at 16.7% in the fourth quarter of 2022 and 21.2% for the full year, respectively. Reported net profit is AED 78 million in the fourth quarter of 2022 compared to AED 62.9 million in the last year. For full year, the net profit is AED 340.1 million compared to AED 283.9 million in the last year. 2022 net profit includes one-off gain of AED 30.8 million compared to AED 22.9 million of one-off gains in last year. The net profit margin is 8.7% for the fourth quarter and 9.7% in full year 2022 compared to 8.4% for the fourth quarter and 9.9% for the full year of 2022. The like-for-like net profit, that is excluding one-off gains for the full year of 2022 is higher at AED 315.5 million compared to AED 265.3 million in last year. Margin remained stable at 9% year-on-year. The EBITDA is at AED 137.5 million in the fourth quarter of 2022 compared to AED 122.1 million in last year. EBITDA for the full year is AED 577.2 million with margin of 16.4% compared to AED 501.3 million in last year. Now we will turn to balance sheet highlights on Slide 19. Overall, working capital cycle has decreased from 149 days in September 2022 to 146 days in December 2022. December 2021, working capital cycle was 175 days. Inventory days reduced from 217 days in December 2021 to 197 days in December 2022. The trade receivable days also decreased from 94 days in December 2021 to 84 days in December 2022. Trade payables remained stable at 63 days year-on-year in December 2022. The net debt increased by AED 330 million to reach AED 1.30 billion as on December 2022 compared to December 2021, mainly due to acquisition in faucets and tableware business. However, quarter-on-quarter, it decreased by AED 114 million due to receipt of AED 66 million being the sale proceeds from sale of land and properties in Australia and lower working capital. Net debt to EBITDA also increased from 1.94x in December 2021 to 2.26x in December 2022. In September 2022, net debt-to-EBITDA was 2.48x. We were also successful in maintaining an adequate liquidity position during the year 2022 in spite of consolidation activities enabling company to comfortably meet our commitments. Capital expenditure for the full year of 2022 has been AED 206 million, out of which AED 97 million are for enhancement CapEx in United Arab Emirates and Bangladesh and AED 109 million for maintenance CapEx. CapEx guidance for 2023 is AED 300 million to AED 350 million. Slide 21 shows the share price movement during the last 12 months. The shares are currently trading at P/E multiple of 9.35x. The Board has proposed to distribute cash dividend of 10 fils per share for second half of 2022. You would recall that as per the dividend policy approved by the shareholders is stipulated a minimum dividend payout of 20 fils per share for the year 2022 to be paid on a semiannual basis and also a commitment to pay a minimum dividend of 60 fils per share over the 3 years from 2022 to 2024. During August 2022, a semi-annual cash dividend of 10 fils has already been paid. Now I will turn back to Mr. Abdallah for his final comments on 2023 priorities before we answer your questions.

Thank you, PK. Today, as we close the chapter for 2022, we are humbly proud of our achieved progress and growth, and we remain firm in our commitment to our stakeholders. 2022 achievements were validated financially as we were able to surpass 2009 level, however, this time on the back of core business. Our profitability also reached an all-time high in spite of navigating through a volatile and challenging environment in 2022. For 2023, we look forward with a cautiously optimistic lens, building on our previous initiatives and achievements and focusing on solidifying our foundation, especially after our 2022 consolidation exercise. We recognize that there exists significant room for organic growth, and we also comprehend the dynamics of the current operating environment. As such, our commercial priorities are outlined by protecting our market share through maintaining healthy competition and leveraging on cross-company synergies, embracing diversification and solidifying our retail business. Operationally, we are determined on optimizing productivity and increasing efficiency, along with advancing on enhancement and expansionary projects across all core businesses and markets. KLUDI turnaround is also a key focus point on 2023 as we aim to transfer KLUDI into a high-end sanitaryware and faucets brand. And finally, digital transformation and sustainability remain at the core of our investment as we continue to see the fruits of such adoption on our products in terms of both end product quality and sales, not to mention on our operations. 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]. It appears we have no questions. I'll hand back to you, Mohamad for any closing remarks.

Thank you, Nadia. Abdallah I have a few questions, please. So Abdallah -- yes, I'm going to ask a question and then we'll return the queue. Abdallah, we're looking at Q4 margins and full year 2022 margins. And there is sometimes a big difference, specifically on sanitaryware. How should we look at 2023? Will it reflect the Q4 margins or the full year of 2022 margins?

Mohamad, thank you for your question. As you can see, if we take the horizon from 2014 till now, and you see the improvement in margin, the improvement happened mainly in tiles and sanitaryware a lot of pressure was there, to be honest. We also invested in a new CapEx program will be coming by end of this year in sanitaryware, with the hope of improving our yield in the production as well as savings in energy prices. Now also the same -- during this year, we were hammered because our biggest market for sanitaryware was Europe, and you know the ForEx exchange, the fluctuation of currencies as well impacted us as end-to-end. During -- also the fourth quarter, always we take all the provisions of the year. Going forward and what we look at improving our sanitaryware margin and maintaining the margin, the high margin as a consolidated margin going forward.

Okay. We have a question on the phone line from [ Sarah Eling ] of [ Al Nahla Group ].

My question is what is the biggest threat for the company despite environment, inflation and interest rates?

Thank you, Sarah, for your question. And for us, always there are challenges, and we always -- like every year, there are challenges in place and there are opportunities also. And if you see from our performance this year indicated that even during a challenging time, clients, especially when there is a demand, they look for a reliable supplier. And I believe we endorsed ourselves during the years that we are a reliable supplier. Going forward, I see some challenges from the interest rate. But this will increase our cost, no doubt. Meanwhile, the main challenge, which we look in case if it happens, we saw a lot of protection market by market during the last year. And we are an export-based company. So we are not exposed to a single market. Therefore, what affects us is really the protection coming from the market, including an open market like the GCC or sending to other places. Meanwhile, honestly speaking, we see also a lot of opportunity, especially that the transportation costs, which hammered us, honestly, the logistic cost hammered us during this year, which we saw a significant reduction. And I can tell you in the beginning of this year, we nearly reached the pre-COVID level of freight, which affected us by a heavy amount this year.

And we have a chat question from Izzul Hakim Abdul Molob of Epicure Investment Management. Can you further explain KLUDI value creation turnaround plan? What exactly are you planning to do and what's the impact you are expecting in 2024?

Look, as you see from our value creation plan, which we launched in 2014 was investing in our core market and this invests our noncore. And if you see that during this year, we -- or during these years, we increased our capacity in tiles and sanitaryware and faucets as well as improved the margins and exiting the noncore. And during this year, we are proud to see that we reached the highest profitability for the company since inception. And in terms of turnover, which was consolidating over AED 1 billion, AED 1.2 billion from a noncore, which we crossed this year since 2009. Going forward, we are keeping increasing and growing organically. As I mentioned, we have a factory, which started actually in the first quarter 2023, producing 5 million pieces of tiles. We have the sanitaryware, as I mentioned, which we already ordered new capacity, which will be in place by end of this year and tableware by the third quarter this year, we will finish the expansion of 10 million pieces. In Bangladesh, which we'll start with a sanitaryware. And the greenfield project which we have in Saudi Arabia, this is very important. Now the biggest impact will be on us the value creation plan, which we have for the KLUDI. And as I mentioned, we -- when we acquired KLUDI during this year with a focus on honestly placing KLUDI which is a 100-year old company, German faucet company has to be the -- within the top 3 players in the industry after the Grohe. Meanwhile, benefiting or building on the brand perception of KLUDI to add a full solution provider as we are a sanitaryware manufacturing. So we'll use the brand KLUDI to also support and have play in a different segment where the RAK Ceramics sanitaryware plays. So by having this, improving the margin, pushing the revenue, consolidating and turning around this company is already a big exercise we are carrying on as on today.

[Operator Instructions]. And we have another chat question. What are the utilization level for the tile and sanitaryware country-wise?

From the tableware, let us start with the tableware. We are utilizing 100% of the capacity. That's why we are waiting to have the extra capacity starting from the third quarter this year. In tiles, you can say that we are almost 95% capacity utilization. And therefore, we're also waiting on the new capacity coming in place which started in this quarter. And as I mentioned, what is next is our expansion in the greenfield project in Saudi Arabia. Whereas sanitaryware, our capacity utilization is above 85%. And therefore, what I mentioned, we ordered some machineries and equipments in order to enhance the production in the UAE. In Bangladesh, we are fully utilizing the capacity as the demand is there, we had the last quarter, last year, we had an interruption in the gas supply, which I believe now it is better as they increased the rate from $3.5 per million million Btu (sic) [ metric million Btu ] to $8.5 per million million Btu (sic) [ metric million Btu ]. And accordingly, the utilization, which normally was always above 90% was dropped to the 85% approximately. In India, we have fully utilized our capacity in Gujarat, in Morbi area and our factory in South is approximately 50% capacity utilization as the energy price was increased, and it was not worth to fully utilize the capacity in there. So in general, if you want to say, at a group level, because 70% of our capacity is located in [indiscernible] so we can see that the capacity utilization within the group is above 92%.

And we have an audio question from Dina Hicham of EFG Hermes.

I have a few questions. The first one is could you quantify how much of sales you lost due to the gas shortage in Bangladesh last quarter? And could you also please update us on the status of gas availability and price changes? And how it will impact product prices and demand. The coming question is regarding the gas prices as well. So is the gas price and freight charges now receded significantly. Would you be able to improve your margins this year? Or do you pass on the savings to the customers?

Thank you for your question. In Bangladesh, during the quarter, we almost lost 22% of the revenue because we had significant on a daily basis cut in gas pressure. And if you see how much it is in dirhams, is plus or minus AED 15 million revenue in the fourth quarter. The price, it was - PK, correct me if I'm wrong, $3.5 -- how much exactly it was?