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

Hello, everyone, and welcome to the RAK Ceramics Third Quarter and 9-Month 2023 Earnings Call and webcast. This is Mohamad Haidar from Arqaam Capital, and we are pleased to have Mr. Abdallah Massaad, Group CEO from RAK Ceramics; and Mr. P.K. Chand, Group CFO from RAK Ceramics. Over to you, Mr. Abdallah.

Thank you, Mohamad. Good evening, everyone, and welcome to RAK Ceramic's Third Quarter 2023 Earnings Conference Call and Webcast. Today, we are working within a complex landscape filled with ongoing geopolitical conflicts, heightened market volatility, rising interest rates and currency devaluation. All these challenges had a notable impact on the market demand. Our revenue has faced a 7.7% decline reflecting the struggle faced by market worldwide. While every market is dealing with a complex interplay of macro and micro challenges, our business too faces stiff competition, particularly from the inflow of low cost and low grade quality products. Yet in the face of these challenges, we remain committed to our clients and have strategically shifted our product mix to sustain our gross margin. This also allows us to sustain our gross margins and improve our net profit on a like-for-like basis by 13.3% from last year to AED 83.9 million. Within our tile segment, revenue decreased by 9.8% year-on-year, reaching AED 475.4 million. This decline was primarily driven by increased competition from regional players, a rise in import of low-cost, low-quality products and challenging market conditions in all markets except the UAE. Our sanitaryware business saw a similar decline in revenue by 3% year-on-year reaching AED 123 million. Our faucet segment witnessed challenges mainly in European market, where lower sales impacted the overall performance, thus resulting in a 2.5% year-on-year decline in revenue reaching a total of AED 114.8 million. Our Tableware division has delivered a robust performance with a 2.5% year-on-year increase in revenue, reaching AED 92.5 million as we continue to introduce differentiated products that resonate with our customers. Let me now take you through a more detailed study on our business performance region by region. The UAE market has presented tough challenges due to the heightened competition and pricing pressure. We have been facing strong competition, particularly from import of low-cost, low-quality product, which has impacted our market share, especially in the whole business -- in the wholesale business. Despite these challenges, our strategic shift towards project channel sales has enabled us to achieve 23.4% year-on-year increase in revenue in the third quarter 2023. Our business in Saudi Arabia has had its share of trials, primarily driven by the surge of low-cost local manufacturers. Despite a decline in revenue and net profit, our focus on premium products and differentiation has allowed us to maintain our gross margins. Looking ahead, it is very important to note that Saudi Arabia is currently making substantial investment in infrastructure and real estate project with numerous prestigious projects on the horizon. There will be a growing demand for a reputable brand and reliable supplier. Fortunately, RAK Ceramics is exceptionally well positioned in terms of our service excellence, diverse product offering and strong brand reputation. Thus, our outlook remain positive and we are well prepared to leverage this opportunity to further strengthen our presence in the Saudi Arabian market. Moving to Europe, particularly the U.K., business continues to grapple with economic challenges and competitive pressures. The rising interest cost has taken at all on consumer spending capacity, leading to delay in home innovation and refurbishing plans. While revenue in Germany and Italy continues to exhibit resilience, the overall decline is predominantly attributed to the sanitaryware business. We have encountered challenges in several other Middle East markets due to increased competition from new regional local players. In India, market continue to feel the adverse effect of rising interest rates and tight liquidity; however, the real estate sector shows signs of resilience and we participate a momentum shift soon. In response, we're evaluating upgradation of our facility in Samalkot and Morbi plants, and we also continue to expand our dealer network. Our performance in Bangladesh has been impacted by currency devaluation and competition from local peers; however, we remain committed to strengthen our retail presence by expanding our showroom network and forming strategic alliance with reputed builders to support the project business. Our tableware business has continued to demonstrate robust performance largely due to the successful launch of new product series, our design hub in the U.K. is now fully operational, actively promoting RAK porcelain displays. We also very soon plan to launch our tableware retail outlet in the UAE. KLUDI's revenue has declined mainly to the recessionary pressure in Europe. We are actively working on cost optimization initiatives and exploring new revenue streams through strategic sales initiatives. With innovation at our core, we continue to modernize our production footprint across India, Bangladesh, and the UAE. In the UAE, we are working towards cost optimization measures, and we continue to enhance our brand presence. With regards to the tableware expansion project in the UAE, we have completed the capacity expansion work and have commenced trial testing for commercial production. In the coming quarters, we plan to increase production in phases based on demand -- on market demand. We are also evaluating 2 major upgradation projects in India in our Samalkot and [indiscernible] facility to bring in production efficiency and enhance existing production capabilities. In Bangladesh, the upgradation work is in full swing to enhance our existing tiles line. Commercial production is set to commence in the first quarter of 2024. Our faucets greenfield expansion is also progressing well with all the necessary approval and permission in place. We are in the final stage of finalizing the factory layout design, which will be followed by the commencement of the construction process in this quarter. We are talking about the expansion of faucets in Bangladesh. All these initiatives are poised to strengthen our presence in the region and cater to the evolving demand of the market. While our journey today is marked by both challenges and opportunities, our dedication to growth and expansion mainly unwavering. In response to the challenges presented in our core market, we continue to devise and implement strategic responses tailored to each region. In the UAE, we are working on optimizing costs, enhancing our product mix and reinforcing the brand presence to combat competition from cheap imports. The Saudi Arabia, we continue to invest in differentiated products, brand enhancement to tackle increased competition with Saudi Arabia's significant investment in upcoming infrastructure and real estate project. The growing demand for a trusted brand and supplier presents a favorable outlook for RAK ceramics to strengthen its presence in the region. In Europe, currency hedging and freight rationalization has allowed us to maintain margin amid necessary fears. In India, we continue to focus on expansion and manufacturing upgrades to counter liquidity issues. While in Bangladesh, our focus centers on improving production efficiency in the face of gas supply disruption. As you can see, our commitment to facing these challenges is unwavering. We are actively implementing strategies that not only mitigate the impact of these hurdles, but also allow us to capitalize on the opportunities that lie with them. These efforts ensure our ability to adapt, innovate, and emerge stronger in the face of adversity. I will now hand over to PK.

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 third quarter of 2023. I will take you through the financial highlights with details on revenue, gross profit margin, and the balance sheet items. We will start from Slide 12. We continue to encounter several challenges, primarily attributable to market volatility and continued macroeconomic challenges across core markets. This has negatively impacted our revenue in the third quarter of 2023 by 7.7% year-on-year at AED 837 million. Revenue for 9 months of 2023 marginally declined by 1.1% at AED 2.59 billion. Tiles and sanitaryware revenue is lower by 8.5% year-on-year at AED 598.5 million in the third quarter of 2023. In 9 months of 2023, it declined by 9.1% year-on-year to AED 1.88 billion. Revenue has been impacted across all markets, except United Arab Emirates, India and Germany. Growth in the United Arab Emirates is largely driven by project and retail channels. Reduction in the revenue in other markets is primarily attributed to recessionary fares and higher interest costs, which are affecting household savings and causing a deferment in major house renovation and development projects. Tableware revenue increased by 2.5% year-on-year at AED 92.5 million in the third quarter of 2023 and 10.5% year-on-year in 9 months of 2023, driven by introduction of differentiated products. Faucets revenue decreased by 2.5% year-on-year at AED 114.8 million in the third quarter of 2023. In 9 months of 2023, revenue is AED 342.9 million. Last year, KLUDI Group consolidation started effective 1st of January -- 1st of June 2022. Revenue from other units decreased to AED 87.2 million in 9 months of 2023, mainly due to decrease in our ceramic raw material trading business. Now let me go through Slide 15 onwards covering the end market performance in the third quarter and 9 months of 2023 for the tiles and sanitaryware segments. In UAE market, tiles and sanitaryware revenue in the third quarter of 2023, increased by 22.4% year-on-year to reach AED 195.5 million driven by project and retail channel despite strong competition and pricing pressures in UAE from import of low-cost, low-quality products. In 9 months of 2023, revenue grew by 21.7% year-on-year to AED 579.7 million. In Saudi Arabia, tiles and sanitaryware revenue in the third quarter of 2023 witnessed a significant decline by 49.1% year-on-year to AED 73.8 million due to intensified competition from the low-cost local Chinese manufacturers, which impacted our wholesale and retail channel. Sales from project channel continues to grow. Our focus remains on offering premium products, securing mega projects and expanding the retail footprint. In 9 months of 2023, revenue decreased by 38.2% year-on-year to AED 279.3 million. In India, revenue in the third quarter of 2023 increased by 5% year-on-year to AED 93.9 million, supported by expanding dealers network and increase in the retail footprint by increasing showrooms. India is currently a challenging market, characterized by lower demand, suffering from adverse effect of rising interest rate and tight liquidity. However, the real sector -- real estate sector is showcasing resilience in the face of these challenges and is expected to gain momentum. Our 9 months of 2023 revenue decreased by 9.3% year-on-year to AED 270.7 million, while in local currency, it decreased by 3.8% year-on-year. In Europe, revenue in the third quarter of 2023 increased by 1.3% year-on-year to AED 98.2 million, driven by growth in Southern European countries. In 9 months of 2023, revenue decreased by 5.4% year-on-year to AED 305 million due to ongoing economic challenges in the region, mainly in the U.K. market, which continued to face recessionary fear, currency devaluation and rising interest cost, impacting consumer spending capacity. Revenue in Germany and Italy have shown resilience. In Bangladesh market, revenue in the third quarter of 2023 decreased by 16.1% year-on-year to AED 59.6 million, while in local currency, it decreased by 5.3% year-on-year. In 9 months of 2023, revenue decreased by 17.3% to AED 190.5 million, while in local currency, it is marginally decreased by 1.6% year-on-year. Despite the challenges, we continue to expand our showrooms network and focus on market penetration and product differentiation. In Middle East, excluding United Arab Emirates and Saudi market looks challenging with increasing supply from the new regional local players. Revenue in the third quarter of 2023 decreased by 21.5% year-on-year to AED 34.8 million. In 9 months of 2023, revenue decreased by 5.2% year-on-year to AED 113.9 million. We are actively working to better position in the above market by directly targeting project segments. We will turn to Slide 16. The total gross profit margin increased by 270 basis points year-on-year to 37.6% for the third quarter of 2023, mainly due to higher sales in the United Arab Emirates market. In 9 months of 2023, the gross profit margin is higher by 80 basis points at 37.6% year-on-year, driven by higher margin in tiles and tableware segment through a combination of improved production efficiencies and shift in the product mix. Tiles margin in the third quarter of 2023 increased by 170 basis points compared to the third quarter of 2022 at 39.1% mainly due to shift in product mix. In 9 months of 2023, the margin increased by 130 basis points to 39%. Sanitary-ware margins decreased by 100 basis points year-on-year at 31.8% in the third quarter of 2023 due to lower revenue and lower productivity. In the 9 months of 2023, the gross profit margin decreased by 130 basis points at 34.3%. The tableware margin increased by 110 basis points year-on-year to 50% in the third quarter of 2023 following top line increase and change in product mix. Faucets gross profit margin increased by 900 basis points at 32.4% in the third quarter of 2023 following the results from the cost optimization initiatives. In 9 months of 2023, gross profit margin is 28%. Net profit before one-off gain increased to AED 83.9 million in the third quarter of 2023 compared to AED 74 million in the third quarter of last year. Last year, reported net profit included net one-off gain of AED 16.1 million towards sale of land in Australia. Margin is 10% compared to 8.2% in last year. In 9 months of 2023, the net profit before one-off is AED 239.1 million compared to AED 244 million in last year. The net profit margin is 9.2% compared to 9.3% in last year. EBITDA increased by 16% year-on-year to AED 169 million in the third quarter of 2023 compared to AED 145.8 million in last year. EBITDA margin is 20.2% compared to 16.1% in last year. In 9 months of 2023, EBITDA is AED 481.4 million compared to AED 439.7 million in last year. The EBITDA margin is 18.6% compared to 15.8% in last year. Now we will turn to balance sheet highlights on the Slide 18. Overall working capital cycle increased from 163 days in the second quarter 2023 to 165 days in the third quarter 2023. However, in absolute terms, working capital decreased by AED 28.5 million to AED 1.5 billion in the third quarter of 2023, mainly due to decrease in receivables. Inventory days increased from 199 days to 210 days quarter-on-quarter, mainly for the inventory buildup for raw materials and profits. Trade receivable days increased from -- decreased from 90 days to 87 days quarter-on-quarter, mainly due to lower revenue and monitoring of credit sales. Net debt increased by AED 198 million to AED 1.5 billion, in September 2023 compared to AED 1.45 billion in December 2022, mainly due to dividend payment of AED 221.7 million and increase in working capital. Net debt to EBITDA increased to AED 2.43x in third quarter of 2023 compared to 2.26x in December 2022. We continue to maintain adequate liquidity position during the quarter. Capital expenditure during 9 months of 2023 is AED 182.5 million, and the CapEx guidance for the full year of 2023 remains same at around AED 250 million to AED 300 million. Slide 20 shows the share price movement during the last 12 months. The shares are currently traded at P/E multiple of 10x. Now I will turn back to Mr. Abdallah for his final comments for the rest quarter -- for the fourth quarter of 2023, and priorities before we answer your questions.

Thank you, PK. As we conclude the third quarter of 2023, we acknowledge the challenges we face in today's dynamic global landscape, geopolitical conflicts, market volatility, rising interest rates and currency devaluation has created a complex environment significantly impacting market share -- our market demand. In this complex scenario, we remain dedicated to serve our clients as we continue to positioning ourselves as a global preferred supplier. Moreover, sustainability will be at the heart of our strategy as we continue to promote long-term value and growth for all stakeholders. As we venture into the last quarter of 2023, our priorities stand strong and aligned with our objectives. We continue to innovate and strengthen our position in the face of this adversity with a particular focus on establishing and strengthening our brand presence in each region. 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] Our first question comes from Sameer from EFG Hermes.

I have a couple of questions. First on the UAE market that you mentioned about increased competition in UAE, could you elaborate on which all segments are you facing the severity of competition? And how are you planning to face it, especially the UAE has signed a CEPA agreement with a few countries including Turkey, which is one of the largest producer of tiles, so does this mean more competition in the future? So yes, that's the first.

Thank you, Sameer, for the question. You know, Sameer, that historically, the UAE, we were always, almost most of the countries we -- they pay the custom duty is 5%. So historically, we've grown in this market without a protection. Yes, these days, at some time, there was antidumping, the antidumping done actually a year back. And yes, in the market, you can see a lot of cheap product. But this will open also us opportunity to export. We are removing barriers also from a market, a big market like Turkey, we were not able to export because we were paying 30% and so on. So honestly speaking, if you look at the segment, yes, in the wholesale business, which we are not focusing much, we lost some market share vis-a-vis the low-cost products, but we increased our revenue to project and in our retail. So what we are following is the retail, the kind of shop-in-shop kind of franchising concept. And honestly speaking, we cannot we -- our sales significantly increased in the UAE and the projects and companies, which we're working in UAE, you have 2 segments, one mature, which require brand and reliability. And you have the normal builders. So we are building always on the good -- dealing with good names and where they want a reliable product, and we want them because they will pay premium for us.

Okay. Got it. One more question from my side in terms of Saudi market. Any hope over the short term for volume growth? Also on the exemption you have applied for the GCC duty, any update on that side because I heard like some of the names already started getting the reimbursements or exemptions. So...

Sameer, yes, first, regarding the custom, they are asking some, honestly, certificate and stuff, which we rely, but they want for every quote, so they want minimum 45%, we are 76%. But they want some requests on a specific quote, which still now we are in discussion with the authorities here to provide us. As per the consultant who is working for us, as you rightly said that some Omani clients get the exemption. They are saying that we have a very big chance to take it. They still need one document, which we are trying to provide. So I believe we have a hope as long as one gutted in the industry, so we are working hard in this. Now volume growth in Saudi, to be honest, the market with the 4 factories opened in Saudi and they drove the competition and the prices into a level where I believe neither them nor anyone in Saudi can make money. So for us, we pulled from this competition and we focused on the project sector specification and our showroom and the shop-in-shop concept where we're trying to differentiate ourselves from the severe competition that is happening.

One follow-up question on the Saudi. What's the current production capacity, total production capacity in Saudi including that 4 new factories?

I don't have it exactly in front of me, but I believe what is the demand, at least what we see the market size today, the capacity is much bigger than the market size because we hear about a huge capacity, which they build it but they are not -- I doubt that they have this capacity. To be honest, we don't have a reliable source to give you the numbers.

We have a question via the chat. Any plans or opportunity to exit any of the geographies and any plans to invest in a plant in Saudi given the opportunity to overcome the import duty? Can you please remind us what is the import duty imposed by Saudi?

We are continuing -- our plan is to open a factory in Saudi. We are facing with approvals, especially in gas because we don't want to start any factory without having the gas allocation, which why we are delaying until we get all the approvals required. What we are paying now is 12% custom, which we should theoretically get it exempted. But we are trying the last few months till now with no success. .

The next question, what will be the dividend distribution for next year?

Regarding the dividend, it is a Board approval, but as we declared that we have a 3-year minimum dividend of AED 0.20 per year. I do not see any changes from the declared policy.

Can you provide us with any update on the progress of the land plot in RAK? Is this still on the table?

Honestly speaking, till now, we don't have any update. The good news that the real estate market in UAE and Ras Al Khaimah is doing well. But as on today, we don't have any offer. The plan is still to sell it.

[Operator Instructions] We have another question via the chat. How much contribution are you expecting from UAE plant expansion in terms of revenue and profit? When can we see material contribution? Question two, despite exceptional performance track record and one of the highest dividend yield, the stock remains one of the cheapest on all valuation metrics. What do you think this is the case? And what is the company's strategy to maximize shareholders' returns?

Regarding the tableware business with this quarter, we will see the increase. And this will be shown -- the impact will be shown in fourth quarter this year onward. As you see, the company already is doing well, and the margin is good. In terms of the price, the stock, means our share price, honestly speaking, yes, attractive today. Maybe the liquidity is an issue. Otherwise from the performance from our peers even, you can look at all international and local competitors, I believe, in terms of margin, which we did it internally, we are among the top margin in terms of even we have a decline of 7%, 7.7% this quarter and 1% yearly. But you go also to the peers, which we compare ourselves to ask some of them reach more than 20% decline in revenue and on average, no less than 10% on average the decline. As you said, the dividend yield also among the highest, so from our side, we are trying to do our best from -- to maximize shareholders' value on having these calls, participating in conferences, discussing, taking any call from any investors and trying to do our best in terms of communication and the branding. So other than this, it's a market-driven thing.

We have another follow-up from Sameer from EFG Hermes.

Sure. Just to follow up on the Saudi. Do you think that your Saudi plan to set up the production factory is still economically viable given the high local competition and the new players or factories in the country?

Maybe I did not reply you properly on the capacity because historically, the Saudi market is a market which go between 200 million to 250 million square meter. Earlier, the capacity, installed capacity was 100. And today, the installed capacity, as what we heard is almost 350 million square meter means above today's requirement. But again, what I mentioned that -- and this, we saw it across the board that now the projects in them is the housing project, is the normal wholesale channel, it's a volume game, volume, price. I believe, personally, and I think this is the way going forward. Today, there are a lot of projects from hospitality to other than the low-cost housing projects. It's some prestigious projects where we are prepared as a brand, as a recognized reliable supplier quality, branded to have a demand. And I believe we will have our market segment, which we want to tackle because in our DNA and you see how we improved our margin, we don't want to only focus on top line and whatever the margin is I still believe we have a chance. And therefore, having a factory also in UAE, in Saudi will support us being a local manufacturer with premium and the branded products supported by the range we have it in UAE will still have a valid economical and a necessity for us to our growth.

Got you. I just wanted to double check if my understanding is correct. You said that Southeast installed capacity is 350 million, right?

There is no proper statistic, but I see it as today, the market is at 250 million and the capacity is 350 million, yes.

Okay. Great. Another question from my side is on the -- like, could you give some color on how the KLUDI Group transformation plan is progressing?

Honestly, Sameer, we are very happy and from this acquisition as a transition. And I have to say that during this transition and this year, we absorbed a lot of probably losses and transitional fees, but we are very happy because it is -- gave us a lot of strategic position when it comes to the sanitaryware and faucets by having another segment to tackle and our capacity in UAE and -- the thesis of buying KLUDI was to move a big part of the production from Europe to our plant in UAE and shut down the high cost and efficient plan remain with high technology advanced R&D and the presence in Europe building on the capacity, which we will increase here have a lower cost of production, then transformed into a higher margin. This quarter, we saw it, I believe, last month, the expansion capacity from 600,000 pieces to 1.1 million pieces already gone live in UAE, and we started shutting down capacity in Europe. I can see that combined last month, which is September, it was the first profitable month in this segment, which we are very happy to see that transformation in place and started -- starting materializing with the plan we put for it.

Great to hear that. And last question from my side, so when will the new tableware capacity to go commercial production? And how long will it take to reach its -- to reach the full capacity utilization?

Already, I can say that almost 2 weeks back, we have started the kiln. And when the kiln start ramping up the capacity, you can see now in 10 days maximum, we can reach the full capacity. Today, I can say that we are in the full capacity. That's why within this quarter, we will see the impact.

Okay. Got it. And how confident you are that this new capacity won't create an overcapacity kind of situation in the market?

As on today, if you see the -- we can see that demand is still there. The tourism business is still doing well. Our position is there. And also with the increase in capacity we have now the bone china, the earth stone, the stoneware, the ivory and the [ white, ] so when we started with this business, we had only the ivory, means the high alumina product, then we added. So yes, we are growing capacity, but today, I'm pleased to say that with this flexibility and capacity, we are able to cater the whole product mix as well as we were only focused on HoReCa business. And now we are preparing the lounge on retail. We already took a showroom in Dubai Hills, where we will open in the first quarter of 2024 as the first retail shop. We are preparing also on online to be there and we see that there is also potential for us to go into the retail segment.

[Operator Instructions] We have a question via the chat. Question one, is there any guidance on dividend policy beyond 2024? Question two, how much impact can we potentially see from the new UAE capacity assuming it runs at full utilization?

Look, for the first one, the dividend again is a Board decision. As for the company, you see that the company cash flow and our EBITDA is growing. Net profit at a level which is according to our expectation, I don't see any requirement for the changes in the dividend policy. But again, I cannot give you a guidance. This is a Board approval and until now -- PK, until when we have?

2022 to 2024.

From -- until '24, this is a policy, which is still in place, and I don't see any changes in there. The second half of the question?

The tableware expansion, so what is the yearly -- from the tableware expansion, the expected revenue is AED 40 million to AED 50 million and the profitability could be in the range of AED 10 million to AED 12 million.

[Operator Instructions] It appears we have no further questions. I'll now hand back to Mohamad for any closing comments.

Thank you, Nadia, and thank you, Mr. Abdallah, Mr. PK for joining us today. We look forward to have you with us next quarter. Thank you.

Thank you.

Thank you so much.