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

Hello, everyone, and welcome to the R.A.K. Ceramics Q1 2024 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 the R.A.K. Ceramics First Quarter 2024 Earnings Conference Call. This is Hamad Haidar from Arqaam Capital. And from R.A.K. Ceramics, we are joined today by Mr. Abdallah Massaad, Group CEO; and Mr. P.K. Chand, Group CFO. Over to you, Abdallah.

Thank you, Hamad. Good afternoon, everyone, and thank you for joining us. Welcome to R.A.K. ceramics First Quarter 2024 Earnings Conference Call and webcast. Let me take you through the consolidated revenue split for the Group across our key markets as well as the split between the product divisions. We continue to strengthen our position in the UAE, which is our largest market as it contributes 36% of the total consolidated revenue for the Group. This is followed by Europe, which contributed 24% of the consolidated revenue supported by [ 2D ] offerings. Our revenue share from Saudi Arabia has declined to 9%, and I will shortly touch upon the challenges we face in Saudi. Coming to the Product segment, Tiles division continues to contribute majority share of the revenue, followed by Sanitaryware, Faucet and then Tableware. At the bottom, you can see our production capabilities where we continue to invest further to improve our capacity and bring in efficiencies. Moving to the financial performance. I'm pleased to report that the tiles and Sanitaryware business continues its growth trajectory in the UAE, reporting year-on-year revenue growth of 6%. In Saudi Arabia, there is a surplus of cheap products from local manufacturers backed by Chinese investors, especially in Tiles segment. This has led to a price war situation mainly in the wholesale segment. Additionally, the ongoing crisis in the Red Sea region has led to a rise in transportation cost and delay in delivery schedules. This has put substantial pressure on margin and the working capital management. Thus, we continue to invest and focus towards strengthening our projects and retail presence in this market as we are optimistic of future business growth backed by government substantial investment in infrastructure and real estate projects for the upcoming period. The Red Sea crisis has also impacted our business in Europe due to increase in shipping costs and delay in delivery schedule. Moreover, the demand has seen a slowdown across wholesale and retail segment as the European market is still struggling to recover from the recessionary pressure, thus reducing the consumers spending capacity. Also, several home renovations projects have been put on hold, mainly impacting our Sanitaryware and Faucet business in the U.K. and Italy. In India and Bangladesh, markets continue to struggle with lower demand, mainly on account of rising interest rates and tight liquidity. In Bangladesh, we are also facing shortage in gas supply, thus affecting production efficiencies. Our tableware division was also impacted, reflecting a 7.8% decline in revenue compared to the first quarter 2023. The slowdown in demand was mainly on account of decline in projects -- hotel projects and reduced spending due to the ongoing regional conflicts. As we closely monitor the ongoing macroeconomic and geopolitical challenges, we continue to innovate our approach to ensure that we stay ahead across all markets which we operate. Our team is working on implementing several initiatives across our core markets. For instance, we are working toward the brand enhancement through opening new showrooms and widening our dealer network in all core markets to strengthen and maintain our position. We are working with architects and designers community to promote our new collection. We are focusing on premium product to mitigate the impact of our margin. We are also working on strengthening our retail and project business with differentiated products that will allow us to maintain a sustainable growth for revenue and margin going forward. The upgradation, our price production facility in India is nearing its completion which will allow us to produce slabs and large format tiles. In the UAE, we continue to invest in the latest deep digital technology and automation of our tiles production facility that will allow us to shift our production capabilities from ceramics to porcelain tiles and also 100% digital slabs. As we recall, we had a big capacity of ceramics servicing the market, especially Saudi and GCC with multiple differentiated size in ceramics and the market has shifted to the demand in porcelain. Therefore, what we are doing is shifting a majority of our existing kiln and facilities with lower CapEx required to be able to produce, again, a differentiated as well as digital full lines from small to the largest tiles available in the market, where we feel that this will give us a big advantage as we are already known in the project as well as the market with our quality and innovation. We are also working towards setting up a production facility in Saudi for tiles in terms of Kludi. I'm also pleased to update that the expansion which we started in UAE is already in production, the quality is by the highest standard, and our transformation of the factories which we closed in Austria as well shifted some capacity from Europe to UAE and therefore, supplying a fully packed product out of Ras Al Khaimah allowed us to improve our gross profit margin, including and speeding the transformation. I will now hand over to PK Chand, our CFO, to provide you with more detailed analysis of our financial performance.

Yes. Thank you, Abdallah. Good evening, everyone, and thank you for joining us. Mr. Abdallah has already briefed on business performance highlights for key markets, challenges and strategy update for the first quarter of 2024. I will take you through the financial highlights for the first quarter with details on revenue, gross profit margin and the balance sheet. We will start from Slide 11. Total revenue decreased by 11.4% year-on-year to AED 781.6 million, reflecting global geopolitical tensions, market volatility, higher interest rate and currency devaluation. Tiles and Sanitaryware revenue is lower by 14.4% year-on-year to AED 556.5 million. Tiles revenue decreased by 14.8% year-on-year to AED 443.6 million, impacted by lower sales volume, particularly in Saudi Arabia and Europe. Sanitaryware revenue experienced a decline of 12.7% year-on-year to AED 112.8 million due to economic pressures in Italy, U.K. and Bangladesh, which are our core markets. Tableware revenues saw a year-on-year decrease of 7.8% to AED 90 million attributed to logistic challenges and currency depreciation. Faucets revenue, however, has increased by 4.7% year-on-year to AED 116.9 million, driven by UAE and European markets. Revenue from other units decreased by 20.7% to AED 18.4 million, mainly due to a decrease in our ceramic raw material trading business. Now let me go through Slide 13 onwards, covering the end market performance in the first quarter of 2024 for the Tiles and Sanitaryware segments. In UAE market, Tiles and Sanitaryware revenue increased by 6.2% year-on-year to reach AED 201.5 million, primarily driven by retail and project channel backed by real estate market growth. In Saudi Arabia, Tiles and Sanitaryware revenue witnessed a significant decline of 44.8% year-on-year due to continued price war and local competition. However, we have been able to maintain our gross margin by focusing on premium products and differentiation. In India, the revenue declined by 3.5%, primarily as a result of persistent challenges such as currency devaluation reduced demand due to higher interest rate. To fortify our position in the dynamic Indian market, we strategically pursued upgrades to our facilities, expanded our market presence, implemented retail initiatives and introduced new product launches. In Europe, revenue decreased by 19.5% year-on-year with significant impact to our Sanitaryware business. As Mr. Abdallah mentioned, the Red sea crisis has severely impacted our business in Europe due to substantial increase in shipping cost and delay in delivery schedule. Moreover, the demand has seen a slowdown across wholesale and retail segments as the European market is still struggling to recover from the recessionary pressure, thus reducing the consumers' spending capacity. In Bangladesh market, the revenue declined by 15.5% year-on-year due to intense local competition, gas supply challenges and the currency devaluation. We have initiated actions to address these challenges by intensifying our marketing endeavors to enhance market penetration and elevate brand visibility. In Middle East, excluding UAE and Saudi market, continued to face adverse effects due to ongoing geopolitical challenges in the region. Revenue has declined by 25.7% year-on-year to AED 26.3 million. Now we will turn to Slide 14. The total gross profit margin increased by 70 basis points year-on-year to 39.3% in the first quarter of 2024 due to lower natural gas price in UAE and improved efficiencies. Tiles margin increased by 50 basis points at 39.4% compared to last year, supported by lower natural gas price and improved efficiencies. However, Sanitaryware margin decreased by 630 basis points year-on-year at 29.7% due to reduction in sales revenue, resulting in shutdown costs. Tableware margin increased by 360 basis points year-on-year to 53.9% following the lower revenue and change in product mix. Faucets margin increased by 450 basis points at 31.1% due to rationalization of costs mainly in Europe. Net profit before tax is AED 73.9 million compared to AED 85.1 million in last year, mainly due to decrease in Tiles and Sanitaryware revenue. Margin is 9.5% compared to 9.6% in last year. Net profit after tax is AED 62.9 million compared to AED 80.1 million in last year. The impact of the newly introduced UAE corporate tax at the rate of 9% effective January 1, 2024 is AED 8 million in the first quarter. Net profit margin is 8% compared to 9.1% in the last year. EBITDA however, decreased year-on-year by only 3.9% in the first quarter of 2024 to reach AED 151 million. The margin has improved by 150 basis points year-on-year to 19.3%. Now we will turn to balance sheet highlights on Slide 16. Overall working capital cycle decreased from 172 days in the fourth quarter of 2023 to 161 days in the first quarter of 2024, mainly due to accounting of dividend liability in the first quarter of this year, which has been paid in April 2024. In absolute terms, working capital decreased by AED 99 million to AED 1.38 billion in the first quarter 2024. Excluding dividend liability, working capital remained stable quarter-on-quarter at AED 1.48 billion. Inventory days increased from 221 days to 228 days compared to December 2023, only due to lower LTM sales. In absolute terms, inventory remained stable at AED 1.3 billion. Trade receivables decreased from 90 days in December 2023 to 88 days in March 2024. In absolute terms, trade receivables decreased by AED 39 million to AED 811 million. Trade payables marginally decreased from 59 days in December 2023 to 58 days in March 2024. Net debt decreased by AED 54.3 million in March 2024 at AED 1.37 billion compared to December 2023. Net debt to EBITDA also decreased from 2.2x in December '23 to 2.13x in March 2024. We continue to maintain adequate liquidity position during the year. Capital expenditure during the first quarter of this year is AED 35 million, and CapEx guidance for the full year of 2024 is AED 300 million. Slide 18 shows the share price movement during the last 12 months. The shares are currently trading at P/E multiple of 10.5x. Now I would like to turn back to Mr. Abdallah for his final comments before we answer your questions.

Thank you, PK. It is evident that the ongoing geopolitical challenges and the crisis have impacted businesses across industries. While we also have seen a decline in our overall revenue, we have been more fortunate than few others in successfully restricting any major impact to our profit margin. In this complex scenario, we remain dedicated to serve our clients as we continue to positioning ourselves as a global preferred supplier. While we also remain cautiously optimistic about the outlook for the upcoming quarters, we will continue to invest and strengthen our presence across market in which we operate. We are committed to protecting our market share and solidifying our retail and project business through maintaining healthy competition and leveraging across product synergies. With digitalization being the core of our growth strategy, we continue to invest in upgrading our facility with the latest technology to optimize productivity and increase efficiencies that drive improvement in our margin. Also, we launched during this quarter, the online sales for our retail business and Tableware. We are ready to open our first showroom in Dubai Hills Mall also during this coming quarter. We already started selling online, so we are also focusing on improving our specification retail job -- retail in general as we did UAE, in Saudi and in India, and then we roll it out. And thank you all for taking the time to joining us for this presentation of our first quarter results of 2024. I would now like to hand over the call to the operator and open the line to questions.

[Operator Instructions] Our first question goes to Sameer Kattiparambil of EFG Hermes.

On the LPG and natural gas costs, although you mentioned that the gas price has been decreased in UAE, but what I've noticed is that in your COGS segment, it has declined by 50% to AED 29 million from AED 59 million last year. So I just want to understand, that decline came just from the UAE costs adjustment? Or is there any other markets like India, Bangladesh contributed to that decline?

Sameer, thank you for your question. And this is what we were discussing, that the market, especially with the Red Sea impacted the volume. And for us, we had less volume manufactured and the consumption also reduced, it is a double impact of reducing the prices as well as reducing the volume utilized.

Okay. So could you remind me what was the price revision in UAE what you're currently paying?

8.9.

We were paying approximately 8.9, now we are paying somewhere below 6.

Got you. Maybe one more question from my side. Like any recovery inside for Saudi market, especially we have seen some early signs of tile price improvement in the country from some of your peer companies. So anything you noticed in Saudi market?