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

Welcome to the R.A.K. Ceramics Q2 and H1 2024 Earnings Call and Webcast. My name is Felicia, and I will be your operator today. [Operator Instructions] I will now hand you over to your host today, Mohamad Haidar from Arqaam Capital, to begin. Please go ahead, Mohamad.

Hello, everyone, and welcome to the R.A.K. Ceramics Second Quarter and First Half of 2024 Earnings Call and Webcast. This is Mohamad Haidar from Arqaam Capital. And from R.A.K. Ceramics, we are joined today by Mr. Abdallah Massaad, Group CEO; and Mr. PK Chand, Group CFO. Over to you, Abdallah.

Thank you, Mohamad. Good afternoon, everyone, and thank you for joining us today. Welcome to R.A.K. Ceramics Second Quarter 2024 Earnings Conference Call and Webcast. As most of you are aware, our industry today faces many challenges given by ongoing geopolitical tension, which is creating uncertainty in the market. Rising inflation and high interest cost is making borrowing expensive, which has reduced consumer spending, and led to an overall slowdown in demand. At R.A.K. Ceramics, a substantial part of our revenue comes from export. And we are facing several issues in these markets. The ongoing Red Sea crisis has led to rising freight costs and a shortage of shipping containers, severely impacting our business, particularly in key export markets like the U.K. and Europe. Additionally, we also experienced a substantial increase in logistic costs for transporting products within the GCC. In Saudi Arabia, the imposing of custom duty on imports, increase in transportation costs and shortage of trucks, affecting our operation in the market. Meanwhile, in Bangladesh, the issue of gas shortage and supply fluctuations has critically impacted our business. With the ongoing unrest in Bangladesh, we expect further impact in our business in this market that has traditionally been profitable for us. Given all these challenges, we are focused on strengthening our presence in the UAE, where we are fortunately not facing these issues. While we do see some pressure from the rising import of cheaper products from India. We are concentrating our efforts on expanding our project and retail business in the UAE to ensure continued growth and stability. Now 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. UAE market continues to remain the largest contributor for the Group total revenue and margins. This is followed by revenue from Europe, which contributes 23% of the consolidated revenue. Moving to the Products segment. Tiles division continues to contribute majority share of the revenue, followed by Sanitary ware, Faucets and then Tableware. Let me now take you through the financial performance across our core markets and product segments. While the UAE market experienced a nominal revenue decline 1.2% year-on-year, mainly due to the holiday break for Ramadan, and it falling in the same quarter and the impact of April floods, we remain optimistic about its growth potential. In Saudi Arabia, we have experienced a revenue decline, mainly due to an oversupply of low-cost products from local manufacturers. Especially in Tiles segments, the ongoing regional conflicts have resulted in liquidity shortage, delaying many projects and increasing the price sensitivity in the market. Additionally, the levy of custom duty on imports, logistic challenges driving up the transportation costs and delay in delivery schedules has put substantial pressure on our margin and business. However, we are pleased to inform you that we have recently received an exemption from the government from the payment of custom duties on imports. This will provide some relief for our business, as we remain committed to investing and strengthening our project and retail presence in the retail. The Red Sea crisis has led to a substantial impact on logistics costs, both for import and of raw material and export of products to Europe and to other markets. Additionally, since the European market continues to struggle with a slowdown in demand, we have seen many competitors reducing prices substantially, supported by a reduction in gas prices in Europe to curb the impact on their revenues. Decline in our revenue in Europe was mainly driven by our Sanitary ware business in the U.K. The recently imposed sanctions against Russia by EU will also impact business overall, since most of the players will push their products further in EU to reduce impact from decline in business in Far East. We experienced a decline in revenue in Bangladesh, mainly driven by reduced demand and price liquidity. Additionally, fluctuation in gas supply continues to impact our production costs and reduce efficiency, thereby impacting our margins. In India as well, the demand was low due to increased interest rate and currency devaluation. Additionally, the national election for 2024 also contributed to an overall slowdown in demand, as many government-funded projects were on hold. However, with the election now over, we anticipate a ramp-up in project orders from Q3 onwards. Within the Tiles segment, we are experiencing an increase in the number of local players investing in tile globally, and also the market being flooded with imports from China and India. Similarly for Sanitary ware division, we have seen companies globally lowering their price to combat falling sales volume. Our Tableware division maintained stable revenue despite an overall slowdown in demand due to the ongoing regional conflicts. We are pleased to inform you that we have completed the acquisition of the remaining 8% equity from the minority shareholders in RAK Porcelain, thus making it now a wholly owned subsidiary of R.A.K. Ceramics. We are also happy to share RAK Porcelain's entry into retail segment, with the launch of our first showroom in Dubai Hills Mall in UAE and launch of our e-commerce website in the UAE market. We are optimistic about the growth potential of RAK Porcelain, and will continue to roll out additional retail outlets in the future. As we navigate these difficult market conditions, driven by the rising instability and regional conflicts, we are dedicated to working closely to innovate our approach for staying ahead across all the markets. We are implementing several initiatives across our core market. We continue toward brand enhancement through opening in new showrooms and widening our dealer network in all core markets to strengthen and maintain our position. We are working closely with architects and designer communities to increase our network and promote our new collections. We are focusing on premium products to mitigate the impact to our margin. We are also working on strengthening our retail and project business and our core market with differentiated product that will allow us to maintain a sustainable growth for revenue and margin going forward. We continue to invest in upgrading and expanding our production capabilities, allowing us to support markets with differentiated products. The upgradation, our tile production facilities in India, is completed, thus increasing our GVT tiles production capabilities for the market. In UAE, we have upgraded our Tiles and Sanitary ware plant with the latest technology and automation. We are also working towards setting up a production facility in Saudi for Tiles. I will now hand over to PK Chand, our CFO.

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 second quarter of 2024. I will take you through the financial highlights for the second quarter and first half of 2024, with details on revenue, gross profit margin and the balance sheet. We will start from Slide 11. Total revenue in the second quarter decreased by 10.9% year-on-year to AED 777 million, and in the first half of 2024, it decreased by 11.2% at AED 1.56 billion due to global and geopolitical tensions, increased competition, market volatility, higher interest rates and currency devaluation. Tiles and Sanitary ware revenue is lower by 13.2% year-on-year at AED 547.7 million in the second quarter of this year, and down by 13.8% at AED 1.10 billion in the first half of 2024. Tiles revenue decreased by 13.4% year-on-year to AED 430.6 million in the second quarter of this year, while in the first half of 2024, it decreased by 14.2% at AED 874.2 million on account of lower volumes across all markets, except the UAE. Sanitary ware revenue decreased by 12% year-on-year to AED 117.2 million. In the first half, it decreased by 12.4% year-on-year at AED 229.9 million due to impact on volume across all core markets. Tableware revenue remained stable year-on-year at AED 92.2 million in the second quarter of 2024, while in the first half, it decreased by 4% at AED 182.1 million, mainly driven by decreased hotel projects and spending due to ongoing regional conflicts. Faucets revenue decreased by 6% year-on-year AED 109.5 million in the second quarter, and in the first half of 2024, it remained stable with a slight increase of 0.8% at AED 226.3 million. Revenue from other units decreased by 17.7% to AED 46 million in the first half of this year, mainly due to a decrease in our ceramic raw material trading business, on lower production of tiles and Sanitary ware. Mr. Abdallah has already covered the regional performance. So now let me go through Slide 14 onwards, covering the segmental gross profit margins in the second quarter of 2024 and the first half of 2024. Total gross profit margin increased by 110 basis points year-on-year to 39.6% in the second quarter, an increase of 90 basis points year-on-year in the first half of 2024. Tiles margin in the second quarter increased by 10 basis points year-on-year at 39.2%, and in the first half of 2024, it increased by 30 basis points year-on-year at 39.3%. Sanitary ware margin decreased by 200 basis points year-on-year at 32.9%, and in the first half of 2024, it decreased by 410 basis points to 31.3% due to change in product mix and lower productivity. Tableware margin increased by 130 basis points year-on-year to 52.2% in the second quarter, and in the first half of 2024, it increased by 240 basis points year-on-year at 53.1%, following change in product mix and supply of premium products. Faucets margin increased by 560 basis points at 30.7% in the second quarter, and in the first half of 2024, it increased by 510 basis points year-on-year at 30.9% due to rationalization of costs. Net profit before tax for second quarter of this year is AED 59.8 million compared to AED 80 million in the last year, mainly due to a decrease in revenue impacting AED 37.4 million to profitability. Margin is 7.7% compared to 9.2% in last year. Net profit before tax for the first half of 2024 is AED 133.7 million compared to AED 165.2 million in the last year, mainly due to decrease in revenue, which has impacted AED 77 million to profitability. Margin is 8.6% compared to 9.4% in last year. Net profit after tax for the second quarter of this year is AED 51 million compared to AED 75.1 million in last year. The impact of newly introduced UAE corporate tax at the rate of 9% effective first January 2024 is AED 6.4 million in the second quarter. The net profit margin is 6.6% compared to 8.6% in last year. Net profit after tax for the first half of 2024 is AED 113.9 million compared to AED 155.3 million in last year. The impact of the UAE corporate tax effective first January '24 is AED 14.4 million in the first half of 2024. Net profit margin is 7.3% compared to 8.9% in last year. EBITDA decreased year-on-year by 11.9% in the second quarter of this year to reach AED 136.9 million. The margin decreased by 200 basis points year-on-year to 17.6%. However, in the first half of 2024, EBITDA decreased by 7.9% at AED 288 million, while margin increased by 70 basis points year-on-year at 18.5%. Now we turn to balance sheet highlights on Slide 16. The overall working capital cycle increased from 172 days in December 2023 to 197 days in June 2024. Also in absolute terms, working capital increased by AED 72 million to AED 1.56 billion in June 2024, mainly due to increase in raw material and spares inventory and payment to suppliers for purchase of fixed assets. The trade receivables increased from 90 days in December 2023 to 92 days in June '24 due to lower LTM revenue. Inventory days increased from 221 days in December 2023 to 239 days in June 2024 due to increased raw material and spares inventory and lower LTM revenue. Trade payable increased from 59 days in December 2023 to 62 days in June 2024 due to lower LTM COGS. Net debt increased by AED 132 million at AED 1.55 billion compared to December 2023 due to payment of dividend of AED 114.6 million, acquisition of remaining 8% stake in RAK Porcelain costing AED 44 million and increased working capital. Net debt to EBITDA also increased from 2.2x in December 2023 to 2.5x in June 2024. We continue to maintain adequate liquidity position during the year. Capital expenditure during first half of 2024 is AED 97.3 million, and the CapEx guidance for the full year of 2024 is between AED 250 million to AED 300 million. Slide 19 shows the share price movement during the last 12 months. The shares are currently trading at P/E multiple of 11.27x. The Board has approved to distribute interim cash dividend of AED 0.10 per share, representing AED 99.4 million to be paid to the shareholders. The current dividend policy, as approved by the shareholders, is to place a minimum dividend payout of AED 0.20 per share the year 2024 to be paid on a semiannual basis. Now I would request 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 has, in fact, impacted businesses across industries. While we also have seen a decline in our overall revenue, we have been more fortunate than a few others in successfully restricting any major impact to our profit margin, mainly supported by the growth and business in the UAE market. For me, going forward, I believe the relief of custom duty on R.A.K. Ceramics in Saudi Arabia will support us in increasing our sales in Saudi. Saudi was always a main market for us. And we are specified in many projects as well as we have our distribution entities, warehouses and showroom. And with now the release or remove of custom, we see a potential growth for us, despite that the market is tough, and it is today over supplied by local factories. But we do believe with a differentiated brand and position which we have, we will be able to sell more. We continue to see more and more local factories coming up globally, focusing on supplying cheaper products in local market. In this complex scenario, we remain dedicated to serve our stakeholders as we continue to position ourselves as a global preferred supplier with strong focus on quality and differentiated products. Lately, we announced of the upgradation of our [indiscernible] by putting the latest continuum means a press to produce the biggest or the largest tiles in the world from 1.8 meter to 3.6 meter, supporting the projects coming, and also increased our area of focus on table tops and kitchen top and also outside cladding. We remain committed to protect our market share and solidifying our retail and project business through maintaining healthy competition and leveraging on cost product synergies. Thank you all for taking the time to join us for this presentation of our Q2 results for 2024. I would now like to hand over the call to the operator and open the line to questions.

[Operator Instructions] Our first question comes from Sameer Kattiparambil from EFG Hermes.

A couple of questions from my side. First on the customs duty cut, are you going to get back the paid amount so far? So I just want to -- and how much you paid so far, I mean in terms of the customs duty? So that's my first question. Second is on the Bangladesh operations. How is the current scenario looks like? How is that going to impact you in terms of sales and overall outcome of the Bangladesh market?

Thank you, Sameer, for your question. Of course, we are very happy to finally get the custom duty relief. And we are now even exempted on paying the tax on the border till October next year. So how it works, you prepare the documents for the 6 months. And we just now accepted these 6 months, which we are working. And I believe, what we will get back for sure is at least almost AED 6 million. For sure, we'll be claiming for the amount which we paid earlier. But this is not yet -- we don't have any confirmation on this. So once we get the relief onwards and almost AED 6 million, which we paid during this period. Now regarding Bangladesh. Bangladesh, the last 6 months, we are struggling with not availability -- nonavailability of gas, liquidity issues. And lately, what happened last week, honestly, we were forced to stop the production with the country went difficult to operate. Honestly now with all these changes, some of the people started coming to the office. And also in terms of production, we started again the factory. So we are hopeful that situation will get stabilized and we will go back to normal.

Okay. That's clear. Just a follow-up on the AED 6 million you mentioned. Is that AED 6 million is the what you paid so far this year? Yes, you're going to get back?

Not the year, not the year, Sameer. So how it works, it is every 6 months you get. So we submitted our documents, the latest documents starting from April this year. So what we paid from April till now is approximately AED 6 million. This for sure, we will get this back. Now from last week onwards, we are not paying anymore. So for sure, for the last 3 years, we paid much more than this amount. This, we are not sure if we will get it back or no. We are trying for sure, but we don't have any confirmation on it.

That's very clear.

But honestly, we are very happy at least going forward, we do not have the 12% to pay out.

Yes. So that much of amount, you will get additional margin for that market, right, like 12%? Or does it mean a higher volume as well?

It is for us, for sure, a higher volume. Even we'll not get that 12% fully, but at least we can get a better margin than what we have today and the bigger volume. And today, as we discussed and whatever is happening as it is the result, we are -- as long -- it happened with us during COVID, yes? And the transportation cost increased, we cannot do anything. We have to increase our cost and the prices. So ideally, is to sell locally or even by car or by road, which Saudi is the market, which supported us during COVID. Unfortunately, for this time, it was with the custom duty. Now with the release of custom duty then, we have the GCC market to support our revenue still, honestly, the export international market and Europe will be always affected. We can sell, but then we will lose money. So that's why we are protecting the margin because we know we cannot do anything with the freight.

[Operator Instructions] We have a follow-up question from Sameer Kattiparambil.

Two more questions from my side. You mentioned about the India upgrade project has been completed. How much, could you remind me on how much CapEx you spend? And what does this mean for volume? And also on the UAE upgrade, can you just let me know what's the current status for the UAE upgrade? That's it.

Sameer, we had in India, 3 manufacturing places. So one of them was for ceramic. It was called Gris Ceramics, which we own 51%. And with the decline in demand in ceramics, we upgraded this line of the existing plant. So we removed the old scale. What we invested is almost INR 50 crore, almost AED 10 million, AED 15 million approximately. So this will give us almost 5 million square meter of GVT or Glazed Vitrified Tiles, it means porcelain tiles in a bigger size. Now in UAE, we started upgrading our continuum. In 2012, we were putting one off the beginning the factory in the world producing larger slabs. So we are adding today the latest a version of the press, which produced the biggest tile with all the finishes. And again, with a bigger kiln, this will take us another 6 months, plus or minus, we will be ready to manufacture.

We have received a tax question. Is the exemption received in Saudi for custom duty very specific to R.A.K. Ceramics? And also, if it is a conditional exemption?

It is. Thank you for the question. Yes, it is. Actually, it is granted for R.A.K. Ceramics because we complied with all the requirements. There is no -- well, conditional, it is not a conditional. It is a 6 months. Every 6 months, we have to update our documents and submit it.

[Operator Instructions]

Felicia, until we get the question, I have a few from my side. So Abdallah, this tax relief is granted until October 2024, 6 months from April. And if you think it's going to continue in the coming periods, do you -- would you still pursue the plan with establishing a factory in Saudi or you think it's no longer viable, if you get exempted in the future to have an actual plan?

Mohamad, thank you for your question. Look, we do believe that with the documents we submitted and get it audited. It is complying with all what authorities is asking. And I believe while we get this for, at least starting from now, I don't see any reason why we don't get it further going forward. And as I mentioned now, we also will try to claim the earlier things, if possible. Now regarding the Saudi plant, Mohamad, for us, Saudi is considered to be our local market. And being in Saudi, having a factory in Saudi will support our sales and present. So this will not cannibalize our sales or what we are doing out of UAE. Yes, even though we got the relief the moment, we get a clarity and the gas and all the requirement to set up a factory, we will proceed.

[Operator Instructions] Since we have no further questions, I'll hand back to the management team for any closing remarks.

Thank you very much. Thank you for your time.

Thank you, Abdallah, PK Chand, and everyone who joined today. Thank you, Felicia, and we look forward to having you with us next quarter. Have a nice day.

Thank you very much.

Thank you, everyone. This concludes today's call. You may now disconnect your lines.