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

Hello, everyone, and welcome to today's R.A.K. Ceramics Q3 and 9 Months 2024 Earnings Call and Webcast. My name is Seth, and I'll be the operator for your call today. [Operator Instructions] I will now hand over to Mohamad Haidar from Arqaam Capital to begin. Please go ahead when you're ready.

Hello, everyone, and welcome to the R.A.K. Ceramics Third Quarter and 9 Months of 2024 Earnings Call and Webcast. This is Mohamad Haidar from Arqaam Capital, and we are joined today from R.A.K. Ceramics by Mr. Abdallah Massaad, Group CEO; and Mr. PK Chand, Group CFO. Over to you, Mr. Abdallah.

Thank you, Mohamad. Good afternoon, everyone, and thank you for joining us today. Welcome to R.A.K. Ceramics Third Quarter 2024 Earnings Conference Call and Webcast. The global economy continues to remain challenged by the ongoing geopolitical tensions, inflationary trends and complex supply chain disruption, which are particularly affecting export-driven industry like ours. The Red Sea crisis continued to push the freight cost upwards, thus affecting our margins, particularly in key export markets. Additionally, we also experienced a substantial increase in logistic costs for transporting products within the GCC. However, the recent interest rate cut, along with expected future cuts will improve the overall liquidity. This may ease credit conditions and stimulate real estate sector, which will support our business. Let me now take you through the consolidated revenue split for the group across our key markets as well as the split between the product divisions. The UAE market continues to remain the largest contributor to -- for the group's total revenue and margins. This is followed by revenue from Europe, which contribute 23% of the consolidated revenue, followed by India and Saudi Arabia. Moving to the product segments. Tiles divisions continue to contribute majority shares of the revenue, followed by sanitaryware, faucets and then the tableware. I will now take you through the financial performance across our core market and product segments. The UAE market remains resilient, supported by growth in real estate and construction sector. In Saudi Arabia, competition and oversupply in the market has led to a decline in revenue. The rising transportation cost also continues to remain a challenge for us, but we were able to sustain our margins, supported by the relief from custom duty on our export and change in product mix. The European and the U.K. markets continue to face inflationary pressures, recessionary conditions and heightened competition. The recent trade cut may provide some relief, but demand continues to remain low. Also, the rising freight cost and logistical challenges further creates pressure on our operations in Europe. While the Indian market has shown resilience despite the macro challenges, it also faces severe competition from domestic manufacturers due to lower exports from India, leading to a highly price-sensitive environment locally. As you know that the increase in freight, as I mentioned, is impacting all the industries where it is export based, especially from East to West. And therefore, the industry -- also the ceramics industry in India has badly affected by the increase in freight and thus, they focused on reducing the price and competing in the market in order to sell locally. Our business in Bangladesh saw a drastic impact due to the political instability, gas shortages and currency devaluation. This also impacted production efficiency and cost along with revenue and margin leading to losses. For the Tiles division...

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Sorry for the line cut. For the Tiles division, revenue declined across most markets, except the UAE, where we achieved positive growth, supported by growth in construction and real estate sector. Our focus on maintaining pricing discipline rather than engaging in price wars had helped us maintain our margin. In the Sanitaryware and Faucets division, we faced headwinds in most of our export market due to the higher freight cost and logistic challenges. Business was also impacted to the decline of real estate sector in China and with the new sanction levy in Russia. Our Tableware division saw a decline in both revenue and volume, largely due to the slowdown in the hospitality sector and supply chain disruption driven by regional geopolitical tension. As we navigate an increasingly complex global environment, I would also want to discuss the primary challenges we are encountering in our core markets and the focused strategies we are implementing to strengthen our position and drive a long-term growth. In the United Arab Emirates, where the influx of lower cost import is rising, supported by the free trade agreements, our strategy remain on strengthen our partnership with reputable developers across the UAE, supplying them with our tiles, sanitaryware and faucets for their project as well as improving our specification team working with a designer, architect and developer to provide solution for their projects. And I believe with our reliability, the good quality and the innovation with our R&D team focusing on solution, this is shown and this even -- despite all the competition we are facing, we saw an increase in sales in the UAE market and especially in the project market, which is going on. In Saudi Arabia, the oversupply of tiles from local manufacturer, combined with increased transportation costs for export from the United Arab Emirates has challenged our position in the wholesale market. However, the recent government exemption on custom duties for imports has provided some relief, helping us to offset cost and improve our competitiveness. Additionally, we are also focusing on introducing premium products to support our retail and project channels, which allows us to maintain margins and avoid engaging in price war. I believe also in Saudi with now the projects -- the premium projects in pipeline, this will be a good potential for a company with a branded product as well as innovative product to get a reasonable market share. Europe remains a challenging market with recent economic pressure driving lower demand. However, we are working closely with the architect and designers community in -- to increase our network and promote our new collection, as we mentioned that we have our design center in the U.K. We opened a new design center in Germany, in Frankfurt. And now we are working -- we already took a showroom in Milan, where we will be opening by the first half of next year, focusing on working closely with architect designer in order to get specified in a global level. India continues to remain a very price-sensitive market. And to address this, we are working on strengthening our retail presence and enhancing the in-store experience to drive higher engagement with customers by providing a differentiated shopping experience. We can attract quality-focused consumers, helping to build a stronger market position. Lastly, in Bangladesh, political instability, currency devaluation and shortage of gas continue to be -- to affect the markets. Our focus here is to establish a strong distribution network that can reliably deliver high-quality products supported by innovative solution to stand out from the competition. We also continue to work towards brand enhancement through opening new showrooms and widening our dealer network in all the markets. In the UAE, we continue to invest in both our production facilities and our retail presence. In our Tiles division, we are upgrading production capabilities with the latest technologies to produce differentiated large-format tile that will meet the growing demand in high-end markets. We are working to put a new Continua Plus where we can go up to the largest format as well as converting part of our ceramics lines to a porcelain line where we saw a big shift in the demand in porcelain globally, and we are upgrading our facilities in order to cap with the demand in this sector. In our sanitaryware facilities, we are investing in the latest technologies that will help us reduce both carbon emissions and energy consumption, aligning with our sustainability goal. Our newly opened showroom in Sheikh Zayed Road in Dubai showcased the R.A.K. Ceramics' lifestyle concepts featuring displays that allow customers to experience our product in real world setting. Also, the same in terms of tableware with the showroom we opened it in Dubai Hills Mall, where for the launching of our retail focus tableware. It's giving a good positioning to the brand. In Saudi Arabia, we are actively progressing towards establishing a new production facility for tiles, which will strengthen our local presence. I'm also pleased to share that R.A.K. Ceramics was recently honored as the UAE Industry 4.0 Leader by the Ministry of Industry & Advanced Technology, recognizing our digital transformation effort within the industrial sector. I will now hand over to PK Chand, our CFO. Please, PK.

Thank you, Abdallah. Good afternoon, everyone, and thank you for joining us. Mr. Abdallah has already covered the key market performance highlights, challenges and strategy updates for the third quarter of 2024. I will walk you through the financial highlights for the third quarter and 9 months of 2024, including details on revenue, gross profit margin and the balance sheet items. We will start from Slide 11. Total revenue in the third quarter decreased by 4.1% year-on-year at AED 802.5 million. And in the 9 months, it decreased by 8.9% at AED 2.36 billion due to continued global geopolitical tensions, inflationary trends, and complex supply chain disruptions, which are particularly affecting export-driven industry like ours. However, total revenue increased by 3.3% quarter-on-quarter, supported by growth in all markets, except Bangladesh and European markets. Tiles and sanitaryware revenue is lower by 2.1% year-on-year at AED 585.7 million in the third quarter and by 10.1% to AED 1.69 billion in the 9 months. Tiles revenue decreased by 1.5% year-on-year to AED 468.2 million in the third quarter and in 9 months, it decreased by 10.1% to AED 1.34 billion on account of lower volumes across all markets, except the UAE. Sanitaryware revenue decreased by 4.5% year-on-year to AED 117.5 million in the third quarter. And in 9 months, it decreased by 9.9% year-on-year at AED 347.5 million due to impact on volume across all core markets. Tableware revenue decreased by 7.8% year-on-year to AED 85.3 million in the third quarter. And in 9 months, it decreased by 5.2% to AED 267.4 million, mainly due to slowdown in the hospitality sector and supply chain disruption driven by regional geopolitical tensions. Faucets revenue decreased by 5.3% year-on-year to AED 108.8 million in the third quarter. And in 9 months, it decreased by 2.3% to AED 335.1 million as we continue to face headwinds in most of our export markets due to higher freight costs and logistical challenges. Business was also impacted due to decline of real estate sector in China and with new sanctions levied on Russia. Revenue from other units decreased by 21.1% to AED 68.8 million in 9 months, mainly due to decrease in our ceramic raw material trading business on lower production of tiles and sanitaryware. Mr. Abdallah has already covered the regional performance, so I will move to Slide 14 onwards, covering the segmental gross profit margins in the third quarter and 9 months of 2024. Total gross profit margin increased by 250 basis points year-on-year to 41.2% in the third quarter, an increase of 140 basis points year-on-year at 40.0% in the 9 months period due to change in overall product mix in most of the markets. Tiles margin in the third quarter increased by 350 basis points year-on-year at 42.5% to an all-time high. And in 9 months, it increased by 140 basis points year-on-year at 40.4%, supported by shift in production mix from ceramics to GP tiles and better efficiencies. Sanitaryware margin increased by 200 basis points year-on-year at 33.8% in the third quarter. While in the 9 months period, it decreased by 210 basis points year-on-year to 32.2% due to change in product mix and lower productivity. Tableware margin increased by 270 basis points year-on-year to 52.7% in the third quarter. And in 9 months, it increased by 250 basis points year-on-year at 53%, following change in product mix and supply of premium products. Faucets margin also decreased by 360 basis points at 28.9% in the third quarter and due to lower revenue. However, in 9 months, it increased by 220 basis points year-on-year at 30.2% due to rationalization of costs. Profit before tax for the third quarter is AED 60.8 million compared to AED 91.9 million in the last year. Profit decreased mainly due to lower revenue, lower other income, higher impairment loss and newly introduced UAE corporate tax. Profit margin is 7.6% compared to 11% in last year. Net profit before tax for 9 months is AED 194.6 million compared to AED 257.1 million in last year. Profit decreased mainly due to lower revenue, lower other income and UAE corporate tax. Factors impacting the profit from 9 months of 2023 to 2024 are given in Slide 15. Profit margin is 8.2% compared to 9.9% in last year. Net profit after tax for the third quarter is AED 55.9 million compared to AED 83.9 million in last year. The impact of the newly introduced UAE corporate tax at the rate of 9% effective 1st January 2024 is AED 7.9 million in the third quarter of this year. Net profit margin is 7% compared to 10% in last year. Net profit after tax for 9 months is AED 169.9 million compared to AED 239.1 million in the last year. The impact of newly introduced corporate tax is AED 22.3 million in 9 months. Net profit margin is 7.2% compared to 9.2% in last year. EBITDA decreased year-on-year by 13.5% in the third quarter to AED 146.2 million. The margin decreased by 200 basis points year-on-year to 18.2%. In 9 months, the EBITDA decreased by 9.8% at AED 434.2 million and margin decreased by 20 basis points year-on-year at 18.4%. Now we turn to balance sheet highlights on Slide 16. Overall working capital cycle decreased from 197 days in the second quarter 2024 to 196 days in the third quarter 2024. Also in absolute terms, working capital decreased by AED 17 million to AED 1.54 billion in the end of third quarter 2024, mainly due to increase in payables. Trade receivables increased from 92 days in June 2024 to 94 days in September 2024 due to higher quarter-on-quarter revenue by 3.3%. Inventory days increased from 239 days to 254 days quarter-on-quarter due to increase in raw materials and stores inventories. Trade payable increased from 62 days in quarter 2, 2024, to 66 days in the third quarter 2024 due to lower LTM cost of goods sold. Net debt increased by AED 14 million to AED 1.57 billion compared to June 2024. Net debt to EBITDA also increased from 2.50x in June '24 to 2.61x in September '24, mainly due to lower LTM EBITDA. We continue to maintain adequate liquidity position during the year. Capital expenditure during 9 months of this year has been AED 132.5 million. CapEx guidance for the full year of 2024 is revised to AED 200 million to AED 225 million. Slide 19 shows the share price movement during the last 12 months. The shares are currently trading at PE multiple of 11x. Now I will turn back to Mr. Abdallah for his final comments before we answer your questions.

Thank you, PK. It's evident that the ongoing geopolitical challenges and crisis have impacted businesses across industries. While we witnessed resilient performance in the UAE backed by growth in the real estate sectors and rising tourism, our revenue in other core market was impacted. However, we have been more fortunate than a few others in the industry in successfully restricting any major impact to our profit margin. We will continue to make strategic advances in our core market, driven by a clear focus on quality innovation and sustainability, as we see more and more local factories coming up globally, focusing on supplying cheaper products in the local markets. In this complex scenario, we remain dedicated to serve our stakeholders, as we continue to positioning ourselves as a global preferred supplier with a strong focus on quality and differentiated product offering. Thank you all for taking time to join us for this presentation in our Q3 results for 2024. I would like now to hand over to the operator, please.

[Operator Instructions] We have an audio question on the line from Nikhil Mishra at Al Ramz.

A couple of questions from my side. First of all, what is the progress on Saudi plant? Is there any update on securing gas supply there? And is the change in the CapEx guidance related to that particular plant? And second question is on the land parcel in Ras Al-Khaimah. Any update on the sale of that land parcel or any progress there?

Thank you for your question. As we always mentioned that Saudi is a very important market for us. And honestly, now with the custom duty relief this, you see that the company and the sales has improved and the margin also improved for us in Saudi. We are continuing, following. Honestly, we are waiting, soon -- at least till now, we have the gas allocation, but we don't have the time commitment from Marafiq. And hopefully, that we are following -- and I think personally for that before the end of the year, we should be able to know when the gas will be given. And accordingly, we will update the market whenever we have any information. Regarding the CapEx for this year, no, because I don't think something it is there. But the moment we will get, as you said, the gas allocation and the timing where we get the gas, we will, with the announcement of the project, give the CapEx guidance in that. Regarding the land, no, unfortunately, until now. I believe, as you said, in Ras Al-Khaimah, many projects are going on. And as on today, we don't have any update regarding the land which we have there.

Just one more question, if I may. A month back -- around a month back, you announced a framework agreement with Sobha Realty. So just wanted to understand what is the potential business that could come from that particular agreement? What is the scope of that agreement? And also, will you be looking to have such more agreements with more developers going forward?

Look, it is not the first time we do such an agreement. Before, with Azizi, we have. We have a framework agreement with Emaar and with many developers, and we are working, as I mentioned, with most of the renowned developers. Look, what affected us badly in the logistics also gave us some advantage locally because other suppliers, which coming also from outside, they will have an issue of logistics and timing and uncertainty. And for us, as R.A.K. Ceramics, branded product, global product, all these developers and contractors, they prefer to work with us, as we are reliable giving a good quality product. Now what is the potential? We are -- you see the sales in our project in the UAE this year is almost up by 18%. So we are gaining more and more projects and we'll have, for sure, a higher potential of increasing our market share and improving our sales in the UAE. I hope I answered you.

We did lose connection with Nikhil, so we can just move on to the next question. On the tech side of things, we have a question from Dina Hicham from EFG Hermes. Despite the cost rationalization, faucets margins is lowest during third quarter '24 at 29% versus 32% last year. What leads to the decline? And customs duty relief in KSA, you mentioned in the presentation, could you elaborate more? Can we expect full repayment of duty you paid over the last 2 years?

Okay. Regarding -- the first thing regarding faucets, look, unfortunately, when we acquired KLUDI and after 2 months, it was announced the war happening with Russia and Ukraine. And KLUDI, as a company, was strong in East Europe because we had factories in Austria, in Hungary before in Poland. So it was having a good market. And this market was with a good margin. So year-by-year, this was impacted. And also the China subsidiary of KLUDI also had a good sale in China as well as a good market. But unfortunately, with some bankruptcies happened to a big player in the real estate sector, this impacted the sales with a big margin. So what remained in Europe was the white label, and we are in process of restructuring, means, manufacturing, relocation plans. This is temporarily. I believe the margin will see improvement next year and the year after where we believe that 2026 will finish all the relocation, manufacturing footprint. And therefore, it will give a positive impact in the margin. Now regarding the custom duties, as we said, after a lot of follow-up -- and I believe we are among the few, if not the first company who get this exemption in customs, we started it starting April. Last year, we already got a refund. How much PK almost till now?

Refund plus the exemption is around AED 10 million.

Around AED 10 million. And honestly, we are happy to see that after the 6 months gone because the exemption will be like for 6 months. Also, we got now the exemption for the next 6 months. So this is, I believe -- regarding the payment, which we have done it before that, we're trying our best. But till now, what we got exemption is starting April till now.

And then the next 2 questions from Dina were how big is the loss in Bangladesh? What's the current status there? And when are you expecting a turnaround? How does the new China stimulus package, including the export subsidies going to impact the tile and sanitaryware segments in the MENA region? Can we expect significant level of export to the MENA region?

Look, let me answer first the Bangladesh. In Bangladesh -- this company in Bangladesh was always really doing extremely good since the beginning. And it was forever a profit-making entities. Unfortunately, with the last few years -- at least 2 years, I believe, with pressure on inflation, on the currency devaluation, on nonavailability of dollars, then lastly -- last -- and the nonavailability of gas supply last quarter with all this disturbance happened and changing of government, we had a loss of AED 4.9 million in the third quarter. What we see that -- I can say now that the supply of gas recently, we came back to full -- almost getting back what is the requirement in the factory. Therefore, we increased the capacity and the factory utilization. I believe that the quarter or at least the business now as it looks, it's stable and going back to a stabilization. It is premature to assess what will happen, how it moves, but as we see an improvement has happened and we are monitoring the situation going forward.

And China stimulus...

The second one is?

Sorry, I'll just repeat the next question. Yes. So the next one is, how does the new China stimulus package, including the export subsidies going to impact the tile and sanitaryware segments in the MENA region? Can we expect significant level of export to the MENA regions?

Honestly speaking, this, we don't take it into consideration because where is our position as a company and what we sell and the price level we are in and the Chinese manufacturers, we are not competing at the same segments. So honestly speaking, I don't see any impact on us because we are not in a competition in the same segment here.

Move on to the next question from [ Wei Chao ] at Al Rayan Investments. Why has selling and distribution increased in third quarter despite lower revenue year-on-year? What is the trend we should expect going forward?

See, if you go to the Schedule 8 on the financial statements, the schedule is very clear. One is staff expenses have gone up because we recruited more people for sales. The second is the freight and transportation expenses, which as Mr. Abdallah already pointed out. There is a significant increase in the transportation expenses post Red Sea issue. And the third is we incurred more advertisement expenses. So compared to last year, AED 60.6 million. This year, it is AED 20. 7 million. So these are the 3 main heads because of which the expenses have increased. The question whether it is how we can see going forward? See, freight and transportation, what we have seen is started coming down slowly. So the increase has stopped now. So that is what we have seen. Now advertisement, depending on the requirements, we will continue to do the advertisement expenses.

[Operator Instructions]

This is Mohamad Haidar. Abdallah, so it's really impressive margins are going up despite -- at the gross level despite the lower sales or revenues. Hypothetically speaking, if you manage to pick up sales in the coming years, can we also expect margins to grow further, like higher than 41%, 42%?

Mohamad, thank you for your question. We had -- if you look at the peers and check the peers -- our peers globally, and you see the margin and the impact. So there was 2 directions. One direction is the demand is lower globally, all the challenges we have it so some of the groups reduced their prices. And therefore, maybe they didn't have a dip in the revenue much, but we can see that they went either into negative net profit or a very, very low negligible margin. So as a group, as a company, we decided that we understand that the geopolitical and inflation and recession worldwide. So we took the other direction on improving our margin, on improving efficiencies, and we understand that we will lose some volume, but let us maintain the margin. I believe the margin, which we are in today, is very healthy. Going forward, can we improve it further? It's premature. We don't know how the market moves, but I don't see a big difference on where it can go on the other direction. But I'm hopeful for sure that wherever there will be, at least the transport -- means the freight, the logistic will improve, our revenue will improve. And therefore, this will give us a different direction.

Understood. And Abdallah, when you say if freight rates improve, sales go up, is this like your decision to export more out of the UAE?

No, Mohamad. Always historically, even today, the UAE is our biggest market. But even with the biggest market, our sales to the UAE does not cross the 35%. While we are -- we have to -- Europe is a big market for us, all the world in terms of export projects. So we cannot sell all our capacity in UAE. We have to export it. And today, with the logistic increase in a big way. So it's not a small increase, plus the timing crossing the Red Sea is giving a big impact on really people, who want to import our products. Therefore, we are, yes, impacted in profitability as well as the volume because today, selling a product going to U.S.A., it's gone up from 3,000 to almost 8,000, 9,000. So the increase for the product which we sell represent a big disadvantage on us. So therefore, this is the main impact in revenue coming from everywhere, including Europe and all the export markets. That's why we focus on the UAE and the GCC. So we'll have a better -- at least better net profit, if you want to see contribution.

Understood. And lastly, so you have agreements in the UAE with Emaar and other developers. Are there similar agreements in Saudi? Or are you working on similar agreements there with big developers?

Yes, yes. So that's why we see that we have done in Saudi, a lot of -- our project specification team is doing really a good job. And we saw that we are having a good lead. Earlier, it was mainly the housing projects, which we are in. But in this case, what is our target is going into the big project, differentiated projects where this is what I mentioned. I believe we will have a bigger market share in the high-end projects.

And currently, we have no other questions on the conference call.

Thank you. Thank you very much for attending, and thank you, Mohamad.

Thank you, Abdallah and PK Chand and everyone for joining. Looking forward for our next call, next quarter. Have a nice day.

Thank you.

Thank you, Mohamad.

This concludes today's conference call. Thank you all very much for joining.