RAK Ceramics (Bangladesh) Limited (RAKCERAMIC) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the RAK Ceramics Quarter 2 2022 Earnings Call and Webcast. My name is Sam, and I will be coordinating your call today. [Operator Instructions] I now have the pleasure to hand you over to your host, Mohamad Haidar from Arqaam Capital [ Lebanon ]. Mohamad, please go ahead.

Hello, everyone, and welcome to the RAK Ceramics' Second Quarter 2022 Earnings Call and Webcast. This is Mohamad Haidar from Arqaam Capital, and we are joined today from RAK Ceramics by Mr. Abdallah Massaad, Group CEO; and Mr. P K Chand, Group CFO. Over to you, Abdallah.

Thank you, Mohamad, and good afternoon, everyone. Welcome to RAK Ceramics' Second Quarter and Half Year 2022 Earnings Conference Call and webcast. I'm pleased to report that RAK Ceramics posted remarkable strong performance in the second quarter of 2022, recording an all-time high quarterly top line and causing a positive and sustainable impact on both operational and financial KPIs despite current market dynamics. Truly unprecedented environment we are operating in. From increasingly high inflation rate to soaring energy prices, unstable ForEx market and continued supply chain challenges all contributing to market volatility and economic uncertainty, raising further fears over a global recession. Despite increased operating challenges, we were successfully able to navigate through with neither disruption in business nor interruption in production, yet even more so emerging with growth and scale and solidified profitability led by key operational initiatives realized in the second quarter 2022. We remain focused on reinforcing the brand image and perception as a premium ceramics lifestyle solution provider and elevating customer experience by inaugurating our first design hub based in London. Participating in exhibitions such as Milano's Salone del Mobile and accelerating digital adoption, we continue to strengthen our retail presence across core markets by opening new showrooms and refurbishing existing ones. To preserve market share and offset increase in production costs, we applied adjustments to selling prices and mix while also increasing efficiencies, production capabilities and capacity utilization to protect our margins. In addition to optimizing supply chain operations, in terms of liquidity, we were able to maintain an adequate position despite consolidation activity, keeping us comfortably in line with our dividend commitment without undermining growth potential. Our revised dividend policy approved in the last quarter stipulates a payback strategy to shareholders of a total of AED 0.60 per share over the next 3 years, 2022 through 2024. As such, the Board has approved an interim distribution of AED 0.10 per share for the first half 2022. Our performance was also supported by key strategic initiatives, enabling the company to maintain growth momentum and unlock further long-term value to its shareholders. Q2 milestones included the conclusion of KLUDI Group acquisition, launch of RAK Porcelain minority position buyout and approval of RAK Ceramics Bangladesh expansion projects. In quarterly numbers, total revenue for Q2 2022 increased by 32.3% year-on-year and 18.4% quarter-on-quarter, reaching AED 927 million, driven by growth in tiles, sanitary ware and tableware. Following process business consolidation, revenue contribution from KLUDI Group for June 2022 amounted AED 50.4 million, given that transaction was completed on the 31st of May 2022. Our total gross profit margin for the second quarter 2022 improved by 0.3% year-on-year, reaching 38.4% despite the imposition of 12% custom duty in Saudi Arabia. The increase in GP margin was recorded mainly on the back of improved production efficiency and production line optimization across all our plants in UAE, India and Bangladesh. Our EBITDA stood at AED 164.3 million compared to AED 129.9 million last year. Freight costs weighed on margins, which decreased by 0.8% year-on-year, reaching 17.7%. Our reported net profit stood at AED 102.2 million in the second quarter 2022 versus AED 94.9 million in the second quarter 2021, mainly due to higher revenue and the gross profit margin in the second quarter. Net profit after minority in the second quarter 2022 was AED 91.2 million compared to AED 87.8 million last year. Like-for-like profit -- net profit increased to AED 102.6 million compared to AED 72.8 million last year after the exclusion of one-off gain of AED 1.9 million during this quarter. Like-for-like net profit margin remained stable at 11.1%. As a performance snapshot on the first half of 2022, total revenue decreased by 20.1% year-on-year, reaching AED 1.71 million (sic) [ AED 1.71 billion ] versus the first half year 2021. Total gross profit margin increased by 1.2% year-on-year, standing at 37.8% for the first half 2022. Total EBITDA increased to AED 294 million compared to AED 256 million in the first half last year. Reported net profit increased to AED 171.9 million in the first half 2022 compared to AED 157.6 million in the first half 2021. Our net profit after minority slightly decreased to AED 147.8 million this year. Like-for-like net profit increased to AED 173.4 million compared to AED 136.3 million in the first half of this year. Moving on to more deeper view of our second quarter 2022 business strategy updates. The UAE market recorded robust performance driven by wholesale and retail business, supported by growing construction demand and a resilient real estate market, in addition to increase in selling price and uplift in the brand retail presence. In the second quarter 2022, we saw a pickup in our e-commerce sales, and we anticipate a further increase to be recorded following the introduction of KLUDI product in the second half 2022. In Saudi Arabia, the company's strategy continues to yield results despite the imposition of 12% custom duty. Quarter-on-quarter growth rebounded significantly following disruption felt in the first half 2022 due to delays in border clearance. We are continuously increasing our focus on growing our presence in the Saudi Arabia most recently in 2022 by securing megaprojects and expanding our retail footprint. In the European market, posted rigid growth in top line, driven by a strengthened brand positioning across the region, diluted, however, on the bottom line due to the recorded surge in rate. Despite increased transportation challenges and economic uncertainties, we continue to position ourselves as a trusted and reliable ceramic solution provider. We have taken a commercial goal to protect and preserve our market share in Europe, absorbing any impact recorded on profitability. As such, we continue to invest in increasing our footprint most recently with the inauguration of our first design hub and hope to tap into the U.K. e-commerce market in the second half 2022. Our operation in India recorded strong performance year-on-year, supported by increasing dealer network presence and expanding retail presence. In Bangladesh, our operations recorded a growth in top line year-on-year. However, higher energy cost and currency devaluation weighed in on the bottom line. The tableware business posted significant improvement in performance following introduction of new range of products and the increase in selling price. Production has been increased to meet demand, and further capacity expansion is under study to drive further growth. In terms of strategic milestone, on the 31st May of 2022, we have successfully concluded the 100% acquisition of KLUDI Group, including the 49% of KLUDI RAK in the UAE, following the satisfaction of all the conditions referenced -- included in the SPA. We are closely working on a 100-day integration plan to ensure seamless integration in the business. In the second quarter 2022, we have initiated the process of minority position buyout for RAK Porcelain, completing to date 40% acquisition, of which 37% were acquired as of 30th June 2022. And additional 3% stake was added in July 2022. Following an all-cash proposal shares to all minority shareholders, as of today, our position in RAK Porcelain stands at 90%, and we are looking to add further stake acquisitions, which are currently in process and under negotiations. We are confident that RAK Porcelain upward growth trajectory going forward, and we aim to fund and support the growth of a promising and thriving division, building on our company's financial soundness and strategic direction. In June 2022, we have approved RAK Ceramics Bangladesh growth plan to expand production capacity through greenfield projects, increasing size, capacity and add capacity of 4.8 million square meters per year and setting up of a faucets plant with producing capacity of 400,000 pieces annually. Concerning recent economic development, global manufacturer players continue to face challenges, weighing on input cost and profitability, moreover, in some instances, affecting course of business. RAK Ceramics was capable to withstand current market dynamics as well as record growth in top line and increase in profitability. Surge in inflation, energy price hikes and freight cost increase are mainly the key challenges our business faced in second quarter 2022, not to mention the impact of the custom duty in Saudi Arabia. Most recently, market volatility increased. Uncertainty and sluggish consumer demand have weighed in on major currencies, raising further worry of the global recession. We remain focused to identifying rising risks and to actively working towards mitigating the impacts in order to avoid any disruption in business and to maintain our position as a reliable ceramic solution provider. The future still remains uncertain and unstable. However, the company remains adamant to navigate through challenges and emerge stronger by always thinking forward and being one step ahead. I will now hand over the call to Mr. P K, our CFO.

Thank you, Abdallah. Good evening, everyone, and thank you for joining us. Mr. Abdallah has already briefed -- summarized operational highlights, regional performance and strategic update for the second quarter of 2022. I will take you through the financial highlights with details on revenue, gross profit margin and the balance sheet. Let us start from Slide 14, second quarter and H1 2022 financial highlights. RAK Ceramics has delivered a strong performance during the second quarter of 2022, despite increased global uncertainties. Total revenue in the second quarter of 2022 increased by 32.3% year-on-year and 18.4% quarter-on-quarter to AED 927 million. KLUDI Group consolidation, effective 1st of June 2022, added AED 50.4 million in the second quarter 2022 revenue. On a like-for-like basis, the revenue increase is 25.1% year-on-year. In the first half of 2022, revenue increase is 20.1% year-on-year at AED 1.71 billion. Tiles revenue is higher by 25.9% year-on-year at AED 595.1 million in the second quarter 2022, driven by both increase in volumes and selling price to partially offset increase in production cost. In the first half of 2022, tiles revenue is higher by 11.9% year-on-year at AED 1.11 billion. Sanitary ware revenue is higher by 7.5% year-on-year at AED 146.3 million in the second quarter 2022, driven mainly by increase in selling price. In the first half of '22, it is higher by 10.3% year-on-year at AED 301.2 million. Tableware revenue increased by 60.0% year-on-year at AED 89.2 million in the second quarter 2022. And in the first half 2022, it increased by 70.3% year-on-year at AED 165 million following market recovery post pandemic. Faucets revenue is AED 56 million in the second quarter 2022, out of which KLUDI Group revenue, following consolidation in June '22, is AED 50.4 million. Revenue from other units increased by 25.1% year-on-year in the first half of 2022 to AED 70 million, driven by mainly increase in our ceramic raw material trading business. Now let me go through the market performance in the second quarter and first half of 2022 for the tiles and sanitary ware segments. In UAE market, revenue in the second quarter 2022 increased by 24.5% year-on-year at AED 176 million. And in the first half of 2022, it increased by 11.7% to AED 340 million supported by wholesale and retail business. In Saudi Arabia, the revenue in the second half -- in the second quarter 2022 increased by 25.6% year-on-year at AED 184 million, mainly driven by project and retail business, while it remained stable year-on-year in the first half of 2022 at AED 307 million. Wholesale business got impacted by 29.5% year-on-year on account of implementation of 12% custom duty effective 1st July '21. In India, there is a strong performance recorded in the second quarter of this year on the back of increasing dealers' network footprint in 9 additional districts and supported by price adjustments to offset the increased input and energy costs. Revenue increased by 55.4% year-on-year at AED 109.6 million. In H1 2022, revenue increase is 25.3% year-on-year at AED 209 million. In Europe, revenue in the second quarter increased by 1.8% year-on-year and 42.4% quarter-on-quarter to AED 116.7 million, following strengthening brand positioning across region. In the first half of 2022, revenue increased 5% year-on-year at AED 225.7 million. Despite growth in top line, high shipping cost and currency devaluation weighed in on bottom line performance. Bangladesh market recorded a strong growth in the second quarter of this year with revenue increase of 11.3% year-on-year to AED 74 million. In the first half of this year, the revenue increase is 12.7% year-on-year at AED 159.5 million, supported by minor price adjustments to partially offset the increased input and energy cost. The total gross profit margin in the second quarter of this year increased by 30 basis points year-on-year and by 150 basis points quarter-on-quarter to 38.4%. In the first half of this year, the total gross profit margin increased 120 basis points on year at 37.8%. The tiles margin increased by 40 basis points year-on-year and 480 basis points quarter-on-quarter to 40.1%. In the first half of 2022, GP margin increased by 30 basis points year-on-year at 37.9%, due to imposition of Saudi customs duty. Without customs duty, tiles gross profit margin works out to 40.1% in the first half of 2022. The sanitary ware margins increased by 40 basis points year-on-year to 36.8% in H1 2022, supported by price adjustments. Tableware margins improved by 15.4% year-on-year to 49.9% in the first half of this year due to increased revenue and productivity. Reported net profit is AED 102.2 million in the second quarter of this year compared to net profit of AED 94.9 million in the last year. Last year profit also included net gain of AED 22.9 million on sale of China assets and provision for a leased hotel. During this quarter, there is net one-off gain of AED 1.9 million, which is after considering gain on KLUDI Group acquisition accounting of AED 32.4 million, extraordinary provision for receivables of AED 27.6 million and impairment of some old plant and machinery amounting to AED 2.9 million. In the first half of 2022, the net profit is AED 171.9 million compared to AED 157.6 million due to higher revenue and better gross profit margins. Net profit margin is 10.1% in the first half of this year compared to 11.1% in last year. The like-for-like net profit, that is excluding net one-off gains and hyperinflation impact, is higher at AED 173.4 million in the first half of this year compared to AED 136.3 million in the last year. The margin is 10.1% compared to 9.6% in the last year. The EBITDA is at AED 164.3 million in the second quarter of this year compared to AED 129.9 million in the last year. EBITDA in the first half of this year is AED 294 million compared to AED 256 million in the last year. Margin is lower by 80 basis points year-on-year at 17.2%, mainly due to higher freight costs. Now we turn on to the balance sheet highlights on Slide 19. Overall working capital cycle decreased from 166 days in the first quarter 2022 to 155 days in the second quarter 2022. In absolute terms, working capital increased by AED 192 million quarter-on-quarter to AED 1.45 billion in Q2 2022, mainly due to addition of AED 106.5 million from KLUDI Group consolidation. On like-for-like basis, working capital cycle is at 160 days. Inventory days reduced from 215 days to 205 days quarter-on-quarter. Trade receivable days increased from 88 days to 91 days quarter-on-quarter following increase in top line mostly related to UAE and KSA markets. Trade payables increased from 62 days in the first quarter 2022 to 67 days in the second quarter of this year. Net debt increased quarter-on-quarter by AED 351 million to AED 1.32 billion in June '22, following AED 149 million for KLUDI Group acquisition costs and net debt acquired on acquisition and also an investment of AED 203.5 million for acquisition of minority stake in RAK Porcelain. Net debt to EBITDA increased from 1.93x to 2.37x quarter-on-quarter. We were also successful in maintaining an adequate liquidity position in the second quarter of this year and in spite of consolidation activities, enabling company to comfortably meet payout commitments. Capital expenditure for the first half has been low at AED 59.5 million. We revised our capital expenditure estimate from 2,000 -- from AED 350 million to AED 250 million in 2022. The next slide shows the share price movement of RAK Ceramics, which has increased from AED 2.28 to AED 2.867 in the last 12 months and trading at the multiple of 11.6x on LTM basis. If we see the comparative chart of RAK Ceramics versus FTSE ADX, we have outperformed yet in line with market trends in the last 12 months. The Board has approved to distribute semiannual cash dividend of AED 0.10 per share, representing AED 99.4 million to be paid to the shareholders registered at the close of business day of 12th of August 2022. The revised dividend policy as approved by the shareholders is to place a minimum dividend payout of AED 0.20 per share for the year 2022 to be paid on a semiannual basis and also provides for a commitment to pay a minimum dividend of AED 0.60 per share over the next 3 years, that is 2022 to 2024. Now I would like to turn back to Mr. Abdallah for his final comments on 2022 priorities before we answer your questions.

Thank you, P K. It is, without a doubt, our best quarter to date, and this is in terms of top line, yet even profitability. We are pleased of our achievement amid current rising challenges, knowing that such growth is based on solid operational fundamentals. Going forward, we constantly aim to strengthen RAK Ceramics' position as being a premium ceramic lifestyle solution provider. To reiterate our priorities in 2022, we continue to align our strategy to the objectives laid out: focusing on protecting and growing our market share; expanding our production capabilities and differentiation -- and differentiating our brand with the use of technology and in term of offering while operating efficiently and sustainably. Finally, we prioritize our short-term initiatives, revisiting them post every accomplishment and establishing alignment with our objectives from the ensuring seamless consolidation of core businesses and advancing on expansionary front to increasing digital adoption and solidifying brand positioning. We continue to invest our efforts to lay the ground for the future organic and inorganic growth while still building business resilience and operating in a more sustainable manner. We remain cautiously optimistic about the future, and we are confident that we are in a good position to overcome current macroeconomic headwinds and mitigate any future risks faced given our strong foundation. We continue to see increased demand and appetite for our products even from core markets with increased volatility, which fuels our drive to pursue even further product innovations and brand development. For the medium to long term, we hope to see immediate positive impact on bottom line with future easing and stability in the market and continue to be forward-looking in our operation to generate sustainable growth and long-term value to our shareholders. Thank you for your time. Now I would like to hand over the call to the operator and open the line for questions.

[Operator Instructions] And our first question comes from the line of Anoop Fernandes from SICO.

Congrats on a great quarter and the acquisitions. I have a couple of questions. The first is on KLUDI. You've mentioned that the revenue for this quarter was AED 50-odd million. Could you please give us a sense of what the EBITDA was from KLUDI? And in general, over the course of the year, what sort of gross margins -- revenue, gross margin and EBITDA can we expect from this business? That's the first question. And secondly, regarding your acquisition itself, you've given the total acquisition value. But could you give us what the valuation of the 49% stake in KLUDI RAK was?

If I start first, P K, you can please elaborate. One -- in the last call, we acquired the 100% plus the 49%. So the valuation was all included. So we paid for the 100% of KLUDI Germany, Austria and Hungary, plus the 49%. So we did not valuate them in a separate manner. In term of top line, yes, because earlier, we were not consolidating even KLUDI RAK. So now it will be a consolidation of the whole group. P K, if you can elaborate on the EBITDA and...

Yes. As far as I see, as far as KLUDI working is concerned, we already hold 51% in KLUDI RAK, which is the main profitable entity. The KLUDI European entities are not that profitable. So to answer your first question, as far as June is concerned, the EBITDA coming from these KLUDI acquisitions, the extra EBITDA is around AED 1.5 million only. And in 2022, we expect about AED 15 million to AED 20 million of additional EBITDA from this acquisition. So as Mr. Abdallah had explained during his initial remarks that we are working for a lot of synergy, which will take some time. But this will actually come maybe in the year 2023 or in '24, where we will get the real benefit of this acquisition. So that is as far as the KLUDI acquisition is concerned, yes.

Yes. So what sort of gross profit margins can we build in this? Should we assume that it is at par with your tiles or sanitary ware business or higher than that? Or is it substantially lower than that level, just from a modeling prospective?

From KLUDI, including the KLUDI RAK as well as the European entities, the gross profit margin could be in the range of 25%.

Okay. 25%, that's fine. Yes. Okay. The next question is regarding the AED 27 million impairment under other receivables. Could you please give us a sense of what these other receivables are? So you have a cumulative impairment, I think, of about AED 35 million, out of which AED 7 million is related to trade receivables, and the remaining AED 27.5 million, I think, is some other receivables.

Yes. So if you go through the -- in detail our financials, where -- and we have detailed that we had an entity in Sudan and which we had disposed of. So if you go to Page #16, comment #15, where there, we have mentioned in view of the uncertainties, particularly in the Sudan market, therefore, the management has been aggressive to take the provision, even though we are confident of the full recovery. But because of the political situation in Sudan, we decided to take this provision.

Okay. Okay. Lastly, regarding your Bangladesh expansion, are you confident of the availability of gas there? Because lately, there has been a lot of buzz around energy shortages there. Of course, over the long term, these things might not last. But we are getting into an extension at a point where these issues are quite prominent. So what are your views on that? And plus, even gas issues at your KLUDI operations maybe in Europe, a lot is happening in Germany right now. Plus, even in India, I guess, lately, there has been some sort of rationing from GAIL. So are your operations there facing any issues because of this?

P K, if I start with the answering. So from your question, the uncertainty in energy, as you said, in Bangladesh, as of today, we do not see really an issue. For some time, it was some maintenance, less pressure. But overall, it is fine. They increased the prices by 12%. Today, it's still cheap in Bangladesh vis-à-vis other countries, to be honest. Now India, again, in Samalkot, we have gas. The price has increased. In Morbi or in Gujarat, we are still also receiving with -- they asked everyone to reduce almost 20% the consumption. But still, we are receiving and operating. And you don't have a problem. In Germany, with the faucets, we don't use honestly a big amount of gas. It's little only on the electroplating, and this can be done by LPG, a very minor quantity. The main energy there is electricity. So also in KLUDI, when we did the acquisition, we initiated immediately an expansion, as we mentioned, for 400,000 pieces, almost doubling the capacity in the Ras Al Khaimah plant as a contingency plan for us. So overall, and this is what I mentioned, that we remain cautiously optimistic. There are many challenges. We can -- we are always following what is happening. And for all of you every day, last night, I believe all of us, we did not slept well and looking what will happen. But the good news that if you see our performance for the last few quarters was sustainable and really strong performance, we have a very focused team looking at the macro environment and focusing on our efficiency and our -- whatever we can do from a micro perspective.

There is a question from one attendee. He doesn't want to -- his name to be announced. The question is, how comfortable are you in RAK's ability to sustain Q2 level of sales? What type of seasonality is anticipated going forward?

Look, for us, I mentioned that, again, that we are cautiously optimistic. We are doing our best. We are very well focused on our market. We do not see any shortages hopefully in raw material and spares and energy, producing, focusing, working hard on our brand and the visibility from increasing on retail outlet to e-commerce to the project activity to the differentiation. So honestly, we are optimistic that whatever we will be able to deliver, we will, for sure, deliver it.

And our next question comes from the line of Sameer Kattiparambil from EFG Hermes.

I have a quick question on your Saudi operations. So you were expecting some favorable announcement in terms of the GCC customs duty. Any update on that?

Sameer, till now, honestly, the last 1 year, we are working, submitting all documents requested. But till now, we did not get any exemption. Not only us, no one can now get any exemption.

Okay. Understood. And on your Saudi expansion, this time, I didn't find any update from your side. So did you drop the plan? Or is it still under consideration?

Sameer, we already announced today that maybe you are right, we did not mention it in the earning call. We already signed a conditional agreement with -- in Yanbu with the Royal Commission allocating the land. We got the land allocation. And honestly, with the plan we have in place that we will take this year for finalizing all the licenses and the factory, machineries and so on. And we will take another -- after 2 years, we will be producing as the gas will be available in the first quarter of 2025.

Okay. That's great news. Congratulations. It's been a long time, right?

Thank you, Sameer. Yes. Yes, it's a long time. But -- yes.

Yes. So understood. Yes. So one last question from my side. Your India operation has grown by 55% last quarter. So how much of that is volume-driven and price-driven? Also, there were some reports that the Morbi ceramic cluster is planning for a total shutdown this month due to some high inflation and inventory levels. So could you give some view on what's the operational scenario in India, how tough the market is?

Look, Sameer, if -- I'll start with first one. The demand -- look, the Indian market is big, and you have a lot of supply. And I know that, yes, it was announced for the Morbi cluster to shut down for months -- 1 month to reduce the inventory, piled-up inventory. And the inventory is coming from many regions, from the supply chain, the increase in freight. And so it is challenging for almost all the manufacturers around the world. Meanwhile, our market share, even though we have a good position, well positioned in the Indian market, but our market share is small. That's why we are trying to go to more districts, more presence and try to gain more market share. So if you see -- also, in India, in the last 2 years, it's consistently every quarter, we are posting a good positive momentum from a top line and bottom line, and I'm pretty sure that this will continue. In regard of increasing, what is the increase, we increase the prices. But the prices, P K, you have the percentage. But -- so it's not the 50%, so maybe driven by volume.