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

Hello, everyone. Welcome to RAK Ceramics Q3 2022 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 RAK Ceramics Third Quarter 2020 Earnings Call and Broadcast. This is Mohamad Haidar from Arqaam Capital. And from RAK Ceramics, we are joined by Mr. Abdallah Massaad, Group CEO; and Mr. P K Chand, Group CFO; and Mr. Nadine Nasr, Head of Investor Relations. Over to you, Abdallah.

Thank you, Mohamad, and good afternoon, everyone. Thank you for joining us today, and welcome to RAK Ceramics' Third Quarter and First 9 Months of 2022 Earnings Conference Call and Webcast. We are pleased to announce that RAK Ceramics posted solid performance, building on achieved operational capabilities to date. As we navigate through current macroeconomic headwinds, the company was able to grow and post top line of AED 906 million for the third quarter 2022 and AED 2.62 billion for the first 9 months of 2022. Performance remains strong and was translated into reported net profit of AED 90 million and AED 262 million, respectively, despite current market dynamics. Today, we see the persistent challenges affecting several markets, industries, not to mention ceramic players. Energy crisis have been felt worldwide, be it in the form of price increases or availability. Inflationary pressures remain high, stimulated even further given high cost of production. And finally, we see today materialized slowdown in terms of global economic growth, causing, as such, several central banks to tighten their monetary policies. Consequently, a global drop in consumer demand has been felt, reflecting in terms of freight rate decrease and commodity price stabilization. To our advantage, our significant operating presence remain in emerging markets. Specifically, markets with strong fundamentals, such as the United Arab Emirates. This has shielded our growth and allowed us to remain resilient to macroeconomic conditions faced. Today's [ region ] environment fuels further competition among players. However, we remain confident in our position, leveraging on our brand positioning, differentiated products and complete offering. This quarter, our initiatives were aimed to strengthen our foundation to allow for further growth, support our strategic directions and build shareholder value. We focused on strengthening our brand positioning by launching new product ranges, by participating in international exhibitions, such as Salone del Mobile and Cersaie, and by increasing our distribution network. Operationally, we remain determined on optimizing productivity and increasing efficiency, along with advancing on enhancement and expansionary projects across all core businesses. Sustainability and digital transformation remain at the core of our investments as we continue to see the fruits of such adoption on our products, both in terms of end products, quality and sales, not to mention our operations. Advancements strategically for third quarter 2022 include allotted Yanbu land for Saudi Arabian expansion, further 4% minority stake acquisition at RAK Porcelain and acquisition of land in Bangladesh for the approved greenfield project. Finally, RAK Ceramics executed contracts for sale of the property we have in Australia in the third quarter 2022. Moving on to a more deeper view on our third quarter 2022 business highlights. The United Arab Emirates market recorded robust performance supported by growing local real estate market and solid brand positioning. We have completed in this quarter several showroom refurbishment projects across flagship and trader showroom. Additionally, we saw in this quarter a pickup in e-commerce sales as we continue to invest in expanding such channel. RAK Ceramics performance in Saudi Arabia remained rigid despite slowdown in top line growth quarter-on-quarter given increased competition in the wholesale division. Company continues to focus on strengthening its position in projects and retail as Saudi Arabia's real estate market outlook remains optimistic following current strong economic growth. In India, the company saw the impact of macroeconomic conditions on top line growth. However, performance remains sound as we continue to expand our sales footprint and improve productivity and efficiency on sustained current energy price increases. Bangladesh's devaluating currency has hindered growth potential, recording an almost stagnant top line and affecting performance despite better brand visibility, increase in prices and product mix shift. Most recently, effective September, we have seen a disruption in gas supply, which will further influence performance going forward. In European markets, currency devaluation impacted revenue and reflected on year-on-year decline, whereas revenue in local currency increased. Despite the applied price increases and the supply chain easing seen in terms of lower yet still higher-than-average freight rate, currency devaluation impact persisted on performance. Tableware business recorded a strong performance supported by post-pandemic recovery, increase in demand and product offering expansion. We are continuing by our project of increasing our capacity. Finally, faucets performance saw an impact given market turmoil and geopolitical instability, especially the Eastern European region. Integration, effective the 1st of June 2022, is currently being finalized internally, and we expect the impact to be materialized in upcoming quarters. In terms of strategic milestones, we have announced earlier this quarter the signing of a conditional investment agreement with the Royal Commission of Jubail & Yanbu, stipulating the allocation of a land in Yanbu ceramics. We were also successful in acquiring further 4% stake in RAK Porcelain, raising our ownership position up to 91% as of 30th September 2022. In the first quarter 2022, we realized advancement on several expansionary fronts, including capacity, adding additional plants and the greenfield projects. In the U.A.E., we are working on enhancements and additions to our tiles, sanitaryware and tableware division. We estimate to launch commercial production post completion of such project in 2023. In Bangladesh, we finalized acquisition of the land for the setup of recently approved greenfield project. We executed a contract for the sale of land held in Australia for a consideration of AUD 28 million, which is equivalent to almost AED 65 million, recording a net gain of AED 18.5 million after-tax in the third quarter 2022. In terms of challenges, and as mentioned, macroeconomic conditions remain unstable, adding increasing pressure as we go on operations and performance, not to mention restriction of top line growth in some markets. With rising inflation, energy crisis, economic slowdown or trade challenges, including higher-than-average freight rates, we see global manufacturing players jointly facing such challenges, realizing substantial losses, in some instance, and halting operations in others. That being said, RAK Ceramics was capable to withstand current market dynamics and continued recording growth in top line and increase in profitability. We continue to leverage on our wide footprint, both in terms of production and in terms of sales, increasing efforts in key focus areas that are outperforming the market accordingly. It is truly our diversification strategy and our strong brand equity that allowed us to sustain current market dynamics. We remain committed in working toward mitigating any risk and toward identifying collective actions to be taken to avoid any disruption and in order to maintain our position as a reliable ceramic solution provider while the future remains uncertain and unstable. I will now hand over to P K Chand, our CFO.

Thank you, Abdallah. Good evening, everyone, and thank you for joining us. Abdallah has already briefed, summarized operational highlights key market and strategy update for the third quarter of 2022. I will take you through the financial highlights with details on revenue, gross profit margin and the balance sheet. We will start from Slide 12. RAK Ceramics achieved a solid performance in the third quarter of this year, supported by strong operational capabilities despite navigating through challenging macroeconomic conditions. Total revenue in the third quarter of this year increased by 32.4% year-on-year to AED 906 million. KLUDI Group consolidation added AED 112 million in the quarter. On a like-for-like basis, revenue increase is 16.1% year-on-year. In 9 months of 2022, revenue increase is 24.1% year-on-year at AED 2.62 billion. KLUDI Group consolidation, effective 1st June 2022, added AED 162 million to the revenue. On a like-for-like basis, revenue increase is 16.4% year-on-year. On constant currency of last year, the third quarter and 9 months revenue increased by 39.9% and 28.5%, respectively, year-on-year. Tiles revenue is higher by 12.2% year-on-year at AED 527 million in the third quarter of this year driven by mainly increase in selling price to partially offset increase in production costs. In 9 months of this year, tiles revenue is higher by 12% year-on-year at AED 1.63 billion. Sanitaryware revenue is lower by 2.7% year-on-year at AED 127 million in the third quarter of this year, mainly due to currency devaluation of pound and euro. In 9 months of 2022, revenue is higher by 6.1% year-on-year at AED 428 million. In tableware, the revenue increased by 33.5% year-on-year at AED 90 million in the third quarter. And in 9 months of this year, the revenue increased by 55.2% year-on-year at AED 255 million due to post-pandemic rebound and introduction of differential products. Faucets revenue is AED 180 million in 9 months of 2022, out of which AED 162 million is on account of KLUDI Group consolidation effective 1st June 2022. Revenue from other units also increased by 64.9% year-on-year and 9 months of this year to AED 114 million, mainly driven by increase in our ceramic raw material trading business. Now let me go through Slide 15 onwards, covering the end market performance in the third quarter and 9 months of this year for the tiles and sanitaryware segments. In United Arab Emirates end market, revenue in the third quarter of this year increased by 28.2% year-on-year at AED 160 million, and in 9 months, it increased by 15.8% and to AED 476 million supported by wholesale and retail business. In Saudi Arabia, revenue in the third quarter of this year increased by 15.1% year-on-year at AED 145 million, mainly driven by project and retail business. In 9 months of this year, revenue increased by 4% at AED 452 million. Wholesale business got impacted by 20.4% year-on-year on account of implementation of 12% customs duty effective 1st July 2021. In India, macroeconomic conditions weighed down in the third quarter of 2022, resulting in drop in revenue by 14.4% year-on-year at AED 89 million. In local currency, the revenue decrease is 7.6%. However, in 9 months of this year, the revenue increased by 10% year-on-year at AED 299 million supported by increase in dealers network and price adjustments to offset the increased inputs and energy costs. In local currency, the revenue increase is 16% year-on-year. In Europe, the revenue in the third quarter of this year decreased by 1.3% year-on-year at AED 97 million. However, in local currency, revenue has increased by 12.6%. In 9 months of this year, revenue increase is 3.1% year-on-year at AED 323 million. In local currency, revenue growth is 9.4%. In Bangladesh market, revenue in the third quarter of this year increased by 4.4% at AED 71 million, and in 9 months, it increased by 10% at AED 231 million due to better brand visibility, increase in prices and product mix shift. In local currency, revenue increased by 19.6% in the third quarter and 17.4% in 9 months of this year. In Middle East, excluding United Arab Emirates and Saudi Arabia, revenue continued to grow by 19.3% year-on-year in the third quarter of 2022 at AED 44 million and 33.1% year-on-year at AED 120 million in the 9 months of this year, mainly due to brand exposure and expanding the distribution network. Now we turn to Slide 17. Total gross profit margin is 35% in third quarter of this year, recording a decrease of 320 basis points versus last year. The margin is at 36.8% in 9 months of this year, recording a decrease of 30 basis points compared to same period in the last year. The margins decreased following further costs associated with Saudi custom duty, higher input and energy costs and KLUDI Group consolidation. Excluding KLUDI Group consolidation, the gross profit margin works out to 36.7% in the third quarter and 37.7% for 9 months of this year. Tiles margin in the third quarter of this year decreased by 90 basis points year-on-year to 37.3% and remained stable at 37.7% in 9 months. Sanitaryware margin decreased by 310 basis points year-on-year to 32.8% in the third quarter of this year and by 600 basis points in 9 months at 35.6% due to higher input and energy cost. Tableware margin increased by 4.3% year-on-year to 48.9% in the third quarter of 2022 and by 10.9% at 49.6% in 9 months following top line rebound and increased productivity. KLUDI Group consolidation has been effective 1st June 2022, and the margin stood at 23.4% in the third quarter and 24.4% in 9 months. Reported net profit is AED 90.1 million in the third quarter of 2022 compared to AED 63.4 million in last year. During this quarter, there is a net one-off gain of AED 18.5 million after-tax towards sale of property in Australia. In 9 months, the net profit is AED 262.1 million compared to AED 221.0 million in last year. Net profit margin is 9.9% for the third quarter and 10% in 9 months of this year. Like-for-like net profit, that is excluding one-off gains, is higher at AED 75.7 million in the third quarter compared to AED 64.8 million in the last year. In 9 months, the like-for-like net profit is higher at AED 249.1 million compared to AED 201.2 million in the last year. Margins remained stable at 9.5% year-on-year. EBITDA is at AED 145.8 million in the third quarter of 2022 compared to AED 123.2 million in last year. EBITDA for 9 months is AED 439.7 million compared to AED 379.2 million in last year. However, the margin is lower by 120 basis points year-on-year at 16.8%, mainly due to higher freight costs. Now we turn to balance sheet highlights on Slide 19. Overall working capital cycle decreased from 155 days on 30th June to 149 days on 30th September of this year. In absolute terms, working capital decreased by AED 25 million quarter-on-quarter to AED 1.43 billion as on 30th September 2022, mainly due to reduction in trade receivables. Inventory days reduced from 205 days to 201 days quarter-on-quarter. Trade receivable days decreased from 91 days to 85 days quarter-on-quarter. Trade payable days have also decreased from 67 days to 63 days quarter-on-quarter. The net debt increased quarter-on-quarter by AED 89 million to AED 1.41 billion on 30th September '22 due to payment of interim dividend of AED 99.4 million and payment of AED 22 million towards acquisition of 4% minority stake in RAK Porcelain. Net debt to EBITDA increased from 2.3x on 30th June 2022 to 2.48x on 30th September 2022. We were also successful in maintaining an adequate liquidity position during third quarter of this year in spite of consolidation activities, enabling company to comfortably meet payout commitments. Capital expenditure for 9 months of this year has been AED 144 million, out of which AED 79 million are for expansion CapEx in United Arab Emirates and Bangladesh and AED 65 million have been spent for maintenance CapEx. We maintain our estimate for capital expenditure during 2022 around AED 250 million. Slide 21 shows the share price movement during the last 12 months. The shares are currently trading at P/E multiples of 11.3x on LTM basis. Now I will turn back to Mr. Abdallah for his final comments before we answer your questions.

Thank you, P K. Finally, and to reiterate our priorities previously set for this year, we continue focusing on protecting and growing our market share, extending our production capabilities and differentiating our brand with the use of technology and in terms of offering while operating efficiently and sustainably. We strongly believe that our continuous efforts and our proactive risk-mitigating approach are solidifying our position today. We remain committed to being a reliable ceramics solution provider internationally, and we leverage on our strong operational presence in emerging markets, especially in the U.A.E., to support our vision and to allow us to withstand disruption in activity amid current market conditions. We continue to look forward to the future with a cautiously optimistic eye as we constantly aim to explore further untapped potential through organic and inorganic opportunities. Despite today's ongoing challenges, we see solid market fundamentals and trade easing in key focus markets, especially in export markets following freight rate drops, hinting to potential upside in the future and allowing the company to materialize truly the post-pandemic pickup previously hammered by supply chain disruption. As such, we remain at the forefront, highlighting our brand competitiveness supported by a complete product offering, innovative capabilities and a strong financial position. Thank you for your time. Now I would like to hand over the call to the operator and open the line to questions.

[Operator Instructions] And our first question today goes to Anoop Fernandes of SICO.

Congrats on another great quarter. I have 4 questions. The first is on your other income. So the notes say that there's about AED 42 million of proceeds from property sales. So I understand AED 18.5 million is related to the gains from the sale of land in Australia. Could you please tell us where the rest comes from? Second question is you've mentioned that gas price in Bangladesh is up, how much are you paying for gas currently? And just while we are on gas, you mentioned allocation of gas in your Saudi project, is this methane or is it LPG? And the last question is on raw material prices. Considering that a lot of your raw material is imported from Europe, and given the fall in the euro and also closure of plants in Italy, those places because of energy crisis, are you seeing any drop in the price of raw materials?

As far as other income is concerned, this AED 42.2 million is before tax. So what we said was this AED 18.5 million gain on sale of the property in Australia is net of tax. So because the tax element comes after the other income, therefore, this is before tax.

Okay. That is why there is a AED 30 million tax. I mean, it's higher than usual here.

Correct. Correct.

Understood. Yes, understood.

The gas prices in Bangladesh today is still the cheapest. If we consider it within the whole group, it's approximately $3.50. But as we mentioned, we are facing now interruption in the gas supply whereas we receive 50% of our capacity, and this is not on a consistent basis. Beginning of this week, we saw an announcement from the Prime Minister's office that they will allow now to import the gas and sell it at a higher price to industry. So this is for that part. In terms of allocation of gas, in Saudi, we use actually natural gas, so the allocation is on -- or what we now get initially on gas. And that's why to -- and the land which we took to get the gas connected, it is on the first quarter of 2025. In regard to the raw material, raw material, and I mentioned it in my opening, that we see the opportunity in front of us. That the supply chain disruption, which led to unprecedented increase in freight, which really increased the cost of operation, now we see that this freight is dropping. We are not yet at the pre-COVID average, but at least, we are at 50% from the peak, and this will allow the cost to reduce as well as support also increase of the export, increase our competitiveness in export. And last, euro. RAK Ceramics somehow, let's say, we have a natural hedging because also we buy the raw materials from Europe, but we sell also to Europe in euro. I hope we answered your question.

Yes, yes. But your imports of, for example, sanitaryware, you mentioned that the cost of imported raw material has gone up. So I'm assuming that what you produce from U.A.E. sort of feeds into all other markets, not just Europe. So I understand that in Europe, your exposure is kind of hedged. But in the other markets, are you seeing like a tangible benefit from this drop in raw material prices? Or is there like a drop in the first place?

There is not natural hedge fully. As far as euro is concerned, we hedge also. So we do the currency hedging also. And what we ensure is that whatever is our exposure from the sales side, either it is through the natural hedge or we do the hedging manually, that is through banks, we keep on hedging from time to time.

And regarding the raw material, which you're asking, yes, we started seeing benefit, as we said, in the reduction from the lower demand worldwide. The prices started to drop.

[Operator Instructions] And our next question goes to Sameer Kattiparambil of EFG Hermes.

I have 2 questions. First is on Bangladesh, you mentioned about the gas shortage. How long is this shortage that you're still facing? And is there any continency plan in place? And would this impact your new CapEx plan?

Thank you, Sameer. Regarding the Bangladesh, honestly, we are facing this issue at all the factories. There are 900-plus factories facing the same problem almost the last 1 month. Fortunately, till now, we have some back-up stock, which we had, and that's why our sales was not impacted as the impact in reduction in manufacturing. The problem of the energy or in the gas, as I mentioned, we are hopeful that this will soon release and the price, we expect that the price will increase, but this will increase for the whole market. Regarding the expansion, look, first, the expansion will start, honestly, on the faucets. And in all cases, in our existing premises we have, the second quarter will come with the efficiency we started in the project last year. So in regard to the expansion, which we will start with the faucets, this will not, I think, refrain us unless something big happens in Bangladesh, which we hope not. And then we will monitor the market before going into the ceramic expansion.

Got you. Got you. And on the Saudi side, we have seen a tight revenue, contracting by 22% sequentially. And you mentioned in the report that there's been some competition in the market. So could you give more color on that? Who is competing so significantly? And how long do you think the competition is going to sustain? And how do you see the price subside?

Sameer, actually, if you see, yes, we sell in Saudi in wholesale business. And wholesale business is mainly the ceramics business. And we were seeing that a lot of competition coming by the local factories are increasing capacity, but mainly, they are 3 factories almost owned and operated by Chinese investors. And the latest one, the third one, operated during this quarter, and they started by dropping heavily the prices. So as a company, we did not drop our prices. In fact, we benefited from the positioning and we benefited from, what we say, the less supply from the European manufacturer. And our target is to replace this less supply from the high-end side. And we can see that we shifted, and our sales to the project increased. And therefore, we see in our factory more demand on the porcelain, with refined tiles, what we call it, which we have kind of less competition in the region. So this is the strategy which we are following, and we are able to remain competitive in the segments we are working on.

Yes, understood. And any concrete turnaround plan for KLUDI Group?

Yes. With our plan, our plan is to -- KLUDI, we see a lot of potential on the long term, but we bought it with a turnaround plan. We finalized -- actually tomorrow, we have the initiation of the program. We have started with the manufacturing footprint where we will close divisions in Germany and in Austria, move part of this production to Hungary, which is a cheaper cost to feed Germany and Austria. And we started with our expansion in the U.A.E., which will be ready by the second half of next year. And with this plan in place, we'll start the implementation. Because we have to prepare for it, tomorrow, the implementation will start, this will initiate the manufacturing footprint, which we mentioned. And we'll start simultaneously with sales synergy. The European manufacturers all got heavily impacted from energy prices as well as demand coming from the conflict of the war in Ukraine, which affected the demand in Europe. So we are heavily concentrating and focused on the turnaround strategy in KLUDI and create a value in the long term.

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

Yes. Just to give more clarity on the Australian land. What kind of asset was that? And is there any similar smaller assets that you are thinking of liquidating?

Sameer, Australia, we started operating in Australia in year 2000. And at that time, we bought a land -- a warehouse with a big land actually with it. And by having it for a long time, you have to pay on maintaining this asset. And our operation reduced in Australia year-on-year. So we took the initiation to sell this property and buy or have a warehouse for us. And we get the offer to sell the land and the warehouse, and we got 2 years free rent to stay operating in Australia. So we have another company, which we are still in operation, which also have assets that we are not planning to sell on the short term.

Okay. Got it. Any update on the RAK land?

So now, honestly speaking, nothing, Sameer. But what we see is a lot of activities and projects around the area, which feel us more comfortable. Not yet -- there is nothing yet materialized, but if there is anything, we will update you.

We have a few questions from Mohamad Haidar of Arqaam Capital.

So just a follow-up to Sameer's question, how should we read the appointment of the new Board member, who is the CEO of Marjan, sitting on the Board of RAK Ceramics now? Given the land that RAK Ceramics owns in Ras Al Khaimah. Do we have the read-through into that?

Mohamad, honestly, there is nothing. Mr. Abdullah Al Abdooli is a very thorough engineer from Ras Al Khaimah, and he was working on the real estate sector from the municipality and later to the CEO of Marjan. He did a very good job by attracting many investments in the island and the Emirates, which you can see from the announcement of the mega projects coming in place. And he is the guy behind this. So I see a lot of added value of him being in our Board. And yes, especially, I hope that he will be a support for us and concentrating with his experience on liquidating our land.

Amazing. That's very clear. And another question on the expansion at the U.A.E. in tiles and tableware. Do you think there's enough demand for this new capacity to be absorbed by the market next year?

Mohamad, look, we always say, and I mentioned it very clear that, yes, we see a lot of competition. All of us, we are questioning what will happen with the recession coming. A lot of disruption around the world, but for us, we see what is happening, really especially on the trade going down, this will help us in being more competitive in supplying tiles. And especially you have tiles, sanitaryware, tableware factories around the world, but mainly you have the European branded product, few branded products around, especially in our region. And we are proud to see RAK Ceramics is a reliable branded manufacturer. We see a good opportunity to fill the gap of lower production and difficulties, which is happening around the world and especially in Europe. And I believe that we will put our pressure and efforts in order to make sure that we gain more market share, and this is our intention.

And we have a follow-up question from Anoop Fernandes of SICO.

In response to Sameer's question regarding those capacities in Saudi, you mentioned 3 new Chinese companies. Do you have any sense of how much -- what is the total capacity that these companies have added, especially the one that started producing this quarter? And I mean maybe 2, 3, 4 years, hence, do you see a situation, even with your capacity coming online, let's assume everything goes as planned, that the Saudi market will end up becoming sort of self-sufficient and there will be a lesser need for imported material going forward?

we hear and, honestly, it is happening that, as I said, the whole factories are increasing their capacity. But the capacity, which we hear, day by day on the Chinese new suppliers is increasing and ramping up. But it is mainly concentrating, as I said, on the ceramics entry-level products more than the differentiated products, which is more difficult to produce. And therefore, it was our strategy to differentiate ourselves from a specification to a solution provider to a nice display with a good product. And yes, there will be, especially now with the gas cheap in Saudi and the real estate activities happening, plus the custom and antidumping happening, by promoting the sector, I see that there will be more capacity in place, but we are not honestly worried in our factory opening in Saudi because from the beginning, we planned it to be AED 5 million to AED 10 million increase later, which is a share in the market where we are sure we can cover it easily from the plant going to the project directly. And I can see later even export out of the Saudi, which, from the competitiveness, at least now in the energy price and available raw material.

And we've had a chat question come through. Question one, how many Chinese manufacturers are in Saudi Arabia that are distributing the market with lower prices? And how did you mitigate it? Number two, is Saudi considered an oversupplied market as there are a number of competition?

Look, from the number of factories, I don't have it in mind, but there are 13, 14 factories in Saudi available, producing tiles and sanitaryware. In terms of now, the market is still bigger than the capacity installed in Saudi. And even though there will be more capacity, there will be always demand, and there will be always a differentiated factor where different products and imported material will always have a space in the market.

Thank you. We have no further questions. I will now hand back to Abdallah for any closing remarks.

Thank you very much. Thank you for all your support.

Thank you, Abdallah and P K Chand, and thank you, everyone, for joining. We look forward to having you with us next quarter.

Thank you, Mohamad.

Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.