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

Hello all, and welcome to RAK Ceramics Fourth Quarter and Full Year 2023 Earnings Call and Webcast. My name is Lydia, and I will be your operator today. [Operator Instructions] I'll now hand you over to your Arqaam host, Mohamad Haidar to begin.

Hello, everyone, and welcome to the RAK Ceramics fourth quarter and full year 2023 earnings call and webcast. This is Mohamad Haidar from Arqaam Capital. And from RAK Ceramics, we are joined today by the Group CEO, Mr. Abdallah Massaad; and the Group CFO, Mr. P.K. Chand. Over to you, Abdallah.

Thank you, Mohamad, and good afternoon, everyone, and thank you for joining us. Welcome to RAK Ceramics fourth quarter and full year 2023 earnings conference call and webcast. I want to start off by talking about the presence of RAK Ceramics across our key markets, as well as the split between the different product divisions. As you can see from the map on the screen, a UAE continued to be our largest market, contributing 31% of the total consolidated revenue for the group. Also, the revenue contribution share for Europe increased to 22%, supported by the addition of KLUDI offerings. As you will see on the right side, Tile's divisions continue to contribute to majority share of the revenue, followed by Sanitary Ware, Faucets and Tableware. At the bottom, you can see our production capabilities where we continue to invest further to improve our capacity and bring in efficiencies. Moving to the financial performance. I'm pleased to report that this year the business has continued its growth trajectory in the UAE, reporting year-on-year revenue growth of 22.3% across all product segments. Despite the strong performance in the UAE, we remain mindful of the ongoing macroeconomic challenges, increasing competition and geopolitical issues across several of our core markets. Looking ahead, it's important to note that Saudi Arabia is currently making substantial investment in infrastructure and real estate projects with numerous prestigious projects on the horizon. There will be a growing demand for a reputable brand and reliable supplier. Fortunately, RAK Ceramics is exceptionally well positioned in terms of our service excellence, diverse product offering and strong brand reputation. Thus, our outlook remains positive, and we are well prepared to leverage these opportunities. The Indian market continues to feel the adverse effect of rising interest rate and tight liquidity. However, we expect the real estate sector to pick momentum as we invest in upgrading our facility and expand our dealer network. In Bangladesh, our business sustained growth in local currency despite several headwinds in the market, mainly, currency devaluation and foreign currency availability. The KLUDI products complement our product offering and provide differentiated German heritage quality to our customers. While Europe continues to be impacted from recession and slowdown in construction sector, we are optimistic to see improvement as we continue to implement our value unlocking strategy. Our Tableware division continues to perform well, driven by factors, including increased demand in HORECA sector and rising tourism. We continue to monitor the recent issues in the region, specifically the ongoing situation in the Red Sea, which is affecting the supply chain dynamics. Despite these challenges, we are committed in turning these obstacle into opportunities as we work towards brand enhancement through new showrooms and dealers network and our core market to strengthen our revenue. We continue to innovate our approach to ensure that we stay ahead across all the markets in which we operate. In light of the ongoing macroeconomic and geopolitical challenges, we believe this innovations are very important to allow us to stay ahead of the curve. In Europe, where high interest rate and inflation are continuing to squeeze household income, we are working with architects and designers to promote brand awareness. Similarly, in Saudi Arabia, India and Bangladesh, we are implementing several initiatives to create and enhance brand awareness. We are pleased with the progress made so far in upgrading our tiles production facility in both UAE and India. Also, we have finished the upgrading, which we are doing in Bangladesh in the tiles sectors. In the UAE, we can already see the automation of some of our tiles production facility that will allow us to shift our production capabilities from ceramics to porcelain tiles. In parallel, we continue to work towards setting up a production facility in Saudi. We are also working on increasing their production capacity in our Bangladesh plan, specifically to produce the large format tiles. We have completed a significant expansion project that has added capacity for another 10 million pieces of tableware. The production scaling process will be implemented in phase. I'm pleased to also mention that lately, we already installed a new kiln in our Sanitary Ware, which is considered to be the longest kiln in the industry, which will allow us to have a better quality as well as improvement and efficiency in the energy consumption. With this, I will now hand over to PK, please.

Thank you, Mr. Abdallah. Good evening, everyone, and thank you for joining us. Mr. Abdallah has already briefed on the business performance highlights, key markets and strategy update for 2023. I will take you through the financial highlights for the fourth quarter of 2023 and also for the full year of 2023, with details on revenue, gross profit margin and the balance sheet. We will start from Slide 11. Total revenue experienced a marginal decrease of 1.7% to AED 3.45 billion in full year of 2023, while in the fourth quarter revenue registered a decline of 3.8% at AED 866.4 million owing to macroeconomic factors. Tiles and Sanitary Ware revenue is lower by 4.8% year-on-year at AED 620.6 million in the fourth quarter. In the full year of 2023, revenue decreased by 8% year-on-year to AED 2.5 billion. Revenue in fourth quarter has been affected across all markets, except United Arab Emirates, Middle East, Bangladesh and Africa. However, the full year revenue was impacted in all markets, except United Arab Emirates and the Middle East. Growth in UAE is largely driven by project and retail channels. Reduction in revenue in other markets is primarily attributable to continued recessionary fears and higher interest costs, which are affecting household savings and causing a deferment in major house renovation and development projects. Tableware revenue surged by 12.1% year-on-year at AED 110.1 million in the fourth quarter of 2023 and 11% year-on-year at AED 392 million in full year of 2023, primarily attributed to innovative products offerings and enhanced production capacity. Faucets revenue decreased by 9.8% year-on-year at AED 113.2 million in the fourth quarter of 2023. In full year of 2023, revenue is AED 456.2 million. In last year, KLUDI Group consolidation was effective 1st June 2022. Revenue from other units decreased by 21.2% to AED 109.7 million in the full year of 2023, mainly due to decrease in our ceramic raw material trading business. Now, let me go through Slide 14 onwards, covering the end market performance in the fourth quarter for full year of 2023 for tiles and Sanitary Ware segments. In UAE market, tiles and Sanitary Ware revenue in the fourth quarter increased by 8% year-on-year to reach AED 207 million, driven by the project and retail channel. In the full year of 2023, revenue grew by 17.8% year-on-year to AED 786.7 million. In Saudi Arabia, tiles and Sanitary Ware revenue in the fourth quarter of 2023 witnessed a significant decline of 47% year-on-year to AED 71 million due to continued competition from local Chinese manufacturers, mainly impacting our wholesale business. However, we are well positioned in terms of our service excellence, diverse product offering and strong brand reputation. In full year of 2023, revenue decreased by 40.2% year-on-year to AED 350.3 million. In India, revenue in the fourth quarter of 2023 decreased by 10.4% year-on-year to AED 91.3 million due to challenging market, mainly due to lower demand on account of increased interest rates and tight liquidity. In the face of these challenges, we strategically engaged in upgradation of our facilities, market expansion, retail initiatives and product launches to position ourselves to thrive in the dynamic Indian market. In full year of 2023, revenue decreased by 9.6% year-on-year at AED 360 million, while in local currency, it decreased by 5.3% year-on-year. In Europe, revenue in the fourth quarter of 2023 decreased by 8.1% year-on-year to AED 79.2 million. This decrease is attributed to higher interest rates and persistent inflation, putting pressure on household income. However, our efforts are underway to collaborate with architects and designers to enhance brand awareness. In full year of 2023, the revenue decreased by 6% year-on-year to AED 384.2 million. In Bangladesh market, revenue in the fourth quarter rebound by 20.3% year-on-year at AED 73.9 million. This growth was fueled by various initiatives taken, including product differentiation and increased product awareness and the strengthening of our retail presence through the expansion of our showroom network. In full year of 2023, the revenue decreased by 9.4% to AED 264.4 million due to currency devaluation. However, in local currency, the revenue has registered a growth of 4.8% year-on-year. In Middle East, excluding United Arab Emirates and Saudi market, continued to face adverse effects due to ongoing geopolitical challenges. However, we have seen positive growth during the fourth quarter in projects channel. Revenue in the fourth quarter of 2023 increased by 19.8% year-on-year at AED 39.7 million. In the full year of 2023, revenue remained resilient at AED 153.6 million. Now, we will turn to Slide 15. The total gross profit margin increased by 70 basis points year-on-year to 35.6% in the fourth quarter of 2023 due to higher sales in the UAE market with better margin and change in the product mix. In full year of 2023, the gross profit margin increased by 30 basis points year-on-year at 37.9% year-on-year. Tiles margin in the fourth quarter decreased by 250 basis points compared to the fourth quarter in last year at 36.4%, mainly due to lower productivity on account of partial shutdown of plants in India and Bangladesh for upgradation. In full year of 2023, margin increased by 50 basis points to 38.4%. Sanitary Ware margin increased by 680 basis points year-on-year at 34% in the fourth quarter and in full year of 2023, it increased by 50 basis points at 34.2% due to change in the product mix. Tableware gross margin increased by 140 basis points year-on-year to 47.8% in the fourth quarter following top line increase and successful launch of new product series. In the full year of 2023, the gross profit margin increased by 100 basis points year-on-year to 49.7%. Faucet's gross margin increased by 480 basis points at 26% in the full year of 2023 following the results from cost optimization initiatives. Net profit before one-offs increased to AED 81.8 million in the fourth quarter compared to AED 65.3 million in 2022. Last year reported net profit included a net one-off gain of AED 12.7 million towards sale of land in Australia. Margin is 9.4% compared to 7.2% in the last year. In full year of 2023, net profit before one-off increased by 3.7% to AED 320.9 million compared to AED 309.3 million in the last year. Net profit margin is 9.3% compared to 8.8% in last year. The EBITDA increased by 20.7% year-on-year to AED 166 million in the fourth quarter compared to AED 137.5 million in the last year. EBITDA margin is 19.2% compared to 15.3% in last year. In full year of 2023, EBITDA increased by 12.2% at AED 647.4 million compared to AED 577.2 million in last year. The margin is 18.7% compared to 16.4% in last year. Now, we will turn to balance sheet highlights on Slide 18. Overall working capital cycle increased from 146 days in the beginning of the year to 172 days in the end 2023, mainly due to lower revenue. In absolute terms, working capital increased by AED 71 million to AED 1.48 billion in end 2023, mainly due to decrease in payables. Inventory days increased from 197 days in the beginning of the year to 221 days in the end to 2023, mainly due to lower revenue. Trade receivable days increased from 84 days in the beginning of the year to 90 days in the end of the year, mainly due to lower revenue. Net debt increased by AED 120.3 million to AED 1.42 billion in December 2023 compared to AED 1.30 billion in December 2022, mainly due to dividend payment of AED 221.7 million and CapEx of AED 273 million. However, net debt to EBITDA decreased to 2.20x in December 2023 compared to 2.26x in December 2022. We continue to maintain adequate liquidity position during the year. Capital expenditure during the full year of 2023 has been AED 273 million, and the CapEx guidance for the full year of 2024 will be AED 300 billion to AED 350 million. Slide 19 shows the share price movement during the past 12 months. The shares are currently trading at multiple of 8.9x. Slide 20 shows the historical dividend payment in line with the dividend policy, the Board proposed to distribute semiannual cash dividend of 10 fils per share for the second half of 2023, amounting to AED 99.4 million. This follows the previously approved and distributed semiannual cash dividend of 10 fils per share, representing AED 99.4 million for the first half of 2023. Now, I will turn back to Mr. Abdallah for his final comments on 2024 priorities before we answer your questions.

Thank you, PK. These results reflect the hard work of our entire team, and we are proud of what we have achieved in this challenging market environment. Looking ahead to 2024, we are cautiously optimistic and are closely monitoring the ongoing geopolitical scenario. We plan to build on our previous efforts, focusing on expanding our market share, and we remain committed in delivering value to our customers, employees and shareholders. With the rising competition across major markets, we are committed to protect our market share through maintaining healthy competition and leveraging on cross-product synergies, embracing diversification and solidifying our retail business. We are also investing on our production capacity to boost productivity and efficiency, aiming for better margins. With regard to KLUDI, we continue building on a strong integration plan and transforming it into a global high-end faucets and Sanitary Ware brand. Thank you all for taking the time to join us for this presentation of our full year and fourth quarter result. I would like now to hand over the call to the Operator and open the line to questions.

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

A couple of questions from my side. First, how does the fuel and natural gas price increase in Saudi impact your operations there? Will it anyway influence your plan for a new plant?

Yes, Sameer, as you mentioned that the gas prices in Saudi increased, for us, it will not influence the decision because the Saudi market, as I mentioned, it is a big market. For sure, today, the main market is for the housing projects and the standard product where we aim that with all the infrastructure and a lot of high-end projects, which will come, 30% of Jeddah is getting prepared for rebuild. And I believe with our brand and differentiating factor in terms of product offering and the brand perception, we are, in the coming years, a good opportunity to enter these projects. And you know that consent of Ma'aden in Saudi is very important, and therefore, it will not affect our decision. Also, Sameer, we did not mention, but you know that we here in the UAE, we entered into a long-term contract and gas prices reduced in a good way where we have a long-term supply at a fixed price, where we will get a good saving in the UAE.

Just a follow-up on that. In Saudi, since your competitors, feedstock prices increased, will that influence the pricing scenario in Saudi? That's first part. And in second part, could you remind me what's your average gas price in UAE?

Look, any increase today in prices and costs will push the market and the suppliers to increase their prices. And with the increase of the prices, this will give us some brief for sure. Because, in this case, with our lower cost of production and the increase in gas will reduce the delta, the difference in prices, for sure, it will not be as competitive as the prices we are offering, but we'll be able to minimize the gap. In terms of our prices in gas, so, I cannot tell you the exact prices, but around, so, last year, our average cost was approximately $9 per MMBtu, and our existing prices will be, little less than $6 per MMBtu.

And one more question from my side. Could you give some color on your Faucet segment? Like what was its bottom line at the end of 2023? And, yes, so that's it mainly. Is it breakeven level, or? I just want to get an update on that.

Look, Sameer, as you know, when we acquired KLUDI, we have 2 operations, one KLUDI Europe and one KLUDI Middle East. In KLUDI Middle East, the sales gone up, and we have a good profitability in the operation. In Europe, unfortunately, we acquired it and after 2 months, when we signed the contract in, if not mistaken, December, 2021 and then in February 2022, the war in Ukraine started and the business had a big impact. So, we started with the restructuring program by, first, we started with the manufacturing footprint. We closed one factory in Austria. We reduced the production in Hungary, and we moved the high end into Germany, but this affected with the recession also followed, affected the top line. So, we ended up in losses in 2023. Combined operation today between UAE and Europe, Middle East and Europe combined as a KLUDI Group, we are EBITDA positive as a net profit negative, but we are continuing with a turnaround plan and I believe we'll have a better result in 2024 and starting 2025, it will be a good operation in place.

Thank you. We will now move on to written questions online. The first question reads, if possible, could you provide segment-wide and country-wide utilization level?

4%?

Yes. Look, in terms of -- we start with tiles and in tiles we have converting from ceramics to porcelain and therefore big part already converted, but still some existing capacity where we are converting the demand in ceramics get reduced. So, I can see the capacity utilization is around 75% to 80% in terms of tiles. Sanitary Ware, we also did a transformation in the manufacturing in order to introduce the Robo in production as well, as I mentioned, we put a big kiln, the longest kiln in the industry with a saving, with the purpose of having a better quality and saving in energy, where we have also the capacity utilization is around 65% today. In terms of tableware, we are approximately 95% in the utilization. In terms of the Faucets with the transformation we have 100% capacity utilization in the UAE and we are reducing the capacity in Europe in order to have a better cost structure.

Thank you. The next question reads, Hi and many thanks for this great set of results. We note with a lot of attention, your increase in EBITDA despite the stagnation/slight reduction in revenues during the course of 2023. How sustainable is this operating improvement, assuming sales will stagnate for another quarter or 2 until the interest rates start declining again? Hence, encouraging consumers to invest again, which will result in increasing your sales again.

Look, as I mentioned that all our focus is on differentiation, on working on the brand perception, on work on innovation. And I believe with this difficult time, despite the revenue is down, there is a pressure in our sector worldwide. We kept with the launching of smart factories and working on efficiencies, where we are able to sustain and grow our EBITDA. I believe, as you mentioned, that we are all betting when the interest rate goes down and the demand increases and I believe during the tough time, if we are able to sustain it in the good time, we will, for sure, sustain our margin. And, therefore, we are working for long term and for the interest of our shareholders always.

The next question is, are you supplying the Saudi market from the UAE facilities? And if so, do you incur any import?

Yes, we are supplying the Saudi market from the UAE facility, and we are paying 12% custom duty as on today. We are working very hard on providing all the documents in order to waive this custom duty as on today, we are still paying, yes.

The next question is, how much does the Red Sea problem affect percentage of your business and your share market, cover the demand through late deliveries, as well as cover your raw materials need through supply chain?

No doubt, the Red Sea problem affect the supply chain and increase our cost of import and export of material. As on today, we do not have any shutdown or missing material, raw material where it's affecting our manufacturing capacity. So, we always maintain a minimum stock and with this minimum stock availability, we never had the issue that we need to shut down. Hopefully, the situation will be improved in terms of market share. And no doubt, there are delays in supply and even non-availability, which is quite disturbing. But whatever is in our hand, we are trying to do our best in order to minimize the impacts which will come on us from that.

And the final question is, can the management shed some light on the expected cost savings that will result from the decline in UAE's natural gas prices and some details behind the agreement, when it will start, why is it happening and whether the management will utilize the cost savings to maintain its market share through more competitive pricing?

As we mentioned, the prices of our gas -- first of all, we have a supply of gas. We don't have any interruption in term of gas supply in our premises in the UAE. Fortunately, we already mentioned this agreement earlier where it will start implementation of beginning of this year, which already started. This will reduce the prices of approximately, as I mentioned, from approximately $9 per MMBtu to a little below than $6 per MMBtu, which according to the volume, which we are doing today, it might give us around AED 70 million impact benefit. Yes, as you mentioned that today with the Red Sea impact, we cannot pass to the consumer immediately the impact. So, we are subsidizing at a part, the increase of raw material and the supply to our clients in order to maintain our market share.

Thank you. And we have a follow-up audio question from Sameer Kattiparambil of EFG Hermes.

One last question from my side. On your landbank, I can see that your land valuation has gone up in your recent valuation. But I think you didn't account that in your balance sheet, yet. And I appreciate your conservative stance. Any chance that you will add that valuation this year? That's first part. Second part is, we want to hear more from you, how the Ras Al Khaimah real estate market looks like over the last 1 year? And what's your expectation on the real estate market overall. So, yes, if you can give some color on that, that would be very helpful.

Thank you, Sameer, for your question. First, as you mentioned, the valuation came little higher. But honestly speaking, as we are not into a real estate work, we didn't want as a management to go with a year-by-year increase in taking provision and reverse provision and focus on our core business. And regarding the land, we will work to offload it. Our aim is to sell it, and we will account the profit or a loss at the moment we sell it. So, in terms of real estate, as you know, that Ras Al Khaimah, honestly, if you see the number of projects and the prices as well as the demand is amazing, I mean, Ras Al Khaimah, the last 20 years. And to be honest, we've never noticed that many prestigious and names which really it's amazing. I believe the infrastructure, you can work and you see the infrastructure as well as the development in a fast mode. We as RAK Ceramics, we did not yet benefit fully when the construction start after at least 1.5 years where we will get the impact on the demand in our products, and we are hopefully, will benefit from the booming happening in the real estate and hospitality sectors. Sameer also, if you allow me, I want to add that this year, we'll have the taxes which has to be at least considered that this year we have to pay taxes.

I just want to reconfirm on that. Unlike your tax rate will be a 9% bracket or is it 15%?

As on today P.K., you can?

Yes, in '24, Sameer, it is going to be 9% because as far as 15% global minimum tax is concerned, it is not yet effective in UAE. As per the latest information, the public consultation document is likely to be issued in the first quarter. And then hopefully, it might get implemented from 2025. That's the latest situation.

Thank you. We have another text question, which reads, could you please provide any update on gas issue in Bangladesh?

Look, honestly, in Bangladesh during this year, we have a supply of natural gas, but from time to time, we have lower pressure, which we cannot run the full capacity or we have some interruption on some hours, which is affecting our production. So, I cannot say that we do not have a gas, but sometimes we have some interruption. Now, the election has happened in the beginning of the year, I think that slowly, slowly, this will be stabilized.

And the final question is, are you planning to increase the capital instead of high interest loan to cover your working capital and CapEx?

As on now, this is a Board decision and general assembly decision. But I didn't hear any discussion in our Board meeting or from this perspective. In fact, you know, that as a company we declared 2.5 years back, I believe, a policy of distributing minimum 20 fils, 10 fils every 6 months. This is continuing. And the Board of Directors also continue to propose a distribution of 10 fils to be approved by the general assembly. I don't see even changes in our dividend policy. For sure before 6 months, another policy will be declared. So, not as per my understanding.

[Operator Instructions] We have no further questions, so, I'll turn the call back to the management for any closing remarks.

Thank you very much.

Thank you, Mr. Abdallah and Mr. P.K. Chand, and thank you, everyone, for joining. We look forward to hosting you again next quarter.

Thank you, Mohamad.

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