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

Hello, everyone, and welcome to today's RAK Ceramics Q4 Full Year 2024 Earnings Call. My name is Drew, and I'll be the operator today. [Operator Instructions] It's now my pleasure to hand over to Abdul Wahid to begin. Please go ahead when you're ready.

Thank you, Drew. Hello, everyone. This is Mohamad Haidar from Arqaam Capital and welcome to the RAK Ceramics Fourth Quarter and Full Year 2024 Earnings Call and webcast. We are joined today by Mr. Abdallah Massaad, Group CEO from RAK Ceramics; and Mr. PK Chand, Group CFO of RAK Ceramics. Over to you, Abdallah.

Thank you, Mohamad. Good afternoon, everyone, and welcome to RAK Ceramics Fourth Quarter and Full Year 2024 Earnings Call and Webcast. We appreciate you joining us today. The global economic landscape remains challenging, shaped by ongoing geopolitical tension, inflationary pressures and persistent supply chain disruption, all of which continue to impact export-driven industries like ours. The Red Sea crisis has led to rising logistic costs, putting pressure on our margins, particularly in key export markets. Also, transportation off through to Europe has been considerably affected by inflation, recessionary pressure and higher logistic costs. These challenges have strained our ability to sustain healthy margins. However, the recent interest rate cut along with expected future reductions may improve overall liquidity, ease credit conditions and simulate the real estate sector, which will support our business. Let me now take you through the consolidated revenue breakdown for the group across key market and product divisions. The UAE remains our largest revenue contributor, driving both top line growth and margins. This is followed by Europe, which accounts for 22% of our consolidated revenue, followed by India and Saudi Arabia. Moving to the product segments. Tiles continue to be primarily revenue driver, followed by sanitaryware, faucets and tableware. At the bottom, you will see our production capabilities where we remain committed to continuous investment to enhance capacity and operational efficiencies. I will now walk you through our financial performance across key markets and product segments. The UAE market continues to show resilience, driven by positive momentum in the real estate and construction sectors. In Saudi Arabia, a highly competitive environment and market oversupply led to a decline in revenue. Additionally, rising transportation costs remain a challenge, however, we saw a significant recovery in the fourth quarter, supported by the government's exemption of custom duties on exports. This, combined with the strategic shift in our product mix, resulted in an improved gross profit margin. Demand in Europe, specifically in the U.K., continues to be lower, driven by inflation, recessionary pressure, currency fluctuation and the ongoing geopolitical tension. Additionally, higher freight cost and logistical challenges are adding pressure to our operation. The Indian market has demonstrated resilience despite macroeconomic headwinds. However, reduced exports from India have intensified domestic competition, making the market highly price-sensitive. In Bangladesh, political instability, gas shortages and currency devaluation have severely impacted our operations. These factors have affected production efficiency, increased costs and contributed to revenue and margin decline leading to losses. From a product perspective, our tiles division saw revenue declines in most markets, except India and the UAE, where growth in the construction and real estate sectors provided a boost. Our disciplined approach of avoiding price war has helped us maintain margins. The sanitaryware experienced a revenue decline, primarily attributed to weaker demand across all major markets, except the Saudi Arabia. The faucets division experienced a revenue decline primarily attributed to geopolitical tension, challenges and transformation of KLUDI Europe, owing to inflation, recessionary pressure, higher logistic costs. The slowdown in China real estate sector and new sanction on China also contributed to the decline. Our tableware division experienced a decline in both revenue and volume, primarily due to the slowdown in the hospitality sector and supply chain disruption caused by regional geopolitical tension. As we navigate an increasingly complex global environment, I want to highlight some of the key challenges we face and the strategic initiatives we are implementing to drive long-term growth. In the UAE, the influx of lower-cost import supported by free trade agreements is intensifying competition. To counter this, we are strengthening our partnership with reputable developers across the UAE, supplying them with our tiles and sanitaryware for their projects. In the Saudi Arabia market, oversupply from local manufacturer and rising transportation costs from the UAE exports have pressured our position in the wholesale segment. However, the recent custom duty exemption have helped offset costs and improve competitiveness. Additionally, we are focusing on premium and differentiated product offerings to strengthen our retail and project channel, thereby enhancing margins. In Europe, economic challenges have led to a lower demand. We are actively engaging with architects and designers to expand our network and promote new collections aiming to capture higher value segments. In India, the price-sensitive nature of the market remains a challenge. To address this, we are enhancing our retail presence and elevating the in-store experience to better engage customers. A differentiated shopping experience will attract quality-conscious consumers, helping us strengthening our market position. Therefore, we are evaluating options to upgrade our tiles and sanitaryware plant in Samalkot. In Bangladesh, political instability, currency devaluation and gas shortages continue to disrupt operations. We are focusing on establishing a robust distribution network to ensure reliable delivery of high-quality products, leveraging innovation to differentiate ourselves from competitors. We also remain committed to brand enhancement through showrooms expansion and a wider dealer network across all markets. In the UAE, we continue to invest in both our production facility and our retail presence. Our tiles division is undergoing an upgrade with cutting-edge technology to differentiate ourselves large-format tiles catering to high-end markets. Our sanitaryware facility is being modernized with energy efficiency technology, reducing carbon emission and aligning with our sustainability objectives. Our newly opened Sheikh Zayed Road showroom in Dubai showcases the RAK Ceramics lifestyle concept offering customers a more immersive experience. In Saudi Arabia, we are progressing with plans for a new production facilities for tiles, which will reinforce our local presence and enhance operational efficiencies. I'm also proud to announce that RAK Ceramics was recently recognized as the UAE Industry 4.0 leader by the Ministry of Industry and Advanced Technology, acknowledging our efforts in digital transformation and innovation within the industrial sector. I will now hand over to our CFO, PK Chand, please.

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 fourth quarter of 2024. I will walk you through the financial highlights for the fourth quarter and the full year 2024, including details on revenue, gross profit margin and the balance sheet. We will start from Slide 11. Total revenue in fourth quarter of 2024 marginally increased by 0.5% year-on-year and 8.5% quarter-on-quarter at AED 870.9 million. In full year of 2024, revenue decreased by 6.5% at AED 3.23 billion due to continued geopolitical tensions, inflationary trends and complex supply chain disruptions, which have particularly affected our export markets. Tiles and sanitaryware revenue increased by 2.9% year-on-year at AED 638.5 million in the fourth quarter of 2024, while it decreased by 6.9% to AED 2.33 billion in the full year of 2024. Tiles revenue increased by 4.8% year-on-year to AED 518.1 million in the fourth quarter and in full year, it decreased by 6.4% to AED 1.86 billion on account of lower volumes across all markets, except the UAE and Indian markets. Sanitaryware revenue decreased by 4.7% year-on-year to AED 120.4 million in the fourth quarter; and in the full year, it decreased by 8.6% year-on-year to AED 467.8 million due to impact on volume across all core markets. Tableware revenue decreased by 7.5% year-on-year to AED 101.8 million in the fourth quarter; and in full year, it decreased by 5.8% to AED 369.3 million, mainly due to a slowdown in the hospitality sector and supply chain disruption driven by regional geopolitical tensions. However, quarter-on-quarter, the revenue has increased by 19.4%. Faucets revenue decreased by 3.3% year-on-year to AED 109.5 million in the fourth quarter and in full year, it decreased by 2.5% at AED 444.6 million impacted by geopolitical tensions, challenges in transformation of KLUDI Europe owing to inflation, recessionary pressures and higher logistics cost. The slowdown in China's real estate sector and new sanctions on Russia also contributed to the decline. Revenue from other units decreased by 18.1% to AED 89.8 million in the full year, mainly due to decrease in our ceramic raw material trading business, which got impacted due to political instability in Bangladesh. Mr. Abdallah has already covered the regional performance, and therefore, I will move to Slide 14 onwards, covering the segmental gross profit margin in the fourth quarter of 2024 and full year. Total gross profit margin increased by 163 basis points year-on-year to 37.2% in the fourth quarter, an increase of 143 basis points year-on-year at 39.3% in the full year period due to better efficiencies, change in product mix and reduction in costs. Tiles margin in the fourth quarter increased by 520 basis points year-on-year at 41.6%; and in the full year, it increased by 240 basis points at 40.8%, supported by shift in the product mix from ceramics to GP tiles and better efficiencies. Sanitaryware margin decreased by 610 basis points year-on-year at 27.9% in the fourth quarter, while in the full year period, it decreased by 320 basis points to 31.1% due to lower margins in the European market owing to higher logistics costs and lower plant utilization in Bangladesh. Tableware margin decreased by 160 basis points year-on-year to 46.2% in the fourth quarter; and in the full year, it increased by 140 basis points at 51.1% following change in the product mix and supply of premium products. Faucets margin increased by 150 basis points year-on-year at 21.3% in the fourth quarter and in the full year, it increased by 200 basis points at 28% due to rationalization of costs. Profit before tax for the fourth quarter of 2024 is AED 82 million compared to AED 88.4 million in the last year. This decrease was primarily driven by a lower other income of AED 20.9 million and an increase in freight costs by AED 15.2 million year-on-year due to supply chain disruptions particularly along the Red Sea route. Profit margin is 9.4% compared to 10.2% in the last year. Net profit before tax for the full year of 2024 is AED 276.6 million compared to AED 345.5 million. This decrease has been primarily driven by political instability in Bangladesh, Red Sea crisis, which has led to higher logistics costs, challenges faced in transformation plans in Faucets division in Europe and lower other income by AED 34.4 million year-on-year. Profit margin is 8.6% compared to 10% in last year. Net profit after tax for the fourth quarter of 2024 is AED 64.2 million compared to AED 81.8 million in the last year. The impact of the newly introduced UAE corporate tax at the rate of 9% effective 1st January 2024 is AED 11.6 million in the fourth quarter of 2024. Net profit margin is 7.4% compared to 9.4% in last year. Net profit after tax for full year of 2024 is AED 234.1 million compared to AED 320.9 million in last year. The impact of UAE corporate tax is AED 33.9 million in the full year of 2024. Net profit margin is 7.2% compared to 9.3% in last year. EBITDA decreased year-on-year by 4.7% in the fourth quarter of 2024 to AED 158 million. The margin decreased by 100 basis points year-on-year to 18.1%. In full year of 2024, the EBITDA decreased by 8.4% at AED 592.2 million, and margin decreased by 40 basis points to 18.3%. Now we will turn to balance sheet highlights on Slide 16. Overall working capital cycle decreased from 196 days in the third quarter of 2024 to 181 days in the fourth quarter. Also, in absolute terms, working capital decreased by AED 99 million to AED 1.44 billion in the fourth quarter of 2024, mainly due to decrease in trade receivables. Trade receivables decreased from 94 days in the third quarter of 2024 to 87 days in the fourth quarter, driven by stricter credit terms and efficient collection process. Inventory days decreased from 254 days to 252 days quarter-on-quarter. Trade payables increased from 66 days in the third quarter of 2024 to 67 days in the fourth quarter. Net debt decreased by AED 174 million at AED 1.3 billion compared to September 2024 and AED 26.2 million compared to December 2023. Net debt-to-EBITDA also decreased from 2.61x in September 2024 to 2.35x in December 2024. We continue to maintain adequate liquidity position during the year. Capital expenditure during the full year of 2024 is AED 183.3 million versus our guidance of AED 200 million. CapEx guidance for the full year of 2025 is estimated to be around AED 350 million, as orders worth AED 236 million have already been placed for which deliveries are stretched in 2025. In line with the dividend policy commitment, the Board proposed to distribute semiannual cash dividend of AED 0.10 per share for the second half of 2024 amounting to AED 99.4 million. This follows a previously distributed semiannual cash dividend of AED 0.10 per share, representing AED 99.4 million for the first half of 2024. For 2025 to 2027, the Board has approved to continue the same dividend policy, that is a minimum payout of AED 0.20 per share on a semiannual basis for the year 2025, subject to consideration of factors such as business outlook, capital requirement for growth opportunities, expansion plans, optimal leverage levels and healthy cash reserves. To further enhance the visibility to the shareholders, RAK Ceramics commits to pay a minimum dividend of AED 0.60 over the next 3 years, that is 2025 to 2027. The dividend policy for 2025 to 2027 will be presented to the shareholders for approval in the next Annual General Meeting. Slide 19 shows the share price movement during the past 12 months. The shares are currently trading at PE multiple of 11.5x. Now I will turn back to Mr. Abdallah for his final comments before we answer your questions.

Thank you, PK. It is evident that the prevailing geopolitical and economic challenges continue to impact industries worldwide. While these challenges have pressured our bottom line, our performance remains resilient. We have been strong revenue growth in the UAE, supported by an expanding real estate sector and the surge in tourism. However, other key markets have been impacted by various external factors. Despite these challenges, we have successfully mitigated significant impact on our profit margins. Our strategic focus remains on quality, innovation and sustainability, ensuring we have stay ahead in an evolving global landscape as more local manufacturers emerge globally with an emphasis on lower cost of production. We remain committed to being the preferred global supplier, offering high-quality differentiated products. And thank you all for joining us today. I now hand over the call to the operator for the Q&A session.

[Operator Instructions] And our first question today is what are the utilization rates country-wise and also product-wise?

See, as far as the utilization overall in tile is concerned, it is around 62% and in sanitaryware, it is around 60%. Is that okay?

Yes. And then your next question is, will your tax rate be 15%?

Yes. Because we are a multinational company and our turnover in the last 2 years have crossed EUR 750 million, so we will be covered under 15% tax rate.

Our next question comes from Dina Hicham from EFG Hermes. The effective tax rate in 4Q is 22% versus 15% in 9 month '24. Why such a southern jump? And should we assume that 4Q level of run rate for tax in 2025?

See, it all depends on what is the profitability as far as the -- from the UAE market is concerned. And since other markets have not done well, and therefore, the effective tax rate for the whole year is 15.28%.

[Operator Instructions] Our next question comes from Richa Kumari from SICO. Could you please give some more detail on CapEx and what is the AED 236 million order?

The AED 236 million, what the orders have already been placed. So these are -- it is basically for MC 5 and MC 9. We have got 2 plants. We are upgrading 2 plants in the UAE here. So these are to produce bigger format tiles, and there is a major expenditure on this. So the orders have already been placed, and that is why it is appearing as capital commitments in our financial statement also and these will be delivered in the year 2025.

Our next question is, do you see any demand from mega projects in KSA?

Yes, for sure, the whole region is doing well. And yes, we can see that more impact of mega project and Saudi. Especially for us, it's becoming more attractive after the custom duty was released on us, and we saw the increase in revenue happened in the fourth quarter.

[Operator Instructions]. Our next question is a follow-up from Dina Hicham from EFG Hermes. When do you expect Bangladesh gas problem to get resolved? And what's the current utilization level in Bangladesh? What's update on Bangladesh expansion plan as well?

Bangladesh, last year was a really tough year because we couldn't plan and we already got approval of getting a direct gas line where in case the gas is not available, at least we can receive LNG, we can continue our production. So honestly speaking, we expected that this year will be better. January was not great in term of gas supply. But I can say the last 2 weeks, we have uninterrupted supply of gas. So in terms of capacity utilization, if you see now, we are fully utilizing. Last year...

Last year was 70% in tiles compared to 90% in 2023. And sanitaryware, the utilization has been 55% compared to 82% in 2023.

And in terms of increase of capacity, what we did last year because the nonavailability of foreign currencies and the political instability, so we continued our upgradation, but in term of the new faucets and increase of capacity, we put it on hold.

Our next question is an audio question from Mohammad.

First off, congratulations on renewing the dividend policy. So that's an extra AED 100 million paid every year with the CapEx AED 350 million to AED 400 million this year. Do you have any plans, how you're going to fund it? You're going to tap extra debt for that?

See, Mohammad, the EBITDA last year was also AED 592 million, and we expect, in fact, a better EBITDA in 2025. And even if you take, let us say, AED 350 million of CapEx and dividend, and if you see our net debt-to-EBITDA level, which is quite comfortable at 2.35x in the end of 2024. So this issue was debated several times in the Board, and the Board is comfortable with a net debt-to-EBITDA of 3.5x. So we are well within that.

That's very clear. And market-wise, so we saw Saudi picking up in Q4. Is this a good benchmark to how 2025 is looking like in Saudi? And do you also expect a strong year for the UAE market?

Look, Mohammad, as you can see that last year was a good year for us in term of the regional performance, especially in the UAE and Saudi. The UAE real estate has continued to be really booming, a lot of projects in pipeline, and it's very, very busy these days. And we have a very good position, and we're well positioned to cater these projects. Yes, we see that 2025 will be a good year in the UAE. In terms of Saudi, if you see the jump in sales, demand is there. It was a matter of the local competition plus the high transportation costs plus the custom duty. Fortunately, when the custom duty gets released, we reach a point where -- and also in terms of transportation costs for the time it is stabilized, especially with, what you call it, the railway, what we have a commitment on a number of containers on a daily basis. And from this perspective, we see, hopefully, a good year in the region.

We have a further follow-up from Dina Hicham in regards to tableware. Does this weakness reflect on volume or prices? And when can we expect a recovery?

Tableware is -- look, honestly, is doing well. It's a minor reduction in term of volume, but the gross profit margins remain good and profitability is good. Yes, this year, it was really disruptive for us in terms of logistics as well as income. The largest market for us is Europe. And you know the devaluation of euro as well as the increase in transportation cost and also the increase of lead time where at some time it reach almost 2 to 3 months to reach the materials. So we expect to have -- we sell to many airlines, and hopefully, we are good positioned to take any contract of airline. This will increase the volume, which we have the capacity to produce it.

Our next question is from [ Hani Janina ] from CI Capital. Could you please shed light on the influx of Chinese producers to the Middle East to bypass sanctions? And how is that impacting the competitive landscape?

Look, honestly, look, the UAE is dealing with no -- and this is part where RAK Ceramics became competitive, and we were forced to differentiate ourselves not based on support from government on competitiveness. Honestly, the UAE is open market, where you can see a lot of material from India to material from China. But we are, what we say, playing in a different league, means we are positioned in a different level and our product is sold at a premium and it is acceptable -- accepted for the prestigious premium products.

Our next question is, please, can you shed more light on the time line for the production facility in KSA?

Honestly, it is very difficult to make it. We are following up. As you said, we have gas allocation letter. But until now, we don't have the commitment when the gas will be there. And accordingly, we are prepared but will not start the project till we get a commitment on when the gas will arrive.

Our next question is from Anoop Fernandes from SICO. Congrats on a good year, considering so many challenges across most of your markets. Could you please talk a bit about the Saudi market? Has the supply landscape in the domestic market changed further over the last 12 months? Has new capacity come? Is new capacity expected to arrive? And how are you seeing demand in 2025? Is there a pickup in activity on the ground? You did mention some challenges, delays in the KLUDI turnaround. Could you please talk a bit about what these challenges are?

So in Saudi, as I said, we have [ in factories ], local factories. Initially, it was market-driven demand by ceramics, which get shifted with the projects and with more competition diverted into more personal tiles facilities and many factories also changed their capacity or capabilities in this perspective. Still ceramics is there, but the demand and porcelain is increasing day by day. Again, the market is big. As you see, the many mega projects and many, many projects is on the pipeline, the demand and the projects and all activities are really good for us. Again, as RAK Ceramics, we are proud that we are multinational, and we are a premium brand and from this perspective, that we can see for a prestigious project, which all the upgrade is happening in office building, and good projects from a government as well as the private where we are able to take our space at premium prices, at the premium level, I see the project means the Saudi construction as a UAE will continue to do well and just more capacity can come, but also a lot of factories are facing a lot of difficulties because there is a lot of competition on the entry-level products. And this, we can see it from the profitability and from what we hear from the raw material suppliers on the cash flow issues from these factories. Fortunately, our decision was not to compromise in terms of prices, focus on always differentiate ourselves in terms of product, technology and products and this is what makes us make us in demand. Now regarding the KLUDI. When we bought the KLUDI, we bought the KLUDI which was a loss-making company, and it was a transformation plan for KLUDI is to shift facilities and the maximum capacity from Europe, which Europe is a high cost of manufacturing where we have a capacity with the 500,000 pieces in the UAE. Now we built the capacity, and we are still building the capacity. We reach now 1.5 million. In the next 2 months, we will reach 2 million pieces, then we are putting a new facility also in the UAE in order to increase further the capacity. We already shut down our factory in Austria, and we are working on relocating a factory in Hungary and focusing on R&D, engineering and technology in Germany with a premium product manufacturing and moving here. Unfortunately, the moment we acquired the KLUDI, the war started between Russia and Ukraine, and this affected all East Europe. KLUDI historically strong in East Europe, where the factories was spread from Germany to Poland to Hungary to Austria, and this belt of countries were severely affected and the revenue came -- get reduced with the pressure of inflation and war and this affected the results in the short term, which I'm confident that this year and maximum next year, we'll have a full transformation program in place, and this will add value for us.

Our next question is from Richa Kumari from SICO. Any update on Bangladesh greenfield plant?

I mentioned that in Bangladesh with the current political instability and nonavailable of gas and foreign currency, so we bought the land, but we put greenfield project on hold, and we are focusing on improving the efficiency on existing plan until we see the situation will improve.

Our next question is, please, can you give us color if the improvement in sales from KSA came from volumes or pricing? And did prices start improving?

So look, I can say that it is both mix where the volume improved as well as pricing improved. And honestly, it helped us a lot because also the custom duty, which was almost 11% get released, and this gave us a brief in term of margin.

Next question is, in the Saudi segment, have you seen a trend of higher profitability for ceramic distributors rather than manufacturers?

Look, I said as a landmark, as a Saudi market, I don't know if the distributors are making more money, but for sure, the competition and manufacturing is affecting the factories. And we saw when the lately investment gain from Chinese investors in Saudi factories affected the result of what we see the publicly listed companies. And -- but I believe that also affected the whole factories, which followed the price war. And what we did well, as we said, as RAK Ceramics, is we built the brand and with a brand we are positioned as a premium brand where we are able at least to get our space. Now distributors, in this case, may have better margin than manufacturers, but also they are in pressure because with extra capacity in the same segment, a lot of new traders will pop up and will create pressure on the established distributors.

We have a further follow-up from Dina Hicham from EFG Hermes. With faucets, where does the European turnaround plan stand? And what's your expectation for 2025? How is the freight cost scenario -- through freight cost scenario now? And with the Saudi market revenue recovered in last quarter, what led to recovery? And how is the competition scenario from new local players?

I believe in Saudi, we answered most of the requirements. And in term of the faucet, I already explained it very, very well that during this year, a big part of the manufacturing will start here. We'll be closing the Hungarian. We remain only with the factory in Germany for the high-tech R&D engineering, and we have a factory with more capacity in UAE moving from when we started of 0.5 million pieces to 2 million pieces and we'll increase further the capacity and the technology where we have a lower cost of manufacturing and more flexibility in term of costs and supply and also from an environment perspective also. So I believe -- freight, this is what I mentioned initially that I was like we all -- it's a very important subject, and I was seeing that the head of Suez Canal was saying that by end of March, we expects the flow of vessels in the canal go back to normal. And by this, I believe we saw a decline in the freight where at a time it reached really the COVID level where the freight came down after COVID in a very good level. But then it went up with the turbulence we had it last year in the Red Sea, we saw a decline. I do expect that this rate will further come down, and this will come -- again, a brief for the export-based company not only RAK Ceramics for sure, but for the whole industry, which was a barrier last year.

[Operator Instructions] We have no further questions at this time, so that does conclude today's Q&A session. I'll now hand back over to the team for closing remarks.

Thank you very much for your time.

Thank you to Abdallah, P.K. Chand and Drew as well than you. We look forward to hosting you with us next quarter. Have a nice day.

Thank you, Mohamad.

Thank you.

Thank you.