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

Hello, everybody, and welcome to the RAK Ceramics Q1 2025 Earnings Call and Webcast. My name is Elliott, and I will be your coordinator for today. [Operator Instructions] I would now like to hand over to Mohamad Haidar with Arqaam Capital. Please go ahead.

Thank you, Elliott. Hello, everyone, and welcome to the RAK Ceramics First Quarter 2025 Earnings Call and Webcast. This is Mohamad Haidar from Arqaam Capital. And from RAK Ceramics, we are joined today by Mr. Abdallah Massaad, Group CEO; and Mr. PK Chand, Group CFO. Abdallah, over to you.

Thank you, Mohamad. And good afternoon, everyone, and welcome to the RAK Ceramics First Quarter 2025 Earnings Conference Call and Webcast. We appreciate you joining us today. Our first quarter 2025 performance has shown resilience in the face of macroeconomic challenges. Total revenue was largely stable, showing a marginal decrease of 0.7%, which was mainly due to ForEx headwinds from a weaker euro, Bangladesh taka and Indian rupees against the U.S. dollars. However, if we look at a constant currency basis, revenue was up by 0.7% year-on-year. Through the group's transformation initiatives has impacted profitability by AED 8.4 million, excluding this impact, profit before tax was AED 74.4 million, marginally down by 1.4% year-on-year. Let me now give you a brief overview of our consolidated revenue by market and segment standpoint. The UAE continues to be our largest market, delivering strong top line growth and healthy margins. This is followed by Europe, which contribute 23% of our consolidated revenue, with India and Saudi Arabia also playing key roles. In terms of our segments, tiles continued to be the primary driver of revenue, followed by sanitaryware, faucets and tableware. At the bottom level -- at the bottom, you will see our production capabilities where we remain committed to continuous investment to enhance capacity and operational efficiency. Now let me walk you through our financial performance across our key markets and product lines. In the UAE, we witnessed strong demand driven by the real estate and construction sector. Operational efficiencies in our tiles plants also helped us achieve higher gross profit margins, strengthening our leadership in the local markets. In Saudi Arabia, the market faced a liquidity crunch, increased competition and an oversupply of tiles from local players. However, we are encouraged by the recent customs duty relief, which improves our cost position. Moving to Europe and the U.K., we saw a decline in consumer demand, largely due to inflation and weakening euro and recessionary concerns. Higher freight costs also impacted our pricing competitiveness. That said, we are actively working on business recovery through a new operating model aims at restoring profitability. In India, I'm pleased to report moderate growth despite global headwinds. However, a decline in export has created oversupply in the domestic market, which is high price sensitive. We are moving ahead with turnaround measures to regain profitability. In Bangladesh, ongoing political instability, low demand and operational constraints, including gas shortages and currency devaluation, continue to pose serious challenges. However, we are taking steps to improve efficiency and manage costs. From a segment standpoint, our tiles division recorded growth in both volume and value, primarily driven by strong performance in the UAE and India. The sanitaryware division experienced a drop in both volume and value, with performance weaker across most markets, except the KSA and the broader Middle East. Faucets division saw a decline in revenue due to weaker euro, economic pressures in Europe, challenges in China's real estate market and the impact of ongoing credit transformation. The tableware division reported a decline impacted mainly by slower demand in the U.S. and weaker euro. Looking ahead, I want to highlight some of the key challenges we are facing and how we are navigating them. In the UAE, we are seeing increased competition due to lower cost imports under free trade agreements. In response, we are strengthening partnership with reputed developers and supplying our tiles and sanitaryware for large-scale projects. In Saudi Arabia, market oversupply and liquidity issues have triggered a price war, particularly in the residential and commercial segments. However, customs duty exemption are helping to improve our competitiveness. We are also focusing more on premium and differentiated offerings to boost margins, especially in retail and project channels. In Europe, consumer sentiment is weak, but we are taking proactive steps by engaging with architects and designers through our design hubs. This will help us tap into higher value segment with our new collections. In India, the reduction in exports has created domestic oversupply. We are actively working on enhancing our retail pressure -- presence and in-store experiences to better connect with customers. And in Bangladesh, we continue to face macroeconomic hurdles. Our focus remains on building a strong distribution network and leveraging product innovation to differentiate ourselves in the market. Across all these markets, we are also prioritizing brand enhancement through showroom expansion and strengthening our dealer network. Now to our strategic initiatives in the UAE. We are investing in upgrading our tiles division with advanced technology to produce large format, high-end tiles. Our sanitaryware facility is also being modernized with energy efficiency systems that align with our sustainability goal. In the Saudi Arabia, plans for our new tiles production facility are in progress, and this will strengthen our local presence and drive efficiencies. We recently showcased our latest innovation at ISH in Frankfurt, connecting with key industry stakeholders and reinforcing our design leadership. This exhibition is focused mainly on sanitaryware and faucets, where we had a stand for KLUDI and RAK Ceramics. KLUDI, after all the turnaround and the launch of the new KLUDI with the latest designs where taking positive in the market. As part of the KLUDI transformation, we are moving forward with our cost optimization strategy, including relocating major EU production to the UAE to improve operational leverage. I will now hand over to our CFO, PK Chand.

Thank you, Abdallah. Good afternoon, everyone, and thank you for joining us. Mr. Abdallah has already covered the key market performance highlights, challenges and the strategy updates for the first quarter of 2025. I will walk you through the financial highlights for the first quarter of 2025, including details on revenue, gross profit margin and the balance sheet. We will start from Slide 11. Total revenue in the first quarter of 2025 marginally decreased by 0.7% year-on-year to AED 776.5 million, primarily attributable to weaker euro, Bangladeshi taka and Indian rupee versus U.S. dollar on currency rates of last year. However, the revenue is higher by 0.7% year-on-year. Tiles and sanitaryware revenue remained resilient with a marginal decrease of 0.4% at AED 554.4 million, led by strong performance in the United Arab Emirates, Saudi Arabia and rest of GCC markets. Tiles revenue grew by 1.2% at AED 449 million, led by robust performance in the United Arab Emirates, rest of GCC, India and Asia Pacific. Sanitaryware revenue witnessed a decline of 6.5% year-on-year to AED 105.5 million, mainly due to a strong U.S. dollar and weaker demand in Bangladesh, India and other markets. Tableware revenue declined by 4.5% year-on-year to AED 85.9 million, impacted by lower demand, particularly in the U.S.A. market. Currency depreciation has further impacted performance, mainly in Egypt, Asia and African markets. Faucets revenue declined by 4.4% year-on-year at AED 111.7 million due to lower revenue in Middle East, Europe, Africa and other markets. The decline in revenue has also been influenced by the slowdown in China's real estate sector and continued sanction in Russia. Revenue from other units increased by 33.5% at AED 24.5 million, driven by ceramic raw materials trading business. Mr. Abdallah has already covered the regional performance, so I will move to Slide 14 onwards, covering the segmental gross profit margin in the first quarter of 2025. Total gross profit margin increased by 33 basis points year-on-year to 39.7%, supported by strong margin improvements in tiles and sanitaryware segment. However, faucets margin decreased significantly. Tiles margin in the first quarter of 2025 increased by 160 basis points compared to the first quarter of 2024 at 41%, driven by improvement in efficiencies and higher sales of porcelain tiles over ceramics. Sanitaryware margin improved by 440 basis points year-on-year at 34.1% in the first quarter of 2025, backed by improvement in UAE and Indian operations. Tableware margin remained stable year-on-year at 53.9%. Faucets margin decreased by 764 basis points year-on-year at 23.4% in the first quarter of 2025 due to lower margins in the European market on account of the transformation activities in Europe. Profit before tax for the first quarter of 2025 is AED 64.5 million compared to AED 73.9 million in the last year. As mentioned by Mr. Abdallah, KLUDI's group's transformation initiatives has impacted profitability by AED 8.4 million. Excluding this impact, profit before tax was AED 74.4 million, which is marginally lower by 1.4% year-on-year. Profit margin is 8.3% compared to 9.5% last year. Net profit after tax for the first quarter of 2025 is AED 48.9 million compared to AED 62.9 million in the last year. This decrease is attributable to KLUDI Group's transformation impact and the newly introduced Domestic Minimum Top-up Tax under Globe Pillar-2 rules. Effective tax rate of UAE-based entities is 13.5%, up from 9% last year, impacting tax of AED 5.1 million in the quarter. Net profit margin is 6.3% compared to 8% in last year. EBITDA decreased to AED 135.6 million in the first quarter compared to AED 151.1 million in the first quarter of last year. The EBITDA margin decreased to 17.5% from 19.3% in last year. Now we will turn to balance sheet highlights on Slide 15. Overall working capital remained stable at AED 1.43 billion in the first quarter of 2025 compared to December 2024. Trade receivables decreased from 87 days to 86 days. Inventory days increased from 252 days to 260 days quarter-on-quarter due to increase in finished goods stock. Rate payable increased from 67 days to 73 days quarter-on-quarter, mainly due to CapEx procurement. CapEx spending has been AED 97 million in the first quarter of 2025, out of AED 68 million relates to upgradation of large format tiles in tiles manufacturing plants. CapEx guidance for 2025 remains at AED 350 million. Net debt increased by AED 41 million at AED 1.43 billion compared to December 2024 due to higher CapEx spend. Net debt to EBITDA also increased from 2.35x in December 2024 to 2.49x in March 2025. We continue to remain adequate -- to maintain adequate liquidity position during the year. Slide 17 shows the share price movement during the last 12 months. The shares are currently trading at PE multiple of 11.9x. Now I will turn back to Mr. Abdallah for his final comments before we answer your questions.

Thank you, PK. As we've discussed, geopolitical and economic uncertainties continue to affect many industries globally, especially export-reliant sectors like ours, yet our ability to deliver stable results in first quarter highlights the strength of our business model. We saw strong momentum in the UAE, supported by real estate and tourism tailwind, while challenges persist in other regions, we have been able to safeguard our margins and remain agile in our execution. Looking ahead, we will continue to focus on quality, innovation and sustainability in a world where low-cost manufacturers are gaining ground. We are committed to staying ahead as the preferred global supplier of high-quality differentiated products. Thank you, again, for your attention and continued support. I will now hand over the call back to the operator for the Q&A session.

[Operator Instructions] Our first question comes from Anoop Fernandes with SICO.

Good afternoon, gentlemen, and thanks for the opportunity to ask questions. I broadly have 3. First is on your intention to create a brand to compete with Indian and Chinese tiles. Just wondering, I mean, RAK has always been known as a premium producer. Why is it that you want to compete in such a low-margin business? And I mean how do you see that strategy playing out? I mean, can you really compete with them on cost? Why don't you stick to your own turf and why do you want to get into that segment? The second one is on the status of duties on Indian and Chinese tiles. So I believe it was due to expire last year. What is the status now? Because apparently, Oman recently made some announcement that they were planning to levy these duties on Indian and Chinese tiles. How is their implementation happening in the other markets? I mean, is there a duty still in place? And the third question is on the impairment of receivables. So in your financials, there are 2 components. One is on trade receivables, and the other receivables, if you could please clarify what these other receivables are where you've taken that AED 4.6 million impairment?

Thank you for the questions. Again, we never said that we are going to compete with Indian and Chinese, because it's all the business model and what we are following, and this proven to be successful is building the brand in order to avoid the competition. But still, what is happening in the UAE or other markets, the difference -- the delta is very big. It's the issue. And this goes down to the next question, and I will go back link it. If you know that today, especially on India and basically started with China, most of the places, they are applying anti-dumping because of the low cost of production and the dumping in a big volume, such Saudi is still having the anti-dumping. Qatar reinstated the anti-dumping. And now Oman, they restarted anti-dumping. You have anti-dumping in Europe, now in U.S., even you go to South America and so on and so forth. So it's a matter of dumping in a big volume with a different multiple, different brand tying up with a local distributor and reducing the prices where the delta is big, but we are not into any intent to compete. But again, some projects where they say, okay, if I go to value engineering, then this is a tile. And when I fix the tile, the brand will not show, kind of these things. But if you understood it, I have to clarify that we are not in an intention, but also to make sure that we have that quality assurance over there. In terms of receivables, I believe, PK, you can clarify?

This receivable provision of AED 4.6 million, actually, we had some exposure in our books on account of the Sudan plant that had been sold. And since considering the situation in Sudan, we thought it prudent to provide for it, and therefore, that provision has been made. So maybe that as and when we receive the money, yes, that will go to the income statement.

Yes. Just to follow up, the duties, as you said, Qatar and Oman and so on, is it the same level as it was when they were first imposed in 2020? Or has the duty structure changed? I mean, is it just a rollover of the duty structure? Or is there a new structure itself in place in terms of the quantum of duties?

To be honest with you, I cannot answer you because I don't know the detail of this, but I believe it goes back from a 40% to 120%, depends which factories and which level of prices they are dumping.

Our next question is a tax question. What is Q1 '25 utilization for every segment countrywide? And could you please reconfirm how much capacities are going to add to every segment in the coming times last years?

Honestly speaking, it will be unfair to answer this question from a level. So our installed capacity -- we had a big capacity in the UAE producing the red body tiles, where the material was coming out of the Ras Al-Khaimah here. And this mainly were products sold to wall tiles and indoor floor tiles. But with the worldwide, the shifts happening in the porcelain tiles, which were the first in the region to start the porcelain, but honestly, at the time, we had 30% capacity of porcelain and 70% capacity in ceramics. This shift happened, and it's happening. And therefore, even now in the UAE, we are shifting part of our installed capacity in ceramics to produce porcelain. So if we go to the installed capacity and we go into what we are producing, you will get around 65%...

70.8%.

70.8%, but this is not accurate because -- yes, the capacity in ceramics is 13,000, but when you produce porcelain, it goes down to 8,000. So therefore, installed capacity divided between ceramics and porcelain, where today, majority of what we are producing is big slabs and bigger products, bigger sizes. So this goes into it.

Our next question is from [indiscernible]. It reads, can you elaborate on the KLUDI Group transformation and when you expect this business to start generating profit? Revenue from Bangladesh dropped 25.7% year-over-year in 1Q '25. What are the company's long-term plans for this country? And is there any visibility for the turnaround of the operations in the country?

Regarding KLUDI, we acquired the KLUDI almost 2 years back. Unfortunately, the month after, the war between Russia and Ukraine started. KLUDI, we had a factory in Austria, Hungary and Germany, then we have a capacity of 0.5 million pieces in the UAE. We started increasing the capacity in UAE, where today, we have a capacity of 1.5 million pieces. So the market gone down because the KLUDI was stronger actually in East Europe, where Poland, Ukraine, Russia and the region was an important market for them. So we started shutting down. We closed down capacity in Austria, and now, we started the closing of the Hungarian plant, whereby -- and/or by July, the factory will be closed, we'll be shifting all production in Germany. And again, we are -- with the condition, Europe in recession as well as the environmental issues, as well as the lower demand in Eastern Europe, mainly, we are even reducing the capacity to do a minimum in Europe, keeping the R&D, engineering, as well as special products production in there. In my opinion, by next year, where the most capacity will be shifted to the UAE. And today, we don't know because every time things are changing. Now the euro improved, actually appreciated in dollars where if we produce in UAE, we will have even extra margin by selling in Europe. So I believe by next year, we will see good improvement and good visibility and the transformation of KLUDI especially that we already enhanced the product mix. We put all our effort to tie up with designers, looking at the overall product mix and the product portfolio renovated. And by next month, we are opening the first showroom in Sheikh Zayed specifically designed to KLUDI, as well as we opened the design hubs in Milano and Frankfurt and in the U.K., where we displayed also there the KLUDI, and we are preparing now 2 showrooms in Saudi, specifically for KLUDI. So I believe by next year, KLUDI will have a good visibility. As well, you will see not -- we launched not only the faucets, but we added the sanitaryware into it, where we will get a good exposure into the high-end projects. Now going to Bangladesh. Bangladesh was a jury within the group. It was always performing. I believe we started in 2000 in Bangladesh. And since then, it was really doing well till last year where the gas supply, the instability and political instability, the revenue gone down by 25%. Basically, we are not getting gas in the area where we are. And if we don't get gas, we cannot produce, and therefore, the impact happened. We are monitoring the situation. It's not easy to decide to do anything because installing a factory is not easy to -- removing it to some other places. We are monitoring the situation. We are -- they promised us that the gas supply will be improved in next month. And we are hopeful, meanwhile, we are even connecting a separate line where we can compress CNG where at least we can run it.

[Operator Instructions] Our next question is, what's the latest on the KSA production facility?

Honestly, thank you for asking this question, but I can say that it's a very positive news. To be honest, we did not yet got the paper documents, but in a call actually this week with Marafiq, looks like that Marafiq will be able to supply the gas to our acquired plan by Q4 2026. We are waiting the agreement to reach, but it's a very good news. We are keeping ourselves very positive in order to take it from there.

We have no further questions. I'll now hand back to Abdallah Massaad for any final remarks.

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

Thank you, Abdallah, PK, for your time today, and thank you, everyone, who joined. We look forward to having you with us next quarter.

Thank you, Mohamad. Thank you.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.