RAK Ceramics (Bangladesh) Limited (RAKCERAMIC) Q2 FY2025 Earnings Call Transcript & Summary

Hello, everyone, and welcome to the RAK Ceramics Second Quarter and First Half 2025 Earnings Call. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand over to Mohamad Haidar from Arqaam Capital to begin. Please go ahead.

Thank you. Hello, everyone, and welcome to RAK Ceramics Second Quarter First Half 2025 Earnings Call and Webcast. This is Mohamad Haidar from Arqaam Capital. And as always, we are joined today by Mr. Abdallah Massaad, Group CEO; and Mr. P.K. Chand, Group CFO from RAK Ceramics. Over to you, Abdallah.

Thank you, Mohamad. Good afternoon, everyone, and welcome to RAK Ceramics Second Quarter 2025 Earnings Conference Call and Webcast. Our Q2 performance was strong, demonstrating the resilience of our business despite challenging macroeconomic backdrop. Total revenue increased by 6.4% year-on-year, reaching AED 826 million, driven by robust demand in the UAE and across the Middle East, coupled with effective cost management. For the first half 2025, our revenue rose by 2.9% to AED 1.6 billion. Gross profit margin improved by 110 basis points year-on-year in Q2 to 40.6% and by 70 basis points in the first half to 40.2%, supported by enhanced operational efficiencies. This margin expansion reinforces our market leadership and reflects our continued focus on high-end differentiated products. Profit before tax surged to 45% year-on-year to AED 86.7 million, and the net profit after tax rose to 30.1% to AED 66.4 million. 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 contributes 23% of our consolidated revenue, with India and Saudi Arabia also playing key roles. In terms of our segments, tiles continue to be the primary driver of revenue, 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. 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 tile plant also helped us achieve higher gross profit margin, strengthening our leadership in the local market. In Saudi Arabia, revenue declined due to the liquidity crunch, intensified competition and oversupply from local tile manufacturers. However, our margin improved by 300 basis points due to a favorable product mix. Moving to Europe. Revenue declined by 3.3% year-on-year, reflecting weak demand in the U.K. and Italy amid challenging macro conditions and continued recessionary concerns. In India, I'm pleased to report moderate growth in local currency, supported by strong infrastructure development, reduced interest rates and the growing disposable income. We are moving ahead with the turnaround measures to regain profitability. In Bangladesh, ongoing political instability, low demand and operational constraints continue to pose challenges. Our revenue grew by 15.6% year-on-year in local currency, indicating signs of market recovery. Also, we are taking steps to improve efficiency and manage costs. From a segment standpoint, our Tile division recorded growth in both volume and value, primarily driven by robust performance in the UAE, India, Bangladesh and Germany. The Sanitaryware division experienced a modest revenue growth, supported by strong demand in the UAE. Faucet division revenue grew by 11.7%, mainly driven by performance in Europe, Saudi and Africa. We are progressing towards our plan for cost optimization by shifting major Europe faucet production facilities to the UAE. The Tableware division reported a decline impacted mainly by slower demand in the U.S. However, UAE, Europe and African markets have performed well, driven by expansion of distributors. Looking ahead, our diversified footprint continues to provide resilience. We are focused on capturing opportunities in high-growth regions, particularly in the UAE and wider Middle East, while taking corrective measures in more challenging markets. In the UAE, we are seeing increased competition due to the lower cost imports under free trade agreements. In response, we are strengthening partnerships with reputed developers and supplying our size and sanitaryware for large-scale projects. In Saudi Arabia, market oversupplies and liquidity issues have triggered a price war, particularly in residential and commercial segments. However, custom duty exemption are helping to improve our competitiveness. We are also focusing more on premium and differentiated offering to boost margin, 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 segments with our new collections. In India, the reduction in exports has created domestic oversupply. We are actively working on enhancing our retail presence and in-store experiences to better connect with customers. We are working on a plan to introduce product offering from the UAE. 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 enhancements through showroom expansion and strengthening our dealer network. Now moving to our strategic initiatives. In the UAE, we have completed the upgrade of our next generation of Continua Plus technology, reinforcing our innovation leadership in large-format surface, equipped with the latest advanced Continua, which can take us to a 1.8 meter time, 3.6 meters from a 6 millimeter to 2 centimeter. And we also put the longest European kiln, which we have it at 300 meters and equipped with IoT-enabled system with full automated quality inspection. Our sanitaryware facility is also being modernized with energy-efficient system that align with our sustainability goals. In the Saudi Arabia plant of our new tiles production facilities are progressing well. This will strengthen our local presence and drive efficiencies. Now we are hopeful to get the gas installed in the land, which we took by the fourth quarter of 2026. In the first half of 2025, RAK Ceramics intensified its transformation into a global lifestyle solution provider. At Milan Design Week, we have opened our fourth international design hub. It was also a moment of immense pride to receive the ICV Excellence Award at the Make it in the Emirates 2025, underscoring our steadfast commitment to local values, talent and manufacturing in the UAE. Now as part of 2D transformation, we are moving forward with our cost optimization strategy, including relocation major EU production to the UAE and improved operational leverage. I will now hand over to our CFO, PK.

Thank you, Abdallah, and good afternoon, everyone. I appreciate the strategic and operational highlights of the second quarter. I will now walk you through the financial performance for the first quarter of 2025, focusing on revenue, gross profit margins and key balance sheet highlights. We will begin with Slide 11. We are pleased to share that the second quarter of 2025 delivered a strong performance and demonstrated the resilience of our business. Total revenue for the second quarter of 2025 increased by 6.4% to AED 826.8 million primarily driven by robust performance in our tiles, Sanitaryware and Faucet segments. Tiles and sanitaryware revenue increased by 7.5% year-on-year to AED 595.7 million in the second quarter of 2025, while in the first half of 2025, it increased by 4.2% year-on-year to AED 1.15 billion. This was supported by strong performances in the United Arab Emirates, Middle East, Bangladesh and Indian markets. Tiles revenue increased by 10.2% at AED 474.3 million, led by robust performance in the UAE, India, Bangladesh and German markets. In first half of 2025, revenue increased by 5.6% year-on-year to AED 923.2 million. Sanitaryware revenue recorded growth of 3.6% year-on-year to AED 121.4 million, supported by demand in the UAE. In first half of 2025, revenue decreased by 1.3% year-on-year at AED 226.9 million due to lower revenue in India, Europe and Bangladesh markets. Tableware revenue declined by 7.9% year-on-year to AED 84.9 million, impacted by slower demand in U.S. In first half of 2025, revenue declined by 6.2% year-on-year to AED 170.8 million However, UAE, Europe and African markets have performed well, driven by expansion of distributors. Faucets revenue grew by 11.7%, mainly driven by performance in Europe, Kingdom of Saudi Arabia and Africa, reaching AED 122.3 million. In first half of 2025, revenue increased by 3.4% year-on-year to AED 234 million. We continue to progress towards our plan of -- for cost optimization by shifting major EU faucets production facilities to United Arab Emirates. Other revenue increased by 5% year-on-year to AED 48.4 million in first half of 2025, driven by increase in our ceramic trading business. We will now turn to Slide 14. Overall gross profit margin for the second quarter of 2025 improved by 110 basis points year-on-year to 40.6% and 70 basis points in the first half of 2025, supported by improvement in efficiencies and higher sales in UAE market. Tiles margin in the second quarter of 2025 increased by 330 basis points year-on-year at 42.5%. And in the first half of 2025, it increased by 250 basis points at 41.8%, driven by improvement in efficiencies and higher sales in UAE market. Sanitaryware margin in the second quarter of 2025 decreased by 30 basis points year-on-year at 32.5% due to ongoing challenges in Bangladesh. While in the first half of 2025, it increased by 200 basis points year-on-year at 33.3%. Tableware margin in the second quarter of 2025 improved by 380 basis points year-on-year at 56%, while in first half of 2025, it improved by 190 basis points at 55%, supported by higher sales to the airline industry and premium hospitality projects. Faucets gross profit margin decreased by 640 basis points year-on-year at 27% in the second quarter of 2025 and in the first half of 2025 by 690 basis points at 25.3% due to lower margins in European market on account of continued transformation activities in Europe. Profit before tax for the second quarter of 2025 was AED 86.7 million compared to AED 59.8 million in the same period last year, that is higher by 45%. In first half of 2025, profit before tax increased by 13.1% to reach AED 151.2 million. The increase is largely attributable to growth in revenue and gross profit margin. The margin increased to 9.4% in first half of 2025 compared to 8.6% in the same period last year. Net profit after tax increased by 30.1% year-on-year to reach AED 66.4 million in the second quarter of 2025. In the first half of 2025, profit after tax is AED 115.2 million, an increase of 1.2% year-on-year. The increase is despite implementation of new domestic minimum top-up tax under the OECD global Pillar 2 rules effective from 1st January 2025. The effective tax rate for UAE-based entities increased from 9% to 14.1%, resulting in an incremental tax impact of AED 15.1 million during the first half of 2025. Net profit margin for the first half of 2025 is 7.2% compared to 7.3% in the first half of last year. EBITDA for the second quarter of 2025 increased by 17.5% year-on-year to AED 160.8 million. And in the first half of 2025, it increased by 2.9% to AED 296.4 million. The EBITDA margin remained stable year-on-year at 18.5% in the first half of 2025. Overall working capital increased by AED 34 million to AED 1.47 billion in June 2025 compared to March 2025. Trade receivables increased from 86 days in March 2025 to 88 days in June due to Eid holidays. Inventory days also increased from 260 days in March 2025 to 265 days in June due to increase in finished goods stock. Trade payables decreased from 73 days in March 2025 to 68 days in June, mainly due to CapEx payments. Net debt increased by AED 120.6 million at AED 1.56 billion in June 2025 compared to March due to higher CapEx and working capital. Net debt-to-EBITDA also increased from 2.49x in March 2025 to 2.59x in June 2025. CapEx spending has been AED 156.1 million in the first half of 2025. CapEx guidance for 2025 is revised to AED 300 million to AED 325 million. We continue to maintain comfortable liquidity and remain well positioned to meet our financial obligations. Over the last -- we move to Slide 19 now. Over the last 12 months, the company's share price has remained stable. The stock is currently trading at a PE multiple of 11.4x, reflecting investors' confidence and long-term value. The Board has approved to distribute interim cash dividend of AED 10 fils per share, representing AED 99.4 million to be paid to the shareholders. The current dividend policy as approved by the shareholders stipulates a minimum dividend payout of AED 20 fils per share for the year 2025 to be paid on a semiannual basis. This concludes the financial overview for the quarter. I will now hand over the call back to Mr. Abdallah for his closing remarks before we open for questions.

Thank you, PK. As we've discussed, our second quarter performance shows strong revenue growth, better margin and solid execution even in markets facing economic headwinds. We saw strong momentum in the UAE, supported by real estate and tourism tailwinds, while challenges persist in other regions. We have been able to safeguard our margin and remain agile in our execution. Looking ahead, we will continue to focus on quality, innovation and sustainability. In a world where lower cost manufacturers are gaining ground, we are committed to staying ahead as the preferred global suppliers 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] We currently have no questions. I will now hand back over to Mohamad for any closing remarks. A question has just come in from Richa Kumari with SICO. Congrats for the solid results. My first question is on other income. Could you please provide some details on provisions, write-back gain on disposal of investment properties, discount earns on purchases and gain on disposal of PPE?

Yes, I will answer the question. Now as far as the provisions are concerned, there were certain provisions created in earlier years. We had examined all the provisions. And then since the provisions were not required, these have been written back. As far as the profit on sale is concerned, there were certain flats available with us, and we have sold those flats and therefore, the gain has been recorded. And the rebate for the purchase is basically -- yes, so as far as rebate is concerned, so we get this rebate on purchases made in last year. So every year, this is a regular phenomena. So every year, this income is coming. So this time, it is coming in the second quarter. I hope I answered all the questions.

Second question, could you please provide any update on time line for KSA plot?

I answer this question. Look, as on today, we received slide is not yet a paper commitment, but tentative date by the first quarter of 2026, the gas will be available in the area where we have the plots. Therefore, we are submitting all our documents and plans where we can get the ready -- the factory ready by end of next year. Hopefully, that we can get a commitment because honestly, until now, we did not spend heavily in CapEx machinery until we get the firm commitment in the gas. But in my opinion that by end of next year, if we get the commitment -- firm commitment, which already we have it in terms of minutes of the meeting actually, but we are asking for more tangible things where the project should be operational by beginning 2027, end of 2026.

And last question from Richa asking, what is the effective tax rate?

The effective tax rate, as I mentioned, as far as UAE is concerned, the effective tax rate for the first half of 2025 is 14% compared to 9% in the last year, but the overall effective tax is 23.8% for the first half of this year compared to 14.8% in the last year.

Our next question comes from William Sewell with Vergent Asset Management asking, can you update on the status of potential sale of the land bank in Iraq?

I answer. Honestly, we don't have any material things to update. As you know, the Ras Al Khaimah is developing in a good way. The momentum is there, a lot of construction. But honestly, we don't have any update on or any material things for our land.

We have another question from Mohamad.

This could continue as long as the real estate activity is strong. And normally, would it still like extend a couple of years after the sale of a certain project given that the ceramics product comes later in the construction stage?

Yes, Mohamad. So honestly, if you look at the construction activities in the whole UAE, especially also in Ras Al Khaimah, we have the output we supplied, and that's why you can see this jump. And yes, it will continue. We have a lot of projects which the ceramics sanitaryware faucets comes in the later stage. So that's why the outlook in the UAE is looking good, yes.

Excellent. And just as a rough estimate, what's the split between like developers-driven projects versus retail in the UAE today?

PK, you have the number, but honestly, the project is the main. So we sell to 3 network. One is projects, wholesale and retail. PK, you have the split, I believe you have...

Yes I have got it. As far as UAE sales is concerned, the project sales are approximately 60%. The distributor sale is around 22% and the retail sale is 18%.

Our next question comes from Wei Chow from AlRayan Investment asking any guidance on margins in the second half 2025 and 2026?

See, as a principle, we don't give any guidance for the future. But tiles, it is expected that the margins will remain the same. Sanitaryware and faucet, the margins may slightly increase. That is -- yes.

[Operator Instructions] We currently have no further questions. So that concludes the Q&A session. I will now hand back over to Mohamad for any closing remarks.

Thank you, Ezra, Abdallah, PK. Congratulations again for a solid strong Q2 set of numbers, and we look forward to have you with us next quarter. Thank you, everyone, for joining.

Thank you.

Thank you, everyone. Thank you, Mohamad.

Thank you very much, Mohamad, and thank you to all the speakers on today's line. That concludes today's conference call. You may now disconnect your lines.