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

[Audio Gap] On a box. Now hand it over to Mohamad Haidar from Ark Capital to begin.

Hello, everyone, and welcome to the RAK Ceramics Third Quarter and 9 Month 2026 Earnings Call. This is Mohamad Haidar from Arqaam Capital. And we are joined today by Mr. Abdallah Massaad, Group CEO of RAK Ceramics; and Mr. Manuj [indiscernible] Group Chief Strategy Officer of RAK Ceramics. Over to you, Abdallah.

Thank you, Jamar. Good afternoon, everyone, and welcome to RAK Ceramics Earnings Call for the Third Quarter 2026. Thank you for joining us. We delivered revenue growth and strong profitability in the third quarter despite continued regional disruption. Strong demand in the UAE, the wider Middle East and India helped offset pressure on exports and higher operating costs. . Revenue grew by 4.4% to AED 861.5 billion, while net profit after tax increased by 15.5% to AED 78 million homes. Gross profit margin remained broadly stable at 40.3% for the first 9 months revenue reached AED 2.45 billion, with both revenue and net profit ahead of last year. Our regional manufacturing presence helped us respond to customer demand as imports remain constrained. Higher project sales supported by cost control contributed to the quarter performance. We maintained a strong focus on working capital with the receivables days remaining stable and inventory days improving. While net debt increased from the end of June we remain focused on maintaining healthy liquidity and strong financial discipline. As we move into the final quarter, our focus is on converting regional project demand into sales, clearing delayed shipments and progressing our turnaround plans. Now let me give you a brief overview of our key market and business segments. The UAE continues to be our largest market with 44% contribution, delivering strong top line growth and healthy margin amid the current regional conflict -- this is followed by Europe, which contributed 20% of our consolidated revenue, followed by India, Saudi Arabia and Bangladesh. In terms of our segments, tiles continue to be our primary driver of revenue, followed by faucets, calendry wear and Tableware. At the bottom, you will see our production capabilities where we remain committed to continuous investment to enhance capacity and operational efficiency. We benefited from our regional production base during supply chain disruption, enabling us to maintain product availability respond to local project need and stay close to customers through our distribution network. This strengthens our ability to compete across both our core regional and international markets. Now we go to the Regional disruption continued to affect the business in the third quarter. The impact varied across our markets and the UAE, strong project demand and constraints imports created opportunity to gain market share. We focused on premium products and local projects to capture that demand. At the same time, disruption around the state of Hermos increased shipment cost and affected both exports and inbound materials. We used alternative routes through Jedda, Huracan and Oman to increase local sourcing. In Saudi Arabia, cyber certification delays impacted deliveries and we are working to streamline the process and support time line project execution. Higher energy cost in India and gas shortages in Bangladesh affected production we recovered part of the higher cost in India and explore alternative energy and gas supply option in Bangladesh. Tableware was impacted by weaker regional hospitality demand, partly offset by Aviation business and premium partnership. Looking ahead, we see further opportunities in gaining market share in the UAE at GCC, we remain cautious about freight and material costs and hospitality demand -- our response remains focused on reliable supply and cost control. Going to the segment performance. Turning to our segments, styles, were the main contributor to revenue growth this quarter, project demand in the UAE and the Middle East, together with India recovery, helped offset export disruption and production concentrate in Bangladesh. Large slabs and the premium products remain important to our sales mix supported by consistent availability and ciliary ware, GCC demand provided some support, but weaker demand elsewhere higher freight cost and Bangladesh gas shortages affected performance. Upgrades to our UAE facility are aimed at improving product quality and cost efficiency, while strengthening the range we offer to customers. In facets, demand in the UAE and the Middle East helped offset weakness in Europe and other export markets. Component delivery delays also affected operations. Premium projects are supporting the [Cody] brand. while the transformation program continues to focus on operational performance and cost efficiency. table ware continued to face weaker hospitality demand in the region growth in aviation and the Americas partly offset this pressure. Our focus is on developing aviation accounts and premium partnership while integrating Cook play to broaden our offering and customer reach. Across all segments, we are focusing investment and commercial effort on products and channel where we can improve profitability and build lasting customer relationship. The market performance -- now focusing on our ties and sanitary wear business across our key markets. The UAE remained strong, supported by construction activity project demand and demand for slabs, constrained imports also created opportunities to gain share. In the wider Middle East, we are strengthening our local sales presence and customer relationship to build on similar opportunities. in Saudi, solar certification delays impacted deliveries, and we are working to streamline the process and support timely project execution. Europe and other export markets faced weaker demand, strong competition and higher freight costs. We are managing this pressure while progressing changes to improve the profitability of our European operations. India return to growth, supported by dealer expansion and continued retail investment. We are building on this momentum through stronger market coverage and continued showroom upgrades. In Bangladesh, gas shortages disrupted production and affected sales, targeted change to distribution, pricing and operating efficiencies are underway to support market share and profitability. These different conditions call for a focused approach in each market. We are expanding where demand is stronger and addressing the operating issues that are holding back performance elsewhere. On strategic updates, our strategic initiatives address both current operating challenges and longer-term competitiveness. In the UAE, we are progressing product and manufacturing upgrades including energy-efficient technology, these investments supports quality, lower operating costs and our sustainability objectives. In Saudi Arabia, the Yanbu Greenfield tiles projects remain on track for completion in the second quarter of 2027. Alongside this investment, we are strengthening premium retail and project sales, including private sector opportunities. In our European distribution business, the turnaround focuses on cost reduction and a more efficient business model. Separately, we continue to execute Kludi's transformation program to improve operational performance and cost efficiency with profitability as the objectives. In India, we are expanding company-owned stores and our dealer network to reach more districts while developing institutional sales. In Bangladesh, targeted changes across channel, pricing and operations are aimed at recovering market share and improving profitability. We will continue to monitor progress closely and maintain discipline in how we allocate capital. I will now hand over to Mr. Maher our Chief Strategy Officer, to take you through the financial performance for this quarter.

Thank you, Mr. Abdullah and good evening, everyone. I'll focus on a financial movement and our responses. Quarter 3 revenue reached around AED 862 million up about 4% year-on-year and 5% from quarter 2. Stronger regional sales helped to offset weaker exports, gross margin remained stable at 40% despite of higher input and logistic costs. EBITDA rose about 5% to AED 176 million with EBITDA margin broadly stable at 20%. Profit before tax increased about 13% to AED 98 million while net profit after tax grew around 16% to AED 78 million. Overall, local sourcing, alternative shipping routes and a partial cost recovery to manage the pressure, cost control and liquidity management remains priorities for the group. I'll move to the financial snapshot for 9 months -- the stronger third quarter performance helped to offset the earlier weaknesses, demonstrating the group's continued resilience. 9 months revenue was AED 2.45 billion up close to 1% with a gross margin unchanged at around 40%. BITDA remained flat at AED 461 million with the EBITDA margin broadly stable at 19%. And Profit before tax was broadly stable at AED 237 million. If you see the 9 months higher operating cost limited earnings growth, while net profit after tax increased about 1% to AED 185 million, the focus is on improving profitability across the business. I'll move to the next section, revenue performance in Q3 2026. Our sales priority is converting original demand into the deliveries. That's the message. Tiles and Sanitaryware revenue reached about AED 635 million, up by 5% year-on-year and 7% from quarter 2. Within this business, UA revenue grew roughly by 33%, the wider Middle East nearly and India, about 12%. Europe improved from quarter 2, but remained below last year. Saudi revenue declined by 17% on account of sober certification delays, while Bangladesh revenue declined by 12% due to the disruption in gas supply. Table revenue was about AED 76 million, down by 11% year-end year, but slightly ahead of quarter 2. foset decline around 3% to AED 115 million, other revenue roughly doubled to AED 37 million. Overall management actions focus on shipment clearance, Avito and premium accounts including cost efficiency and subsidiary turnaround plans. -- reliable supply and timely execution remains a priority for the group. I'll go to the revenue performance for 9 months 2026. The 9 months picture highlights the resilience performance of our growth. Tiles and Santerre revenue rose close to 1% to AED 1.77 billion gross. Phosphate grew about 3% to AED 363 million. tableware declined around 11% to AED 228 million, while other revenue rose about 28% to AED 85 million. In terms of markets, U.S. sales increased by around 19% year-on-year, supported by project segment for the Bangladesh sales increased by 7% despite of Q3 gas supply disruption. Europe declined by 19% year-on-year, while India quarterly recovery has not yet offset earlier weaknesses. And Africa went below last year. plan is that the dealer expansion in India, Europe distribution business turnaround and operating improvements in Bangladesh remains the priorities. -- these actions should support broader, more profitable growth for coming days. I'll move to the gross profit margin. We are focusing on our product mix and efficiency to protect margins. Group gross margin for quarter 3 and 9 months remained stable at a 40% reason despite of the higher direct cost and our supply chain disruption and related costs. Tiles margin was close to 42%, broadly stable year-on-year, supported by higher sales in the U.S, where margins are higher. Santee was around 36%, slightly lower than last year, but better than quarter 2. Both recorded a modest 9-month improvement. Tableware margin fell to around 47% from 54% on account of higher raw material and freight costs. Its 9-month margin showed a resilence, and it remains about 50% versus sort of a recovery. Faucet recurred about 26%, in line with last year, although the 9 months margin reman lower year-on-year, raw material and freight costs continue to pressure these businesses. On a note, UAE factory upgrades, better sourcing and at transformation and a subsidiary turnaround initiatives are aimed at improving the cost efficiency, strengthening the margin for long term. I'll move to the profitability bridge. Q3 profit before tax rose around 13% to AED 98 million. gross profit increased by about AED 14 million, while the higher administrative and selling expenses absorbed around AED 5 million of that gain. -- after tax, net profit was AED 78 million, up by 16%. Over 9 months profit before tax remained near AED 237 million. Gross profit and administrative and selling expenses each increased by roughly AED 7 million. After tax, net profit was about AED 185 million, up around by 1% margin. So here, the stand I look at more of a cost control, manufacturing efficiency and turnaround execution remains a central focus to improve underlying earnings. Coming to the balance sheet and capital allocation. Our priority is always a cash conversion alongside a disciplined investment thesis. Working capital was about AED 1.45 billion, around AED 25 million above June Working capital days rose from 183 days to 187. Receivable days remained broadly stable, while the inventory days improved to 256 days Credit payable days were unchanged. Tax payment reduced our other payables, which is a periodic of. Net debt increased around AED 72 million crossing to AED 1.5 billion, mainly reflecting an interim dividend and US tax payments. The equation drives to the leverage rose by about 2.56x EBITDA from roughly 2.48x in June. 9-month CapEx was about to AED 163 million, including AED 59 million in Saudi Arabia for greenfield project and AED 47 million for plant and warehouse upgradation in the UAE. Full year guidance remains AED 225 million to AED 250 million. In a nutshell, we will keep close control on collection inventory and spending while progressing growth projects. I'll move to the share price on our shareholders' value analysis. Our focus is consistent written and long-term shareholder value. The 8 October share price was around the round AED 2.28 versus they're around AED 2.49 at year-end. With the market capitalization at the around AED 2.27 billion the shares traded at around 10x earning compared with roughly 11.5x at year-end. Enterprise value to EBITDA was broadly unchanged at around 6.5x bank. So here with the turnaround, delivery, cash generation and disciplined investment remains our priority. I'll now hand back to Mr. Abdulla for the closing remarks.

Thank you, Manus. Our third quarter results demonstrates the group resilience with revenue and earnings growth supported by strong regional demand despite continued disruption. Looking ahead, -- we will build on this momentum by capturing UAE and GCC opportunities and supporting tableware recovery. We will remain agile, closely monitor the political environment and respond quickly to changing conditions, local sourcing, alternative logistic rules, -- and our regional manufacturing footprint will help us maintain reliable supply and service. We will continue Kludi's transformation and our subsidiary turnaround plan to improve profitability while maintaining cost discipline and strengthening liquidity investment in Yambu and retail expansion will support future growth. Our design hubs in London, Frankfurt, Dubai and Milano, together with our Elisa partnership and Roberto Cavalli collection, strengthen our premium and luxury offering and our reach among architect designers and customers globally across the group, we are expanding AI adoption, improving manufacturing efficiency and embedding sustainability in our operations. We remain confident in RAK Ceramics long-term growth prospects and our ability to deliver sustainable value for shareholders. Thank you for your continued trust and support I will now hand over the call back to the operator for questions.

[Operator Instructions]

Alex. I'll start with a few questions from my side. -- really impressive results in Q3. And I'm trying to understand the gross margins which were impressive, given what's happening around us, -- and we're speaking to other companies, they're all feeling the impact. I'm not sure if your RAK Ceramics is also feeling it when it comes to higher transportation costs and higher raw material input costs. higher award premium and insurance. So what's the trick behind the impact margins close to 40% in Q3. Is it only because UAE is selling higher? Or it's also because you're doing something else on the cost front?

Thank you, Mohamad, for your question. And look, as we always discuss, we are always in continuous improvement. We are always on continuous investment how we can be more efficient and more creative. To be honest with you, Mohamad, our margin in the UAE historically is better than the margin when we export, which is we have to add transportation on top, and we have our own sales team. We sell directly to the projects where we have a better margin. And also, we have our showroom, which we sell again at a good margin. So what happened, our cost, as you said, increased cost of raw material and the inflation, insurances, everything we face it, but we try to change our formulas by using more local content, local raw material, as I mentioned, more efficiency. And even by having we did not increase the prices for -- in local markets. So our margin in the UAE gets reduced means in the market -- end market UAE, while the increase of volume supported us in maintaining the gross profit margin. Now if I look at the Sanitaryware, for example, where the raw material increased, but we have invested initially in high-pressure casting and the new technology where helped us improving the efficiency and they're recovering. So we were able to offset the increase in raw material and the expenses from the efficiency rate. So it is a blend. So there is no 1 straight answer it.

That's very clear. I'll switch to the Q&A box. We have a few questions. It's also a follow-up to my question. So the first question says, UAE revenues increased 33% yearly, while project sales grew 55%. How much of this momentum reflects structural market share gains versus temporary import disruptions? And how should we think about the sustainability of this growth into 2027?

Mohamad, again, we are doing our job. So our job was, okay, let us -- we have a significant market share in the UAE. We had more than 30% market share in the UAE. So while this issue happens, so we thought from honestly, to angle -- 1 angle that we don't want to increase the prices because we are a company in the UAE during this difficult time come and impose increase in cost on top of the issues probably the developer contractor, is facing -- we will -- and already, we have a good margin. So we thought that as maintain our prices, let us support the developers and contractors during this period. Also, at the same time, we are expecting, and this is what we are discussing that, look, we are standing by, we're supporting and we are not looking for short term. We are looking for a long time -- long term. So we are showing that we are a partner, a long-term partner, which we can rely on us -- and therefore, we supported the continuation and the supply of the projects where I believe our market share today without putting a number, but we closed 50% in this case. We are expecting that this service, quality, design solution, which we are providing -- this will allow us to gain more market share for a long term, and it's not only a temporarily option. For sure, some people will whenever possible, they will find a cheaper option they will buy, we cannot guarantee, but at least no doubt that we will benefit in the long term of the -- actually did it in the short term.

We also have a few questions on Saudi. But before we move to Saudi, I have 1 follow-up on the UAE. I mean knowing that you are a premium manufacturer of ceramics and you usually sell at higher than prices than your competitors. The market share that you have gained -- is it for a similar quality product or it's because other products are missing, so people are shifting to your products, which are more premium and higher price -- so just trying to understand that.

Mohamad, we gained from both from there are projects who they wanted only imported high-end branded products. These people we won. And also some projects which they were buying cheaper product and by the additional freight -- the costs became -- if they can get it on time almost similar to ours. So 1 angle is good, is that the eye and even some branded projects, which they were reluctant to try as they tried us and they are satisfied. Honestly, also our launch of Sanitaryware of Kludi supported this. So initially, at the acquisition of Kludi, which was only in forces, we started investing in sanitary ware. And this helped us by positioning Kludi also as a premium sanitary ware most of the developers and most of the high-end project today I can say we are specified or we supplied already to the on top of RAK Ceramics tiles. So I can say from both sides. That's why the higher end which they tried as I believe they will stick to us after seeing the project and the low-end projects, which if there are opportunities to have a lower rate, they might shift.

That's very clear Abdallah. Moving to the questions on Saudi. Given the cyber certification delays affecting shipments in August and September, what proportion of the deferred deliveries is expected to be recovered in Q4? And is there any risk of these delays extending into 2027?

Look, honestly, I can tell you that this problem is sorted out, yes. So we had issue during this quarter in the supply, but fortunately, and the good news that already started and we are supplying with no restriction. Yes, during -- it is a normal action that some projects might have -- was not able to wait, but that is not significant. We will try our best to recover it during this quarter as per our plan.

Third question, with the Yanbu manufacturing facility targeted for completion in the second quarter of '27, how should we think about the production ramp up initial utilization levels and the time line for achieving meaningful profitability? .