Al Hassan Ghazi Ibrahim Shaker Company (1214) Earnings Call Transcript

Greetings, everyone. This is [indiscernible]. And on behalf of SNB Capital, I would like to welcome you to a conference call with Shaker's management regarding the financial results of H1 2026. With us on the call today, we have Mr. Firas Al Sayegh, VP of Strategy and Shared Services; and Mr. Mohammad Abedrabboh, acting VP of Finance. We will first listen to the management's feedback. Following this, we will open the floor to questions. Shaker's management, please begin with your feedback.

Good afternoon, everyone, and welcome to Shaker Group's Q2 and First Half 2026 Earnings Call. Thank you for joining us today as we review our second quarter and first half performance and discuss the group's operational, strategic and financial progress during the period. We also thank SNB Capital for hosting today's session. Joining me today is our Acting Vice President of Finance, Mohammad Abedrabboh. Earlier this month, we announced our Q2 and first half 2026 results on Tadawul, together with a detailed earnings release outlining our financial and operational performance for the period. If you have not received the presentation, please contact us. Otherwise, all materials will also be available on our corporate website after the call. Please refer to our disclaimer, which applies to all disclosures made in today's presentation. Kindly note that all figures discussed during today's call are in Saudi Riyal, unless otherwise stated. For today's agenda, I will begin with a review of the group's operational and strategic highlights for the second quarter and first half of the year, after which Mohammad will take you through our financial performance in more detail. I will then return to provide an update on the execution of our Elevate strategy before opening the floor for questions. For the first section, which is the first half highlights. In the first half, Shaker focused on strengthening the operating and financial foundation of the business while continuing to execute our Elevate strategy. Throughout the period and given the recent geopolitical developments and its impact on the market and demand, our priorities shifted and focused on enhancing cash generation, strengthening the balance sheet, optimizing working capital and maintaining disciplined cost management. These initiatives have strengthened our financial position while providing greater flexibility to support future growth. Within our core businesses, home appliances continued to grow across our retail, wholesale, e-commerce and shop-in-shop channels. We also continue strengthening our partnership with leading global brands while enhancing our customer proposition through strategic initiatives, including developing new e-commerce marketplace channels, strengthening our digital capabilities and expanding further our buy now, pay later offering and collaborations. With HVAC Solutions, we expanded our tendering activities in Q2, securing additional partnerships in the residential and commercial sectors such as PureGym, delivering advanced energy-efficient cooling solutions tailored to modern fitness facilities. As we continued executing Elevate strategy, we maintained a disciplined approach to capital allocation, operational efficiency and investment sequencing, ensuring we remain well positioned to capture long-term opportunities while preserving financial flexibility. I will now hand it over to Mohammad to take you through our financial performance for the second quarter and the first half of 2026.

Thank you, Firas. Good afternoon, everyone. I would like to thank you all for joining us today. Let me now take you through the group's financial performance for the first half of 2026. Revenue for the first half reached SAR 743 million, a decrease of 3.4% compared to the same period of last year. This was primarily driven by lower HVAC solution revenue due to the timing and more selective phasing of project activities, partially offset by continued growth in the home appliances segment. Home Appliances revenue increased by 8.8% year-on-year to reach SAR 251 million, supported by continued expansion across our retail, wholesale, e-commerce and shop-in-shop channels. Gross profit, on the other hand, amounted SAR 175 million with a gross margin of 23.6% compared to 25.1% for the first half of last year. Profitability was impacted by the lower contribution from HVAC projects, together with elevated logistics and component costs during the period as well as lower share of our associate company. Against this backdrop, we maintain disciplined approach to project execution with a continued focus on capital efficiency, prudent customer and project selection and long-term value creation. EBITDA amounted SAR 56.4 million with EBITDA margin of 7.6% at the same time. We continue to maintain disciplined control over operating expenses, procurement and resource allocation while advancing our operational efficiency initiatives across the business. Net profit attributable to the shareholders reached SAR 29.6 million compared to SAR 47.1 million for the first half of last year. With that overview of our first half performance, let me now take you through the financial results of the second quarter. Turning to the second quarter, revenue was SAR 341 million, down 7.5% year-on-year. Activity during the quarter continued to be influenced by the timing of HVAC projects execution, while home appliances delivered another quarter of growth, increasing 9.7% to reach SAR 104 million. The gross profit reached SAR 79.8 million with a gross margin of 23.4%. The quarter also continued to see pressure from elevated logistics and component costs, which weighed on profitability alongside the other -- the lower contributions from projects business. EBITDA amounted SAR 19 million with an EBITDA margin of 5.6%, while net profit attributable to the shareholders was SAR 5.3 million. Throughout the quarter, we remain disciplined in how we manage the business, balancing these term market conditions with action that supports stronger cash generation, tighter working capital management and long-term shareholder value. Let me now turn to our balance sheet and leverage position for the first half. As we can see, short-term borrowing increased by 11.8% year-on-year to reach SAR 382 million, while net debt stood at SAR 297 million with an increase of 10.2% compared to the same period of last year. However, on the other hand, the short-term borrowing decreased significantly by SAR 95 million when we compare it versus December level. During the first half, we remain focused on strengthening the balance sheet throughout disciplined working capital management, tighter control over receivable, inventory optimization and a stronger operating cash generation. This initiative supported liquidity and provided greater flexibility in managing the funding requirements of the business. Net debt to EBITDA stood at 2.5x compared to 2.2x in H1 of last year and interest coverage stood at 3.56x. From a capital structure perspective, total liabilities to assets improved to 0.52x from 0.56x, while total liabilities to equity declined to 1.08x from 1.2x, which enhanced our capital structure healthiness. Net debt to equity remained broadly stable compared to H1 last year. We continue to maintain a disciplined approach to liquidity management, capital allocation, balancing the funding requirements of the business with our long-term strategic priorities. Let me now take you through our cash flow performance for the first half. We started the year with SAR 57 million in cash and cash equivalents, and we closed the first half with SAR 85 million, supported by significantly stronger operating cash generation. Net cash generated from operating activities reached SAR 122 million, more 9x versus last year. This was driven by disciplined working capital management, stronger collection, inventory optimization and prudent capital allocation. Investing activities also generated another inflow of SAR 7.9 million as we maintain disciplined approach to capital deployment while also recording proceeds from investment activities during the period. Financing activities recorded a net cash outflow of SAR 102 million, mainly due to the repayment of the bank facilities in line with our continued focus on strengthening the balance sheet and maintaining financial flexibility. Throughout the first half, our financial priorities remained clear. We placed a greater emphasis on cash generation, working capital efficiency and disciplined capital allocation, strengthening the financial foundation of the business while maintaining flexibility to support our long-term strategic priorities. Thank you. I will now hand it back to Firas to take you through our Elevate strategic update and outlook.

Thank you, Mohammad. Let me now take you through our Elevate strategy and the next phase of its execution and giving an assessment and overview of its road map and progress. When we launched Elevate in 2024, we set clear ambitions for the group with a focus on strengthening our core businesses, building new growth engines and expanding the platform for long-term growth. Since then, the operating environment has evolved. -- geopolitical developments, supply chain and logistics disruptions, changing demand patterns and timing of market opportunities have affected the pace at which some of our initiatives can be developed and scaled. Taking these factors into account, we have made a deliberate decision to move the realization year of our revenue ambition from 2027 to 2028. Importantly, this is a change in the timing of the ambition, not the change in the ambition itself. We remain committed to the underlying objectives of Elevate, but we are certain that the approach is to give each growth engine the appropriate time to develop and to sequence investment around market conditions, commercial readiness and expected returns. We have made tangible progress since the launch of Elevate. From a revenue base of approximately SAR 1.3 billion in 2023, the group reached approximately SAR 1.4 billion in 2025, representing around SAR 130 million of progress from the original baseline. This progress has come from strengthening the businesses at the heart of the group, especially B2B and HVAC services, B2C and aftersales while also building in new platforms around that core, including the 3PL solutions. As we move through 2026 to 2028, the focus is, therefore, on execution. We see approximately SAR 500 million to SAR 600 million of additional revenue opportunity to be unlocked across the different Elevate initiatives during this phase. That opportunity spans the projects and HVAC services, dealers and wholesale business channel, retail and direct-to-consumer, aftersales and our strategic adjacencies. The 2028 build currently represents approximately SAR 1.93 billion of revenue, bringing us close to the original SAR 2 billion Elevate ambition. The decision to move the realization year to 2028 gives us the opportunity to build a stronger and more scalable business rather than pursuing the original time line at the expense of execution quality, cash generation, capital allocation or targeted returns. The strategy remains intact. The ambition remains clear and our focus through 2026 to 2028 is on execution across the businesses that will take us towards that ambition. To be more specific, I will take you through the individual Elevate commitments, where we are progressing as planned and where we have deliberately adjusted the pace of selected initiatives. The picture is quite balanced. We have a number of initiatives that are progressing well and remain firmly part of our growth plan, while a few areas require a different pace or sequencing based on the conditions we see today. Starting with our core platform, Project and HVAC services remain a key growth engine. Revenue from this area reached approximately SAR 598 million in 2025 compared with SAR 397 million baseline at the launch of Elevate. Despite the market and operational conditions we faced during 2026, we continue to see opportunities to grow the project pipeline, increase tender participation and conversion, strengthen execution capabilities and expand our aftersales and retrofit partnerships. Our current 2028 revenue contribution is projected to reach SAR 800 million in 2028. On the dealers and the wholesale channel business, revenue was SAR 632 million in 2025 compared with SAR 696 million baseline. This channel is working capital intensive, and our core focus remains on maintaining a balanced performance across categories, enhancing the brand and channel mix. We currently foresee this channel to deliver SAR 750 million of revenue contribution by 2028. On the retail and direct-to-consumer, this is an area we are taking more measured approach. Direct-to-consumer represents approximately 9% of B2C business in 2025, and we are reassessing the pace of expansion with a greater focus on profitability, inventory, working capital and cost efficiency at group level. We will continue to pursue the e-commerce opportunity and selective retail expansion where the economics support it, and we are aiming to deliver approximately SAR 100 million by 2028 with around 13% contribution of B2C. On the aftersales channel, the aftersales continues to progress with a strong upward trend from the original SAR 90 million baseline. Our focus is on expanding AMC base and renewal rates, growing demand for spare parts and service jobs and strengthening service quality. We forecast SAR 150 million of revenue contribution by 2028. Moving to our strategic adjacencies. 3PL has made progress since being introduced as a new initiative under Elevate. Revenue reached approximately SAR 13 million in 2025, and the business remains on track with a SAR 30 million 2028 revenue contribution. The focus here is on building a scalable asset-light platform with a strong customer base and recurring pipeline. On our OEM owned brand initiative, this is being rephased. We have not launched the business yet. And the current plan is to target a launch in early 2027, with the brand distribution and awareness built in phases and aligned with market readiness and market conditions. We currently forecast SAR 100 million of revenue contribution by 2028. Direct appliance leasing remains on hold. We have completed the feasibility work, but the model requires significant capital commitment. Given our focus on capital allocation discipline, we will revisit the model as conditions and its economics evolve. There is currently no revenue contribution from the leasing business in 2028 build. Taken together, these initiatives currently give us a 2028 revenue build of approximately SAR 1.93 billion. This brings us close to the SAR 2 billion Elevate ambition while giving us a more deliberate path for how different businesses are developed and scaled. The decisions across the portfolio come down to 3 things: market conditions and demand timing, capital allocation discipline and our focus on sustainable returns and scalability. So the approach we took through 2026 is to continue scaling what is working, selectively rephase what needs more time and remain focused on initiatives where the returns do not yet justify further capital. Now I will turn to how this is translating into stronger cash generation and greater capital efficiency across the group. The approach we are taking is also translating into the way we manage the business day-to-day, particularly around the inventory, working capital and cash generation. We have continued to reduce inventory through tighter inventory management and more strict procurement planning while maintaining the service levels required by the business. This has helped improve working capital efficiency with operating cash flow moving from a significant outflow in the second half of 2025 to positive territory in the first half of 2026. We are now at a level where we are selective in capital deployment while continuing to fund areas where we see the strongest opportunities for growth and returns. This balance between growth, cash generation and capital discipline is an important part of how we are moving forward in future phase. To conclude on how we are thinking about the next phase of Elevate, the first point is what remains unchanged. Our ambition and strategic direction remain intact. The core businesses, particularly the B2B HVAC services and home appliances remain the foundation of the group's growth. The adjacencies we have discussed, including the 3PL, aftersales, retail, OEM and leasing also remain part of the broader elevated journey. What differs is the pace at which we develop and scale each of these opportunities and recalibrate the timing and sequences of selected initiatives based on market environment, customer demand, capital requirements and visibility on returns. This means rephasing initiatives where a different pace can create a better outcome, focusing capital and management attention on the areas that can deliver the strongest impact and maintain the discipline to pause initiatives where economics are not yet in place. At the same time, we are continuing to improve the underlying business through cost discipline, working capital management, operational efficiency and stronger customer relationships. The progress we have seen in cash generation and inventory management gives us a stronger base. So to be clear, this is a tactical reset in execution, not a change in strategic direction of the company. The SAR 2 billion revenue ambition remains intact with realization now targeted for 2028. And the focus through the next phase is on building, scaling and optimizing the businesses that will deliver that ambition. With that, we conclude our presentation and Elevate strategy update, and I will now hand it back to SNB team for the Q&A session. Thank you.

[Operator Instructions] Our first question is from the line of [indiscernible].

I just have a question regarding the Elevate strategy. So from my understanding, you pushed the top line goal to 2028. But can you elaborate about the bottom line? Is it also pushed to 2028? Or you still maintain the bottom line goal of SAR 130 million in 2027?

Thank you, [indiscernible], for your question. The targets of the revenue and the bottom line doubling the net profit are pushed to 2028.

Okay. Could you also elaborate on the weakness in the profit from associates for this quarter? What's the reason behind that?

The lower performance of the associate company was mainly related to the lower demand on project side that we talk about. Also, we manage our inventory by lowering the number of orders from the LG-Shaker, the associate. And this was the main reason of drop in the profitability.

[Operator Instructions] Our next question comes from the line of [indiscernible]. His question states, can you further elaborate on the demand side of the HVAC segment going forward, which would lead to your target growth in the segment by 2028?

So for the HVAC segment, there are 2 parts. The first part is product related and the second part is the services related. Now the services related throughout 2025 and also 2026, there is an uptick in the performance and there is a growth. And this is strategically where Shaker is positioning itself rather than a supplier of equipment and more solution companies for the project segment. So when we talk about the services, we're talking about installation services, we're talking about energy management services. We're talking about retrofitting services, and also the aftersales activity, which comes in form of annual maintenance contracts or agreements. In terms of the project side, the first -- the equipment side, so the first half of 2026, we've seen a softer demand in customer deliveries due to the market situation. However, what we have seen in the second quarter, in particular, an uptick in the tendering and awards activities, which are due to come in the second half of 2026 and later 2027.

[Operator Instructions] Our next question is a follow-up from the line of [indiscernible]. His question states, is there any significant projects in Q2 '26 that were won?

So significant projects, there was an uptick in the award activity by almost 20% compared to Q1. Now these awards are phased in terms of delivery within the second half. Our focus on -- by major, the terminology of major, meaning big projects, yes, we are tendering for big projects in -- specifically in the residential sector and the commercial sector.

Our next question states, what is the expected CapEx for 2026 and going forward?