Riyadh Cables Group Company (4142) Earnings Call Transcript

Good afternoon, everyone. This is Jehanzaib Zafar. On behalf of SNB Capital, I would like to welcome you to a conference call with Riyadh Cables management regarding H1 '25 earnings results of the company. With us on the call, we have today Mr. Borjan Sehovac, CEO; Bahaa Eissa, CFO; and Mouaaz Al-Younes, CSO. We'll first listen to the management's feedback. Following this, we will open the floor to the questions. Riyadh Cables management, please go ahead with the feedback.

Thank you for attending Riyadh Cables' H1 '25 Earnings Call. Today, we will provide a quick overview of the company. Then we will talk about the company's performance during the first half. Next, we will review the financials for the same period. And afterwards, we will provide a recap on the company's strategy and an update on the market. Lastly, we will discuss the management's outlook and the way forward. I'll leave it now to Mr. Borjan.

Thank you very much, Mouaaz. Good afternoon, ladies and gentlemen, and welcome to Riyadh Cables Group earnings call for the first 6 months. As usual, for your background, I would like to remind you that Riyadh Cables Group is the largest regional player in wires and cable industry since over 40 years, 1984. We manufacture and supply all type of cables used in generation, transmission. I want to remind you, transmission is overhead lines, high voltage and extra high-voltage cables. Distribution, which means medium voltage and low-voltage cables. And end users, let's say, low voltage and wires. We manufacture also fiber optical cables, which are used in data transmission. We are able to produce any type of cable needed in the market using our center of excellence plants located in Riyadh without forgetting to mention our plants in Sharjah, UAE and Baghdad, Iraq. Moving to the financial performance highlights. We are pleased to announce an excellent set of first half results, marked by record high financial KPIs, as you can see in the slide. Achieved revenues are SAR 5.2 billion, record high sold volumes of 133,000 tons, 19% more compared to the first half '24. And we are keeping as well an excellent utilization rate at the level of 96%. Profitability metrics are showing significant improvement with the gross profit per ton almost SAR 6,400 per ton. This is 33%, 34% more compared to previous year and slightly higher when compared to the previous quarter. We have an excellent achievement in EBITDA of SAR 654 million, almost 50% more than previous year, and an exceptional 63% increase in net profit at the level -- at the number of SAR 536 million. Free cash flow is at SAR 81 million positive -- sorry, is SAR 61 million positive and with a very low net debt-to-equity ratio, which is 0.22 multiple and the CapEx that we have spent until to date is SAR 81 million. Moving to the backlog on the right side of the slide, we are holding a record high 181,000 tons of confirmed orders. And more importantly, we will see it later in the presentation that the value of this backlog is at the level of SAR 5.7 billion. Moving to the next slide, showing the key performance drivers. We can see that, as I said before, the sales volume increased by 19%, backed by an excellent export. And an increase in transmission, again, both in domestic and export markets. The next point, we can see that the solid demand-driven revenue increased by 28%. And in fact, the performance also of domestic market together with an excellent export, as mentioned before, is very good and it's very good for all segments. Gross profit per ton increased 34% as a result of mix and cost efficiencies. And surely, this is as well, thanks to the very high utilization at 96%. Net profit increased by 63%, backed by strong operating income and firm control on overall cost. In fact, G&A and S&D costs together are again below 3% of our revenue as it was always our target. Free cash flow positive SAR 61 million. This will be accelerating as usual in the second half. In fact, towards the year-end, we are forecasting to be above the level of EUR 500 million of free cash flow. Moving to the Slide #10. Quarter-on-quarter, we can see the revenue increased by 9%, together with the increase of volume of 4%. So quarter 2 very well, very good, stronger than quarter 1. 6 months to 6 months of previous year, we can see the volume is higher by 19%, while the revenue increased by 28%. As mentioned, the market remains solid, both domestic and export. And generally, all cable segments are doing quite well, witnessed once again by a record high backlog of confirmed orders. With regards to the split between copper and aluminum, we don't see any exceptional change. The split is still between the range of 55%, 60% and 40%, 45%. Moving to the next slide, Slide #11, and this is one of my favorite slides as it gives a very good outlook for the future business. We have reached an exceptional backlog of SAR 5.7 billion and record high volume backlog of 181,000 tons. These are confirmed orders in our SAP system with advanced payment received, letter of credit in place and fully hedged metals. This backlog will be realized in the next 6 to 18 months approximately. And this strong demand, of course, keeps our utilization rate at a quite high level of 96%, which we always want to repeat that this utilization level brings also very good operational efficiencies, thus very good profitability KPIs. Thank you very much. Now I hand it over to Bahaa for more financial highlights.

Thank you, Borjan, and good afternoon, everyone. Another great quarter for Riyadh Cables Group Company, leading to an excellent H1 performance results. H1 gross profit has increased by 57% to SAR 870 million compared to the same period of last year. This came on the back of higher sales figures, which were up by about 28% H1 to H1 in previous year, in addition to order selection, product mix and continued efficiencies. If we compare quarter 2 '25 gross profits to the same period of last year, we have achieved an increase of 64% to Saudi riyal SAR 443 million. As a result of this, EBITDA increased by 48% to SAR 654 million in H1 of 2025. That compares to the same period of last year. And when we look at the quarterly performance, Q2 EBITDA increased by 59% to SAR 343 million compared to the same period of last year. Looking at the cash flow. Again, Riyadh Cable's free cash flow for the 6-month period was SAR 661 million. That was in spite of the increase in receivable, inventory, CapEx and other expenses. This is an increase of 45% over the same period of last year, which was QAR 42 million. Again, this was achieved through strong profits, provisions that we've taken during the year. We expect the cash generation to accelerate during the second half this year, which will bring us to around SAR 500 million figure, as already mentioned earlier. These results support our declaration that the company will always aim to fund its operation, including CapEx and dividends from its own cash flow. As for the dividends, as you recall, the company has paid a total of SAR 524 million in dividends for the full year of 2024, which equates to SAR 3.5 per share compared to SAR 2.5 per share in 2023, and that's an increase of 40%. Our dividends, as you recall, for the 2024 was paid out in 2 payments, one in October of 2024 and the second was in May of 2025, SAR 300 million. This puts the ratio of dividends paid to net income to about 64%. Looking at the next slide, the hedging. As previously stated, our hedging and pricing strategy doesn't neutralize the commodity price fluctuation. From the chart that we're looking at, we can see that our gross profit per ton for the first half of 2025 has improved further compared to H1 '24 by about 34% to SAR 6,390 per ton, close to what was achieved in quarter 1 of 2025 of SAR 6,330. Also compared to 2023, there has been a continuous improvement in this figure. This was achieved through continuously improved pricing policy as well as better product mix, mainly transmission cables, operating efficiencies, which were due to higher utilizations, which has reached 96% for the first half of this year, in addition to production lines improvement and vertical integration. The bottom chart shows that regardless of fluctuations in the metal price, our profitability is not impacted by its movement since it is calculated as an absolute number that we applied. Looking at the average copper price over the past 4 years, we can see that the fluctuation -- that there has been fluctuations, but it has not impacted the growth of our profitability. Just a last note here to mention or to highlight the fluctuation in copper prices in 2025 for the first half of this year, prices have ranged between $8,500 to above $10,100. That's a movement of about 19% and yet profitability continued on an upward trajectory. With that, I'll hand it over to Mouaaz.

Thank you, Bahaa. This slide provides a snapshot of RCG's key operating markets, which collectively account for approximately 95% of our total revenues. During the reporting period, market demand remained resilient with Saudi Arabia continuing to be the largest contributor to our volumes, followed by UAE and then Iraq. In Saudi Arabia, volume growth was primarily driven by the sustained momentum in core demand sectors, including giga and mega projects, renewable energy developments, transmission network expansions, decent recovery in utility sector demand, large-scale housing and real estate programs in addition to the oil and gas sector investments. Despite the geopolitical tensions observed towards the end of the reporting period, we expect market momentum to remain strong. This outlook is underpinned by the sustained implementation of vision programs, capital expenditures on giga projects, the preparations for major international events and the acceleration of renewable energy initiatives. In the export markets, particularly in the GCC and Iraq, performance was excellent, supported by infrastructure investments and utility projects. However, in Africa, performance remained stable. Based on the internal market intelligence, third-party research and current backlog visibility, our projected market growth rates between 2024 and 2028 are as follows: Saudi Arabia around 5%, as you can see in the presentation. GCC is slightly above 3% and then Iraq continues to be about 9%. Riyadh Cables continues to execute its growth-oriented strategy, maintaining its position as the regional leader with the largest production capacity and most comprehensive product portfolio within the region. Our strategic initiatives to enhance capabilities and expand capacity are progressing as planned, which is in line with our long-term growth objectives and projected market expansion. We are actively growing our footprint in export markets through high value-added products, broadening our customer base and securing consistent revenues from premium offerings. The company is also diversifying its service portfolio by launching the cable accessories and expanding turnkey project services. This is reinforcing our position as a complete solution provider beyond just a cable manufacturer. With that being said, third-party testing for our medium-voltage cable accessories is nearing completion. In the services segment, RCG currently has over SAR 700 million in high-voltage turnkey projects that are under execution across Saudi Arabia and the UAE. To support continued performance, RCG is leveraging its technical expertise and advanced technologies to drive cost optimization and operational efficiency. The development of a company-wide digital transformation road map is underway and expected to be finalized within this year. On the sustainability front, Riyadh Cables is making measurable progress on its ESG agenda, particularly in carbon emissions reduction. This is going to be detailed in our disclosures in the upcoming 2024 ESG report set to be released this month. Riyadh Cables sustains its leading position with a 38% market share across the core markets. Back to you, Borjan.

Thank you, Mouaaz. So with this last slide, we are glad to announce the upgraded guidance. We are increasing the range of the net profit up to 25%, which take us to the level between SAR 980 million to over SAR 1 billion of net profit in 2025, which [Foreign Language] will be also our record high net profit ever achieved. We also [indiscernible] CapEx to be in the range of SAR 300 million, which is allocated for both capacity expansion and efficiency replacements of old machineries in order to keep our competitiveness at the highest level. In conclusion, we hold a record high backlog with a good mix and good pricing. In the Kingdom, in the region, the macro trends are still very strong. Some of you may see the guidance somehow conservative, but let's see how this new quarter will develop. And rest assured that we are committed to overachieve the mentioned target, assuming, of course, the same geopolitical situation and no major, let me say, market disruption. This is the end of our presentation. I believe we can now start the Q&A session. Thank you.

[Operator Instructions] Looks like we have our first question from the line of [ Khalid ].

Can you hear me now? Am I audible?

Yes, please.

Congratulations on the good results. I have a couple of questions with regards to the backlog. So the backlog grew to SAR 5.7 billion. Could you provide us sort of with a rough breakdown of the backlog? Is it in transmission, utilities or distribution? And I'll ask follow-up question following that.

Sure. As far as the backlog, I would say 70% of what's in the backlog today is for transmission. This includes obviously the local projects and utilities and then the export markets as well. Distribution is about 20% and then we have 10% in end usage, including renewable energy projects.

Okay. And what's the highest margin part of the business? Is it the utilities? Is it the transmission? Or is it the...

Typically, the higher the voltage level, the better the profit margin. So transmission is high and extra high in overhead power lines, and that typically has higher margins than distribution and end usage. However, with the renewable energy projects and the specialty cables are used in renewable energy, they do have good margins over the conventional low voltage and building wires.

And I have one sort of question with regards to the slight drop in the gross margin for the second quarter. Could you elaborate, was that due to higher COGS? Or was it the revenue mix itself?

When you say the drop in gross margin, you're referring to the percentage drop, correct?

Yes. Yes.

So I can answer to this question. The percentage is not the major indicator we are following because there is as well always the fluctuation of the metals, which is fluctuating as well the revenues. But what we -- what is our strategy and what we have done since decades is to follow the profitability on profit per ton. So the gross profit absolute value per ton, which is instead increasing. And this is the real indicator of, let's say, profitability of our revenues.

And just one final question. In terms of the EBIT line. Did we have any one-off ECL impairments or is this a free from any one-offs?

Thank you. We had for this -- during this quarter, second quarter, we had an ECL increase in provisions of about SAR 42 million. And this maybe that's what you're referring to in terms of the profitability, but that was impacted. And this is, as you know, ECL is a calculation that is being used where the company does not have much an influence over the outcome of that figure.

So in total, for this half, we had around SAR 100 million with the first half's SAR 59 million...

You are right, yes. You are right, Khalid, yes.

Dear management, I'll take one question from Q&A box now. The question reads, is it possible to discuss the potential supply to Syrian market given the Kingdom's recent efforts with Syrian government? And would you be impacted by potential capacity constraints?

Yes. Thank you for the question. A very interesting question. Syria surely is giving opportunities to cable manufacturers like ourselves to enter into the new market and all the infrastructure, electrical infrastructure in Syria must be installed or replaced. We have always capacity, of course, to sell to Syria. It is still in early stage because the banking system is not very well established, financial banking system, and this is the key in order for anybody to make business in Syria. But rest assured that this is one of our major targets in the future, not to be present as well as Syria because we believe that in the future, this will be a quite good market [Foreign Language] if everything goes well. But for time being, we don't have any exceptional or any, let's say, move because it is too early still to consider Syria. Thank you.

Next question comes from the line of Andy [indiscernible].

Andy, we cannot hear you. And we see that maybe your microphone is not connected.

I'll take the next question from the line of [indiscernible].

This is [indiscernible] Holding. Congrats on the results. I have one question. If we take into consideration that many of the giga projects are currently under review, how does this impact your planning and visibility of future orders? Talking about the -- you guys raised the net profit growth in this year, I think from '16 to '20 to '25, approximately SAR 900 million to SAR 1 billion. If you could please elaborate on that, it will be helpful.

To answer this, I mean, if we look at the current backlog that we have, and we talk about transmission, distribution, end usage. But if we were to break down the backlog as far as the sectors, 60% of it is projects. And the projects here are 30% renewable energy, 30% giga project, 35% urban construction and about 5% in oil and gas projects. With that being said, Yes. I mean, giga projects are a cherry on top. They're helping our volumes, obviously. There's no question about it. However, in our backlog, not everything there is giga projects. So if there is any possible delays or scaling back or something like this, obviously, it might affect the backlog. However, keep in mind that what we're executing today is something that has been awarded, budgeted already and contractors are working on it. So it's not like it's something that will be awarded soon or it's still in the design phase. So what we have in our backlog is solid orders that have deadlines for execution. We hear a lot, obviously, and we read reports about possible scaling back, and I understand that the investment community is worried about this. However, the latest reports by IMF and others are rather comforting. We haven't seen anything on the ground that's alerting us at this point. We can encounter the usual delays that happen with contracts or contractors, whether it's related to the [ size ] of the projects themselves, but we haven't seen anything to alarm us at this point. One last point to keep in mind is that we have multiple products within the backlog. And they cater multiple projects as well. Keep in mind that renewable energy projects are going at full speed. These are projects that the government has set targets for, very ambitious targets, and they have been executing them quite rapidly. And we have seen that in the awarding rate last year for renewable energy projects and this year so far. So there are some sectors that we're not worried about at all. The giga projects, they might have some impact in the future, but I wouldn't consider it as a huge impact if there were any scale downs. As I said, what we have today -- what's being executed today is what's in our backlog. So if there are any decays or delays, maybe it would happen possibly in 2027 or further than that. And by then, no one to tell what's going to happen.

Okay. Clear. So my second question is, what is the expected payout for this year? Is it a similar range, 60% to 80%?

Well, I mean, as we said previously, we will try to keep or to be in line with what was paid out in previous years. So if we paid 63%, my guess is we're going to be within the same lines, but I cannot give you or a state a specific figure.

But in other words, we don't have any reason to, let's say, make any changes or to reduce the payout. So we'll be proposing to the Board upon the Board approval, similar percentage ratio as we have done in the past.

I'll go back to Andy [indiscernible], again.

Andy, we cannot hear you. Maybe try to make your question. Otherwise, you pass to the next person.

In the interest of time, I'll jump on to the next question. Next question comes from the line of [ Mohammed Adnan ].