Oman Cables Industry SAOG (OCAI) Earnings Call Transcript & Summary

So welcome, everyone, on board. My name is Jad Atallah. I'm the Investor Relation at Oman Cables Industry. This will be our first presentation fashioned to the market through MSX. We share our thanks to MSX for the hard work they are doing and for the support they are providing for the listed companies in Oman. This will be the first presentation to the market in 2022. From this presentation, as you can see, we will be talking about 3 main points: the overview of Oman Cables Industry, the macroeconomics and business environment, and the presentation of the midyear financials ended 30th of June 2022. On this presentation, we have the Chief Executive Officer, Cinzia Farise, on board; and we have our Chief Financial Officer, Ercan Gokdag, also on board. So welcome again, and I will leave the floor to our CEO, Cinzia Farise.

Thank you, Jad. [Foreign Language] Very good morning to all of you. Thank you for this introduction and also for illustrating briefly the agenda because it's giving me the opportunity to enter quickly in the first topic of today presentation, which is an overview of our company, Oman Cable Industry. Over the past 4 decade, Oman Cable has marked his reputation with its unique manufacturing capabilities and efficient operation. 38-year experience, more than 800 employees, a presence in 39 country that we serve today. By conquering a leading position to a long-term customer orientation, our unique team has been able to preserve the vitality of its brand over time and to become undoubtedly a same type of excellence in Oman and in the Middle East. We are proud that we offer our contribution to the industrialization and the economy of Oman as well of the country we serve and to be the exclusive solution partner for the most prestigious project within the region. This is, for us, the occasion to confirm our mission: to link Oman to the future, supporting Oman Vision 2040 through continuous transfer of technology, people empowerment, investment of innovation, sustainable solution in Oman and for the region. This is briefly what we are doing today. Our goal is to link Oman to a sustainable future through a very clear vision to be the leader in our industry in quality and performance and a clear mission to strive for excellence through the integration of sustainable business development and innovation. We are sustained by 3 core values. Empowerment, we are driven by a culture that used to share value, open communication and accountability of all employees of the company. Innovation, innovation looking at a dualistic dimension or low environmental impact but also safety and well-being of our people. And excellence, excellence same an industry benchmark. We are fully determinate on this while creating customer-centric solution. We have a very simple structure, Oman Cable, together with Oman Aluminum Processing Industry, OAPIL, on [indiscernible] by Oman Cable; and another company, Associated Cable based in India, 100% Oman Cable again. Our shareholder are represented by Prysmian Group, worldwide leader in the cable industry, 51% of the share. Public is 37.8%, and the [indiscernible] is 11.07%. When we speak about our facility, we have 3 plant in Muscat. Our facility are -- have an installed capacity to produce up to 120,000 tons of copper and aluminum [indiscernible] medium voltage power cable. The expansion of our facility through the acquisition of OAPIL and ACPL, together with Prysmian Group integration, has allowed the diversification of cable product and business portfolio. We have a testing laboratory, the advanced testing laboratory, that has the capability to perform all the routine sample, special template [indiscernible] tight tester. And through Prysmian Group, we have access to the largest network worldwide for testing facility. We also have 2 plant outside Muscat was in -- based in Sohar is a plant for the production of rod and conductors aluminum, basically pertaining to API, our affiliate in Sohar; and another plant in [ institued ] in, India through ACPL is the first and unique plant in India for the production of instrumentation and control cables. It's clear that through the with Prysmian Group, we have successfully industrialized revolutionary advanced proprietary technologies with an infrastructure of other innovation. And we also recently introduced new solution that meet efficiency, safety and durability requirement for our customer. Getting stronger to the integration with Prysmian Group, we speak about people through program and opportunity of training offered by all the 4 academy at Prysmian Group level partner with the international business and technical schools. We speak about innovation. We are -- we do continue to transfer technology and knowledge to the country, leveraging on 25 worldwide center at global level. We speak about the excellence combining the best practice wide in the cable expertise. We speak about solution through an integrated portfolio of cable and services. We speak about quality. Through the most advanced international quality standard, we speak about servitization when we speak about asset management and intra management. And we speak about network because we offer whatever is in term of cable solution to our partner, looking at more than 108 plants in the world and a presence in 50-plus diversified country to address all the cable requirement coming from our customers. This is clearly creating significant value for all our stakeholders. Sure. When we speak about our journey, it is difficult to fix all the different achievement throughout the year. We made this exercise, considering that the most relevant pillar of our history are looking at the major expense in low-voltage cable in 1993, in the major expansion in medium voltage cable in 2003. But also with Prysmian Group becoming shareholder -- main shareholder in 2015, we speak about the creation of our advanced test laboratory here in Muscat, the ACPL acquisition, the OAPIL total acquisition and the launch of diversified product and solution like Trial [indiscernible], special cable to serve the entire industry in Oman and in the Middle East; digital solution extended for our launch of sustainable cable for the renewable energy sector; and last but not least, the launch of [indiscernible] and the instrumentation cable commissioning with the first order that is today under production. When we speak about '22, we speak also on our sustainability plan, our ESG plan, being our goal to continue to link Oman to a sustainable future. We decided to build our commitment in front of all our stakeholders with a specific strategic approach, engaging more and more all our stakeholders. We did specific planning, sustainability organization, 39 business sustainable ambassador, and a special plan made by KPI and target to be achieved throughout the year and investment dedicated to sustainability. We have -- we are assisted by KPI management system online, where we measure our target achievement in real time. And last but not least, we are launching our Sustainability Academy, which will be the fifth academy at Prysmian Group global leader. Sustainability has always been a priority for us and now is becoming the main driver of our strategy and vision across all level of our company. As you see, we have clear ambition, an ambition which is made by a net-zero vision when we speak about energy management, renewable energy services, when we speak about recycled material and low-carbon product, risk management and pro circularity. But we speak above all of people vision where health and safety are at the top of our mind, diversity and inclusion, talent management to people empowerment. And when we speak about corporate vision, now we have a sustainability coordinator still in committee, meeting every month to analyze the achievement in our ESG plan. We will have for the next year a sustainability report, and we continue to work on our sustainability management system. You see on the right side a list of project, concrete project, that we are developing in the 3 ESG pillar of our strategy in all companies of our group. Sure, there are important initiative that I don't want here to mention very much in detail. The only one that I would like to illustrate a little bit more in detail is our Sustainability Academy. As I was mentioning, this will become the fifth global academy Center of Excellence for Prysmian Group. This will be based in Oman in Muscat but for the entire group. We already moved the first step in order to create a specific link with the best university and excellence center in [ thermal ] Academy within the world. And this will be based in our advanced testing laboratory just to underline how innovation is embedded on sustainability and how sustainability is starting from scratch when we start creating, when we start innovating, when we start delivering sustainable product to our customer. And all this activity is bringing some interesting result. If we look at the most prestigious project we were able to achieve in Oman and outside Oman, just to mention some: the [ OERLive ] House in Muscat; Salalah Airport, Muscat Airport; Oman Convention Exhibition Center Max Expressway; the Amin Solar Park; Duqm Dry Dock; and last but not least, the [indiscernible] Sustainability City where we will provide the first batch of Cap for the infrastructure. Some other important prestigious project in the region we are following: [indiscernible] in Abu Dhabi; [indiscernible] that will be the most relevant train projects in the region with a length of 800 kilometer. It will be the -- we will serve the Hitachi Rail STS as our system that will become the longest distribution network -- rail network in the country. We were serving Burj Khalifah. Our cable -- fire performance cable are in the most prestigious building of the region, if not the world. Dubai Frame, Bahrain International Circuit, Kuwait Airport, where all cable are made by Oman Cable; Qatar National Museum; and last but not least, [indiscernible] Gas Project. With this, I have finished this very short illustration of our vision mission and main target that I think it was important to underline and to express considering, as Jad was mentioning, this is the first analyst meeting for Oman Cable. Let's try now to enter a bit in the macroeconomics in the business environment that what we see at Oman Cable level, looking a little bit at the macroeconomics in the region but also to the opportunity that we see more and more from now on. So it's clear that despite the scarring from the pandemic in term of higher debt and lost job remain, we see an economic activity in the Middle East that has remained robust with 2 different situation. One is related to oil exporter that are benefiting from rising of oil revenue and with oil exporters that are gradually catching up to their pre-pandemic outlook trend. On the contrary, we see gap for oil important expecting remaining wide. We see also increasing uncertainty, including through oil price and financial market volatility that could determine consumption and investment in the region. We were facing a first half that was clearly showing very high inflation, maybe unexpected at such level. It's clear that this difficult backdrop was followed by the Russia invasion of Ukraine with, as I was mentioning, a mixed economic impact on the regional sales. We see an average growth for the region that remain at 5.9% for 2022. Some [ clout ] may be more for 2024 for oil exporter also in general for the financial market volatility. We see some strong opportunity coming from some of the country where we are in city and speaking of Saudi Arabia on UAE in Qatar. So let's say, all in all, we can say an economic activity that remain robust for 2022. What we see on -- as an opportunity is on the other side, the new energy economy emerging in this macroeconomic environment. Our role will be to help to meet the 3 big challenge of today. Our role is to leverage on the opportunity -- on this opportunity of the energy transition, of the digitalization of the world, of the electrification more and more of the society. The transition, obviously, to the sustainable energy is asking for the capability to transmit and dispatch the energy from one place to the other from where it is produced to where it is consumed and the capability to build a reliable and capable grid for transmission but also for distribution will be key for the integration of renewable. And we think we have a great opportunity to play in this content. We are surely between the enabler of this transition and by our wide product offering to the market we have, and we will continue to have more and more an interesting role in the energy transition. I -- first of all, I think it is the perfect time to broaden our vision to the new opportunity for our expansion and growth, looking a bit beyond the comfort zone and exploring the unexplored potential in the region. In short and in conclusion, we can speak about Oman Cable for a success story that will leave behind but also agree to challenge, which is represented by the energy transition. With this short conclusion, I will leave the floor to our CFO for a deep analysis of the financial result. Ercan Gokdag is online at the moment. Ercan, the floor is yours.

Thank you very much, Cinzia, for the extensive presentation. I will try to demonstrate how the turnover has moved from 2021 first half to 2022. On the left-hand side, we see the distribution channel split of 2021. The turnover was OMR 84 million, roughly around that number. And in 2022, first half, with 14% increase, we moved to OMR 96 million. If you look at the composition, we see a growth on domestic market from 49% last year to 56% this year, which is compensating the reduction in the export channels. We see that there is Prysmian Group share. What is the intention and what is the collaboration between Prysmian Group here? As our CEO mentioned, we try to bring technology from Prysmian to Oman. On the other side, when there is available capacity for Oman Cables, we are trying to bring some business opportunities from Prysmian Group companies to utilize our capacity at the best level. In the next page, we will see the revenues by segment. Here, the intention is to give some information about our business units. First, we see T&I, trade and installers. Here in this business unit, we are mainly serving to our distributors in GCC. We see that there is a decline from 53% to 44%. This is reflecting the reduction on the infrastructure investments in GCC. Therefore, you see a reduction there. On the other side, there is an increase on power distribution from 33% to 35%. On power distribution area, we are serving 2 utilities in GCC plus any utility of Prysmian Group around the world. So here we see some new flows with Prysmian Group, which is helping us to increase our share by 2%. And the third one is oil and gas projects. Here, as it is mentioned, oil and gas projects or the maintenance activities, new projects or maintenance activities are reflected. And the biggest growth is on this area from 9% last year to 15% in 2022. As you know, during the COVID period, there was a strong reduction in the oil prices, which kept all the projects stable and also postponed the maintenance activities. In 2022, while we see some recovery on the oil price, we also started to see the activity going back to previous level, even maybe at a higher pace. So we are seeing such a big jump from 9% to 15%. So if you also have a look at the profitability in the next page of these business units, we see that trade and installer again has the lion's share despite a 44% sales. This is 46% profitability in 2022. Then there is a big jump on power distribution. On the power distribution, usually, we have long-term project prices. So we have fixed prices for the contract period. And during the 2021, while, raw material prices were fluctuating significantly. The increasing raw material prices were reducing the profitability of these businesses. But -- while we need to contract prices, we are able to reflect raw material price increases and update our profitability. And coming back to oil and gas, again, we see a jump from 10% to 15% since in 2022, instead of bulk new projects, we are serving mainly to maintenance projects. This is giving us an opportunity also to maximize our turnover and serve different many orders, which are small, but also in terms of profitability is good. If you look at the next page, here, we see the revenue by quarter. We mentioned that there is 14% increase. And if you look at last year's second quarter, we were having OMR 41 million turnover, while this year, there is OMR 49 million and OMR 46 million. Therefore, the 2 quarters of this year better than last year. And this 14% is generated from raw material price increases on the metals, which impact our prices. There was a significant increase, which supported the turnover increase. On the other side, there is a mixed improvement, so more value-added products. And finally and which is very important also for the future quarters, there are new innovative products launched, which is also due to the collaboration with Prysmian Group. Looking at EBITDA and EBITDA margin. We see 41% increase on EBITDA in the first half of the year from OMR 4.1 million to OMR 5.9 million and also EBITDA margin increasing from 5% to 6.1%. If you look at the quarterly split, last year, second quarter, we had OMR 1.6 million. This year, we doubled it, and in the same quarter had OMR 3.3 million EBITDA. Also, the EBITDA margin has been maximized by 7.1%, which is a great success for the quarter. And this success is coming from 3 main elements: dynamic pricing in order to reflect raw material price increases continuously; and cost improvements through design to cost, which is very important because this is keeping us competitive on a daily basis and keeping our opportunities always live; and finally, continuous focus on fixed cost management. This is a discipline that we never give up. Looking at net income. Last year, same period first half, OMR 2.4 million was our net income. And this year, we increased it to OMR 3.6 million with 49% improvement. And on the quarterly basis, last year second quarter, we had OMR 821 million. And this year, we had almost OMR 2 million quarterly net income. And this is due to successful price management, keeping overheads under control and the financial discipline. So from the P&L point of view, I think it was a very good first half for 2022. If you look at the balance sheet side, as a company, we are always very disciplined also on the balance sheet side. On the left-hand side, you see DIO, which is showing our inventory days. At the moment, there is a significant supply chain issue all around the world due to the lockdowns on China side and also the transportation issues. In this environment, it is difficult to bring the material on time. So it requires a very detailed inventory management. Therefore, we are always focusing on our stock levels and trying to keep inventory at a level which help us to give quick reactions. On the other side, it's also important to keep inventory at a minimum level because the cost of money is increasing. What has happened here? Last year, first half, there was 49 days; December, 53 days. And at the moment, we are at our best with 46 days of inventory. Looking at collection trend, DSO. last year, in the first half, we had 122 days -- collection days. At the end of the year, we maximized to 108. So at the moment, even though we are not at a year-end, we are also very focused on the collections and reduced it from 122 days to 114 days, so 8 days improvement compared to last year. On the DPO, which is our payable days, suppliers continues to focus on cash payments and trying to improve their collection terms. On the other side, we are trying to maximize our payment terms, first, to find the product with the cheapest cost; second, to bring it on the right lead time; third, to buy it with the longest payment terms. So we see that in the second half of -- in the first half of 2022, we increased our payment terms to 6 to 9 days. And all in all, if you look at the right-hand side, these 3 components gives us a big improvement on net working capital to annualized sales. Yes, it was 33% in the first half, 32% in the second half. And at the moment, we had a 24% level on net working capital to annualized sales. So we are also experiencing our best on this aspect. And this is giving us a big cash generation. So if you look at last year's same period from OMR 24.5 million, we increased up to OMR 31.7 million. So in the first half of year compared to year-end closure, which is OMR 28.4 million, there is OMR 3.3 million cash generation despite we paid dividends. So also on the balance sheet side, there is a strong financial discipline we can mention, and we will continue to seek improvements on this area. This is all from my side. Thank you very much.

Thank you, Ercan. So this is the presentation from our side. And now the floor is for questions and answers. So please go ahead whoever has a question to raise, and we'll be happy to answer.

Anyone has any questions?

Jad, this is Sameer. I have a couple of questions. First, you mentioned about -- the CEO also mentioned about there were new product launches over the last 1 to 2 years. Could you quantify how these products would add to your top line margins and net profit?

I can answer. Thank you, Sameer, for your question. The most relevant activity we are now focused is to grow in a sustainable way. In this sustainability approach, there is the introduction year-on-year on important product that can assist and that can help us in growing in a sustainable way. This is part of our group project that is moving on 2 guidelines: one is through the geographical expansion, the other one through the product range penetration. Our mantra is to grow, trying to exploring the unexplored potential in the region, to boost our geographical presence and to enable new business or reentering a new business. It's clear that all these new product are special product, added value product that require a transfer of technology and knowledge that we are continuously introducing in the country and in our company. And they are answering to higher-quality standard that are also recognized outside Oman, so giving us the opportunity also to increase our export. We are sticking on special cable dedicated to a different industry, supporting for sure our expansion and our growth and giving us the opportunity through an increasing promulgation of our product to participate to Prysmian Group opportunity in interesting part of Europe. I hope I have answered to your questions, Sameer.

But again, because we -- since 2016, I guess, the Prysmian Group increase the stake in the Oman Cables. At that time during the management meeting, they were telling about the introduction of these kind of products since then. So we've also been trying to get more details out of it. Since you mentioned about it, I'm -- we are -- I'm just trying to get an understanding how that specifically improve your margins per se, okay, if you can quantify it from this much percentage, you are expecting it to increase to -- do you have any kind of target to the EBITDA margins on these products that...

Let's say, we have a specific pricing for each and all products we are introducing. These are, for sure, value-added product that give us the opportunity to enter a new segment. When we speak, for example, on solar cable, when we speak on dry land, when we speak about airbag, these are all product that are not standard at all that have specific pricing, maybe also less competition, let's say. And we have a specific launch project for each of this project -- product. Yes, for sure.

Okay. Okay. Understood. One -- another question from my side is on your capacity utilization. So what's the current capacity utilization? And what these new product launches means? Does the -- are you -- do you have any plan for CapEx -- growth CapEx?

Yes. We have plan. We are just concluding our 3-year plan, and we are now ready to launch our plan for the next year that will be followed by a 3-year plan for sure. We -- at the moment, we have a good capacity utilization, but this is depending on the different product. While the mix is increasing, not necessarily we consider this operation in terms of tons. We are considering the different line of utilization. For example, we recently introduced the instrumentation and control cable that are special cable may be in term of volumes. We don't see the same bulk as in the standard product but our added value product that give us the opportunity to compete in a very, very diversified segment. So despite -- in term of standard product, we think we have a good capacity saturation. We are introducing a new line that are giving us the opportunity to differentiate. In this moment, the mantra is to increase our knowledge through new technology, new product that maybe are not increasing dramatically our capacity but are focusing on or anticipating the new market needs.

Okay. One last question from my side. In the first half of 2022, out of your top line, what percentage comes from these new product you launched?

We are continuously calculating. It's clear that if we consider the product launch of the last 2, 3 years, let's say, despite the difficulties and considering the geopolitical situation, considering the macroeconomic trend, we can say that the new products are at a range of -- remain in the 10% of our total production.

[ Joyce ]?

Just a very quick follow-up question on what Sameer was asking about, the capacity. You just mentioned that your capacity is around 120,000 metric tons per annum. Is that including the Oman Aluminum Processing company? Or is it only for your desal plant?

No. This -- normally, we consider the cable business capacity. As you see in the presentation, maybe Jad, you can go, we have also OAPIL capability. That is not considered when we speak about 120,000 metric tons because in this case, we have to speak about rod and conductor capacity, which is around 55,000, 60,000 per year. In this sense, also when we speak about OAPIL, we have an opportunity to increase our capacity. The available -- we have available capacity for further expansion in the same area that is quite interesting at the moment.

Ercan was talking about the revenue mix, which shows that more than 40% of the revenue is coming from Omani market. How do you see the future? What's your outlook on the product demand going forward from different markets in the region? And when do you see that -- earlier, if I remember, 5 years plus ago, the revenue contribution for Oman Cable was primary revenue contribution was from exports, and Oman Cables used to be the largest exporting house from Oman. So when do you think that you will regain this position as your -- more revenue will come from exports than the domestic demand? And which are the countries that you think will be contributing to that?

As my colleague -- as Jad was mentioning, through Prysmian Group, we have access to a larger opportunity, which is not representing also by the area but also for external market compared to the GCC country or the Middle East. It's clear that we are speaking on the necessity for the company to be ready to compete and to create more opportunity in this sense. What we are doing is to try to transform a standard-oriented company in a specialized-oriented company, introducing more and more specialized cable. I think that the very competition in the future will be from one side to assist the biggest utility in the area to boost the energy transition through the edification of important power grid; on the other side, to be able to supply the necessary product to assist this energy transition. And I think that in this sense, in the future, we can become more and more competitive abroad. Please consider that today anyway, we have a presence in 39 country in the world, which is introducing a very diversified geographical arena for us. But I think that as more as we are able to introduce also in the country new standard and to qualify, sure, it is an investment. We don't only need embedded investment in new line and cable facility, but we need also investment in homologation in certification to participate and to beat and to assist the broader. And we are doing so. I think we have a very interesting presence in the country that we see moving interestingly in the next future. Maybe they recover from the COVID period was -- is still ongoing, but we are quite positive about the future. I'm convinced that our capability to support the market is normally a little bit delayed compared to what the market is pricing. So I'm quite confident on the first half of 2023 just to answer also to your first question.

Okay. And so my last question is on your Sustainability Academy that you said you'll be starting in Oman. Is it a commercial enterprise or just an R&D center, which will support the off-road Prysmian operations?

Thank you for this question because it's giving us the opportunity also to clarify a bit a question that is coming from many, many stakeholders today, knowing about our focus on the sustainability approach. The Sustainability Academy, as I was mentioning, will be the fifth academy of Prysmian Group in the world. I have presented to build this academy here in Oman. The academy is dedicated to all employee of Oman Cable and to all employee of Prysmian Group. So through this academy based in Oman Cable, we will assist around 30,000 people coming from all over the world. So this is an excellence center, academy excellence of our group for our group essentially. It's clear that this will introduce the opportunity to prepare the sustainable leader of the future whilst contributing to our plan to the local needs. And it remains an academy for the company and for Prysmian Group in the world but will be based in Oman, and we leverage for sure on the cooperation and support of all the most relevant institute in the country.

Thank you, Joyce. Shaheen? Shaheen, I can see you raising your round, if you have any...

Surely. Congratulations on a good set of numbers. Just wanted to get your view on -- we've seen commodities come off its peak recently. Talk about copper, giving back its gain. It's down by about 21% year-to-date. Aluminum is down by about 15%. Steel is down 10%. What is your outlook on commodities that is priced for the second half of the year?

Yes. Thank you for this question, Shaheenn. As I was mentioning before, this is clear that this volatility is the main topic we are facing. It's true that we are facing it starting from March, April 2021. So this is not new. Maybe it was not so much related to copper and aluminum in the initial moment, but it clearly came up later. But the raw material price increase was surely the big challenge of the second half of 2021 that is continuing today. I think that the Russia-Ukraine conflict emphasized again this matter, especially related to metals. We see also while managing the situation related to our main customer for -- from OAPIL that the challenge is clear, and it is a worldwide challenge. We are facing it while concentrating very much on dynamic pricing. We are facing transferring most part of the raw material price increase and certainly, the fluctuation in the metal to the market, but it's clear that we are not up. We are absolutely -- no doubt, these remain the most the risk and challenge of the second half of 2022.