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

Thank you, everyone. We had some technical problems. Thank you for joining us again. We're having the first analyst meeting for 2023, representing the audited financial results of 2022 Oman Cables Group. On board with me, I have Cinzia Farise, the Chief Executive Officer; as well as Rinke Kieboom, the Chief Financial Officer. And I believe we could kick off the start of this meeting. Again, welcome everyone on board. We will start by sharing the presentation. So starting the presentation, the agenda will cover 5 items, starting with an overview of Oman Cables -- starting about Oman Cables' industry overview; macroeconomics and business environment as the second point; growth as a mantra, as a third point; sustainability as a compass, as a fourth point, considering the importance of sustainability, as the financials as well, and ending with a highlight on the financial results of 2022. I will leave the floor now to the CEO, Cinzia Farise.

Thank you very much, Jad. I apologize for your patience for this meeting due to this technical problem. We will try to recover a little bit being a bit more close to the point. So from my side also, [Foreign Language]. A very good afternoon to all of you. Thank you for assisting to our presentation today, your interest in our company, and its performance in 2022 is well appreciated, as well as, we will have the opportunity to share together the challenges and the opportunity for 2023. Let's start with a very brief overview of our company. You will know that Oman Cable is a well-known and popular cable manufacturer in Oman, producing and marketing a totally integrated variety of electrical products and services, especially including power cable, but also during the recent years, including more and more advanced and the special cable product and the variety of its portfolio. 38 years, 39 countries covered by our export, more than 800 employees, with a clear vision to remain the leader in our industry, in [ Polyken ] performance throughout our product offering and exceeding the expectation of our customers and stakeholders, a clear mission, integration of sustainable business development innovation, while continuously strive for excellence in all as aspect of our business and 3 core values: empowerment, with the culture driven by open communication; accountability and share values to our people; innovation as the main driver to grow in a sustainable way, in a different dimension. Not only consider financial, but also environmental and social impact of all our activity and excel as customer-centric solution to determine the setting an industry -- as industry benchmark. We -- our facility are based in Muscat, essentially with 3 plants; the plant #1 dedicated to energy cable, plant #2 dedicated to industry cable, but also more and more to our specialties; a third plant dedicated to PVC compounding. But we are also -- we establish our advanced test laboratory, and very recently our Sustainability Academy. But we have also a facility outside Oman through 2 different companies. One is OAPIL based in Sohar, for the production of rod and conductor aluminum; and ACPL based in Chiplun, India, especially related to special cable instrumentation and control. During the last few years, we get the opportunity to integrate with the special partner, Prysmian Group. Prysmian Group, who is the worldwide cable leaders, is bringing value creation for all stakeholders through a great step forward on our people, managing a program and opportunity for training at our [ 4 ] academy in the world, managed in cooperation with the best international business and technical school in the world. Innovation. We have 25 worldwide Prysmian R&D centers all around the world, and we try to translate innovative and product and integrated solution also in Oman Cable excellence, combining 150 and more year of worldwide cable expertise and enlarging our solution, solution that are more and more looking at integrating service where quality in terms of testing facility and best knowledge, international quality standard are applying together with the servitization. More and more, we are translating the [ digitization ] as one of the main pillar of our innovation through revolutionary technology in terms of asset management and supply chain above all. We can count on a huge network, more than 100 -- specifically 108 different plan in more than 50 countries the world where we can address any customer cable requirement anticipating the need of our customers. We are happy to share with you the most relevant project achieved in 2022 in Oman and in the region, for example, with the [ ET ] Sustainability City that is certainly the largest sustainability community, with the ambition to be the first net 0 emission community in the country of Oman. We participate and we are winning the tender for the supply of cable for Ras Markaz crude oil storage terminal in Duqm, in Burj 2020 based in Dubai, UAE, one of the tallest commercial building worldwide. As well as also speaking about UAE, Dubai, the possibility to participate Al Warsan Waste to Energy, which is the largest biopower project in the world. We also achieve a great opportunity for Borouge Phase 4, as you all know, is the UAE, in Abu Dhabi, petrochemical complex. That is now reaching Phase 4, and we will participate also to this phase. We are also achieving the opportunity to deliver our product and services to La Mer, Dubai, the eclectic beaches on -- of Dubai, UAE. We also are participating in[ Ajeek ] refinery in Saudi Arabia. We completed recently the -- our delivery to Etihad Rail, the UAE national railway network. We completed our Expo 2020 metro line in term of [indiscernible]. And also, we have -- we will have the opportunity to participate to Cairo monorail project in Egypt. These the main achievement in term of big bulk project in 2022. Looking a bit now to macroeconomics. First of all, a look to our year '22, where we cannot meet that it was a really complex year, to say the least. In 2022, 1 year ago, we were predicting that GDP would exceed $100 trillion for the first time, but when this was preview, the inflation in the world was not double-digit. There was no war in Ukraine. The recession was never mentioned as a [ spector ]. After this 1 year, the world economy is likely to face a recession, especially due to interest rate hikes in response to rising inflation. And the volatility in the global economy is complicating a bit the scenario. Maybe it will complicate also the net 0 transition, but it is clear for us that they need to scale up climate solution -- is and continue to be very much evident, especially if the path at our net 0 is -- remained the strongest commitment worldwide in term of sustainable economy, and this -- we are convinced it will create unprecedented opportunity for low emission offering. In this global economy transformation, we see some we see some grow potential for our solution, for climate technology and solution. So all in all, it's through a global recession that is at our door, maybe, but together with new urgency, we see also some grow potential. What about the reading we do on GCC country, we are convinced that the region is much well positioned compared to the rest of the world, and despite the situation, is expected in term of volatility, in terms of turbulence in 2023 -- the region is still expected to grow at 2.7% in 2023. That is over twice the pace of the world economy. Even if the grow is moderate in term of GCC for 2023, this remain above the average pace of the 5-years preceding the pandemic. And also, we see that these domestic economic condition across the Gulf will be strong in 2022. This especially is related to the first quarter of the year, and this is certainly supporting the business sentiment. In the meantime, the conclusion for this macroeconomic overview can suggest that, while the base is still projected to be higher in this part of the world versus the rest of the world, we see some specific country, especially, for example, Saudi Arabia, that are representing one of the fastest-growing economy this year in the world and also an interesting trend in term of tourism that is bringing support to the growth of the [ oil ] sector. So let's say, a mixed project in 2023 for world GCC is concerned anyway better than the rest of the average of the world. What we see in our country, in Oman, we know that the International Monetary Fund forecast the real GDP for Oman at [ 4% ] and above for 2023. At the same time, we see a very interesting movement that was also well underline and announce during the 3 day of the green hydrogen summit in 2022, where the hydrogen strategy -- the green hydrogen strategy of the country was unveiled. We see this trend going very much in line with the Oman net 0 target recently announced by His Majesty Sultan Haitham bin Tarik, and we are very much ready to support Oman hydrogen ambition, considering that in order to develop reliable grid infrastructure, the power transmission and the distribution will be key for the integration of renewables. In this sense, our company can be considered clearly one of the enablers of this transition, tower decarbonized future energy system. With our product offering to the market, we are convinced to continue to play a very important role in the energy of this country, but also in the energy transition, our [ sustainings ] of product are ready to support the ambition of the country. And this is to say that we are ready to go beyond growth. If we look at 2022, we were improving our adjusted EBITDA of 48% compared to 2021 from OMR 18 million -- OMR 11.8 million to OMR 17.5 million. The net result at the same time was improving 87% from OMR 597 million to OMR 1,117 million. And we are ready to do our part to continue to grow in the country and outside the country to 5 different pillars: pushing business development from one side; investing in our people and in our asset; transferring technology and knowledge to the country; boosting innovation and digitization; and supporting our community; and local empowerment. All this in line with the commitment we have at our 2040 Omani vision. You see on the left side of this presentation, our celebration for the first Sustainability Day in Oman Cable in 2022, and in the second picture, the celebration of our Sustainability Academy, also ready to give a global perspective to our country. So basically to go beyond [ grow ]. Despite we see some macroeconomical environmental uncertainty in the world, we have a clear plan for 2023, 5 different charter to reinforce our business model and to guarantee our grow in 2023, but also in the medium term, pushing business development, investing in our people and in our asset, transferring technology and knowledge, boosting innovation and digitization, and supporting our community, and local empowerment, in brief, to continue to link Oman, but also the entire region to a sustainable future. After seeing this, we passed to the following chapter what we mean about grow for us. Grow and innovation are linked for us. The company had, but also will continue to play a key role in the country of Oman, and we are aware of this rule, but also of the related responsibility, which is why our vision but also our investments are focused on grow. We are convinced that it's time to look a little bit beyond the comfort zone after this 1 year good results, to explore what is unexplore and what is potential in the region for all the different business. Our innovation is at 360 degrees as a catalyst for grow, and when we speak about innovation, we don't speak only about creativity or idea, but we really go deeply at its heart, speaking about how resources allocation are important when we speak to the necessity to empower people, so to transfer [ knowhow ] to this country, but also to identify the needed asset in order to guarantee this innovation and new product and services. And last but not least, how it is important that the management is providing direct attention in support of the best ideas, which will be our investment for grow. We have a dedicated plan to grow in Oman Cable. This is the first batch of investment that we are also publicly announced. The first one will be related to new product in '23 and diversification and sustainability. The second one is a very important investment to guarantee OAPIL expansion in aluminum. And all in all, we preview a payback for this investment considering at least 1, 1.5 year for the investment completion, of not more than 4.5 years, which will be the most relevant investment when we speak about new product diversification and sustainability. The first one is the ambition, the dream to become renewable excellence center, not only for this region, but for the entire world, considering also the importance of -- the intercompany flows are acquiring more and more as -- sales opportunity in our company. And in this case, we will need to optimize but also to enhance our capacity and to improve solution for specific solar PV cable. In this moment, we are already producing solar cable in our company. We are trying to optimize this solution in order to become [ excellence ] center worldwide. A second relevant investment between this first chapter called the new product diversification and sustainability, is the opportunity to be harmonized for the European market. We insist when we speak about transfer of technology and transfer top knowledge, on the opportunity to give our company to enlarge the [Technical Difficulty], the geography of its export, and through the capability to be compliant to the construction, product regulation in force in Europe. We already are achieving important project also, not only in the residential business, but also in oil and gas, also in the renewable business, and we are fully determined to reach the highest standard in term of construction, product regulation and to complete it throughout the year in order to be able to cover all cable produced by OCI with this very high standard regulation or [ motivation ], and this obviously will be the base to expand our export capability all around the world. The second big chapter I was introducing is related to the OAPIL expansion, [ OMR 1.8 million ]. The focus is on aluminum, while we assist to progress with switch from copper to aluminum. We needed to enhance, optimize our conductor capacity in OAPIL. OAPIL is our facility in Sohar, producing rod but also conductor capacity. These will enable OCI to become renewable excellence center worldwide, but also will support very much the expansion of Oman infrastructure in the country, as we are already participating to the Phase 1 of the OETC connection throughout the country, but also again here to participate and increase our export and intercompany opportunity that now are becoming extremely interesting, especially in Central Europe. This is all for what is concerned, the chapter related to grow. But as you may recollect, our main target is to grow in a sustainable way, which is why we put sustainability as a compass, and our ESG planning for 2022 was a completion in term of time and in term of action that it was a preview. So we identify our governance in 2022. We engage our stakeholders, not only our people, but enlarging our Scope 1 and 2 -- Scope 2 and Scope 3 of the sustainability approach. We made our materiality analysis and assessment stakeholders. At the same time, we identify our ESG KPIs, and we built our full work system that we are following on a monthly basis at steering committee level in the company. At the same time, we built our sustainability management system in order to guarantee a quality approach to this journey. And also, we are preparing our integrating reporting system that we are fully determined to translate into reality within 2023. This planning was supported by numerous project that we translated into reality when we speak about environment, social but also governance. Here, in this slide, you see a long list of project where all our activity were readdressed, giving and paying attention not only to our financial and economic performance, but also to the impact on environment and social and governance activities. Which is why we want to mention here the successful SHE STEMS, long-term program that we started in 2022 in cooperation with the Ministry of Higher Education and Minister of Labor in Oman. 20 unemployed ladies -- Omanese ladies were engaged. They are completing in this moment the 6-month program. As you see in the central picture, they are now a completion their training in our plant, assisted by our manager. The course will be completed end of the month, and we will celebrate with a specific Diploma offered by the Ministry of Higher Education. The second big activity are our Sustainability Days. We are proud to say that we were involving not only our massive -- through our massive participation, all our people, but also the main stakeholders, customer and suppliers, with more than 350 stakeholders attended in person and 70 remotely and with a strong focus on climate, social innovation ambition, but also health and safety. And last but not least, our Global Sustainability Academy. This was a dream of Oman Cable to establish in Oman for the entire Prysmian Group worldwide the Sustainability Academy where all our manager worldwide are train, are shaped to become the sustainable leader of tomorrow. We inaugurate our Sustainability Academy. We opened it in the last January with the first participation of 27 colleague coming from all over the world, 1-week training supported -- one of the most relevant business school, Polytechnical Milano from Italy. And then, we are continuing our journey for 2023. We made our materiality assessment process through a stakeholder engagement in order to identify the focus point of our ESG plan for 2023. There was a massive participation, means that, also in our region, sustainability is becoming more and more effective on the activity of all companies interacting with our company. We are now preparing our sustainability impact scorecard, having in mind the 4 pillar climate ambition, not only Scope 1 and 2, with net 0 by 2035, but also Scope 3, net 0 by 2050, with our 2020 social ambition, with our innovation strategy, where all our product now are designed for sustainability and where we are introducing the eco-cable labelling on our product, and looking obviously at the universal SDG goals, that are bringing now us to identify 6 pillar impact also: [indiscernible] climate, green and circular economy, diversity and inclusion, people well-being and solid governance and ownership as a category for our sustainability impact scorecard for 2023. With this last chapter -- is -- I will leave the floor to [indiscernible], our Chief Financial Officers, in order to illustrate you the result of 2022.

Okay. Good afternoon, everyone. The first page is an overview of our sales. As you can see, the absolute sales in 2021 above OMR 227 million, growing to almost OMR 259 million and OMR 222 million, which is a growth of 13.7%. In the picture, you can see the split between domestic export and intercompany, and comparing the 2 years, you see a growth in domestic and in intercompany. The next slide is this -- it's the same sales, but that divided in business units, and where you can see -- that we see a strong growth in 2022 in the business units, PD, oil and gas and water industries. This slide is giving you an overview of the contribution margin by business unit. You have -- if we look at the index, you see T&I, which stands for trade and installers; PD, power distribution; OG, oil and gas; OEM is industry network components; and WC and other industries. You see a very nice split between the various business units. We have a good contribution in 2022 with some growth in PD, oil and gas and other industry segments. If I look at the next page, we see the revenues. The growth in absolute value in Oman rial, in 2020 OMR 175 million growing to OMR 227 million in '21, and then to OMR 258 million, almost OMR 259 million in 2022. As I said before, 13.7% sales increase in 2022 mainly due to raw material price increases, which we could pass on to the market, and mix improvement and new and innovative product launches. If I look at the EBITDA in absolute values, we see the growth from OMR 6.8 million to OMR 0.9 million, almost to 17.4%. In absolute value, a very nice growth, as least as important is the growth in percentage -- the EBITDA percentage, so the EBITDA on sales growing from 3.9% to 4.8% to 6.7%. A very strong increase in 2022 due to dynamic pricing to reflect raw material price increases, continuous cost improvement through design to cost, which is a R&D project, to try to reduce the cost of the design of the cable without jeopardizing, of course, the quality of the cables, and focused on fixed cost management. The third graph is showing the net income. You see the growth from OMR 2.3 million in 2022 to OMR 5.9 million in '21, to OMR 11.2 million almost in full year 2022. 87% income increase in 2022 mainly due to the successful pricing management, but also keeping your [ offers ] under control, focus on profitability rather than volumes, and strong financial discipline. And this slide is showing the net working capital on annualized sales. You see in 2020, 28%; 2021, 27%; and a very strong improvement in 2022 to 18.7%. The net financial position in December 2020, OMR 28 million grew in December '21, OMR 23.5 million, and then in December '22, a strong improvement to OMR 44 million. [Technical difficulty] this, bringing strong cash management, bring the [Technical difficulty] improvement and the reduction on net working capital on NSAs ratio for the past helped a lot in improving this net financial position.

With this, we finish our presentation, and we are available for any question you may rise.

My name is [ Abbas ]. I work for Vision Capital. Just a couple of questions. In '23, if copper prices have to move on from this $9,000 band, let's say, go to like $10,000, $11,000 -- I was reading an article by Goldman Sachs expecting it to go to $12,000 next year. How do you expect your margins to behave? And at what point will it be difficult to pass on raw material price increase to your end customers? And do you feel margins could come under pressure if copper prices move up from this $9,000 range?

We pass on the copper prices to the market. So we do not expect a negative impact from the increase of copper prices on our margins.

And in terms of the CEO, Cinzia spoke about growth, and not just near-term growth, but there's a solid sort of 3 to 5-year growth plan. When you look at '23, and given that last year was one of the better years on record when it comes to [ rural ] sales by Oman Cables -- I think 2015 was the last year when you managed to exceed last year's numbers. What sort of growth are you expecting in the top line and the bottom line in '23?

Yes. As you said, it was an exceptional year that cannot be compared to all with 20 years ago, when the situation was completely different in term of opportunity of infrastructure, in term of competitor arena in the country and outside the country. So we cannot certainly compare these 2 situation. Today, we are in a very fragmented market in complete transition. After a year of depression, after a year of pandemic, after oil price slowing down dramatically, to rebound, it was not so easy. It is clear that, today, we are accompanied by uncertainty by different phenomenon, volatility, raw material price increase, and shaping all these ingredient into a good dish is completely different compared to the past. The macroeconomics are much more complex today, but it is true that the company has also increased all -- in all direction its own risk management. So we are fully determined to protect our market, our activity while expanding. As I was mentioning, what can be new in 2023 is this energy transition going on, especially in this area, and the necessity to reinforce the grid to sustain this transition. It will be extremely important. We are fully determined to have another important year for 2023. So despite all these macroeconomical situation, we are fully determined to go on with our growth for 2023, doubling the good result of 2022.

Did you say doubling the results 2022?

Doubling the good results, means, having a second -- I would like to double, means plus 100%. We will do our best, but I cannot assure. This remains a dream, but I want to underline very much that, as you saw in 2022, and we can confirm, demand was not changing dramatically. Sales, we are not increasing dramatically. What was changing was the ingredient that we are cook in a different way. So through this diversification, through innovation, through strong design, through cost, through strong financial discipline, we were capturing and selecting the good business, and we were making them as much as possible profitable. So also in front of a steady demand, sometimes is -- it is possible to make something better, and this was what we did in 2022. We are full determined to go on in this way. to continue to book in the best possible way assisted by a demand that we do expect at least steady compared to 2022. I hope I answered to your question. Maybe not to your dream. That is my dream, but we will reach it some day.

Any other questions from the participants, please feel free. Yes, [indiscernible].

Just some basic questions. What is your capacity utilization in 2022 for the Ras Al plant as well as for the [ OAPIL ] plant in terms of tonnage? And then, can you provide these numbers in terms of tonnage as well as in terms of the percentage?

We can see that while we were reaching almost a situation in Sohar, so in OAPIL, we think that with a different mix, as we are mixing very much, we can still grow in Ras Al.

So in term of numbers, how much would that be?

We can -- it is difficult to say a number because from one year to the other, we are diversifying quite a lot our production. So it is no more a saturation that we calculate in term of volumes, but a situation in term of machine. So, we are obviously now increasing our capacity when we go to special cables, and we try to decrease our capacity, and so our saturation in terms of standard product. So the future is not saturation, but it's a diversification.

So is that the reason why we had a lower contribution to sales from the trading business and the other industries contributed significantly in 2022?

Yes. It is the reason why the good mix. You focus exactly the point. One of the big focus was to diversify, and while diversifying, increasing the added value product at our portfolio and focusing more on added value product than on standard product.

Lastly, your trading margins have shrunk significantly. From 48% it has reached 38% almost, your gross profit margin. So what was the reason for that? And what was the reason for the growth in your Power Distribution segment margins?

The overall margin percentage, you are comparing to the sales and the sales is influenced by the metals, which we transferred to the market. So a strong increase in metal prices is not resulting in a fluctuation in the margin. But of course, it is an impact in the margin percentage. So you have to be a bit careful on making that comparison.

So are you saying the product mix changes resulted in others? Or is it -- because what I'm saying is your Power Distribution margins have increased from 13% to 25%.

Yes. That's the content of the margin on the total. So it's not the margin on the products themselves.

So how do you explain this -- the content of margin?

We had a strong increase in our sales in Power Distribution products all around the world, and with that, bringing more margin.

But we are seeing only 23% of your revenue, which is same as last year -- was the same revenue contribution from the Power Distribution segment, isn't it?

Yes, you are totally right. The point is different. Also in this case, we were very much selective, focusing on the opportunity in term of deal and in term of tender that were interesting for our scope. Sometimes, especially while building with utility, we assist in front of standard product, but -- because when we speak about Power Distribution, basically, we speak in terms of standard product. We assist to big fight and higher competition. We decided to focus maybe on less volume, but in the most interesting tender where our presence was extremely qualified, where we could offer a better service to our customer and not only standard product. I hope that [ will ] satisfy your question.

The other question that I have is your geographical distribution. Last year, it was primarily domestic-oriented sales which has driven the revenue. Whereas in last year 2021 it was primarily the export sales. So how do you see 2023 shaping up?

We are fully determined to on to expand our export opportunity while remaining very strong in the country. As you see, we are also qualifying and [ evaluating ] new product in order to be able to capture opportunity outside the country also. Sure while remaining leader in Oman, we have to address all our potential whenever is possible. We have a region who is moving, especially in renewables, and we want to be there. We have -- thanks to our partnership with Prysmian Group great opportunity, and we want to be there.

And another question that I have is on your expansion plan. Can you provide some more details about the plan which you have for the Sohar plant as well as for the Ras Al plant? So will it result in a capacity expansion? Or is it a product mix change by introducing new machines? What exactly is it?