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

So welcome, everyone. My name is Jad Atallah. I'm handling Investor Relations in Oman Cables. This is, I believe, our third analyst meeting/session. The first one, we remember it was in August 2022, then February 2023 and now 27 July, 2023, our third meeting. Welcome, everyone. This is our opportunity to present to the market the H1 2023 financial results. I hope everyone can hear me very well. I'll be sharing the presentation. And for any questions, please raise your hand and feel free to ask questions. Normally, we'll start with the presentation at the end of this session, unless if you have any questions in between. I'll be sharing my screen and I will leave the floor to our CEO, Cinzia Farise, who is with us; and our CFO, Rinke Kieboom, who is also present on this call. I'll share my screen and I will leave the floor to Cinzia.

Thank you very much, Jad. While you are sharing this call -- the screen, let me welcome again all the present, [Foreign Language], good afternoon to all of you, and thank you for being with us today. Our presentation will focus 3 main chapters. We will provide you an overview of Oman Cables, an overview as per our perspective of the macroeconomics and the business environment where we are operating. But above all, we will focus on our approach to sustainability with a dedicated chapter that we call Sustainability as a Compass, just to show how now we are redesigning all our business in order to include together with the economical approach also the social and environment responsibility. And then I will leave the floor for the fourth chapter to our CFO, Rinke Kieboom for a deep analysis of our results. Here, you see our headquarter. Our headquarter that in this moment is completely review. Our head office are under complete refurbishment in order to offer our people the best place to work. The well-being and the safety of our people is and remain one of our most important focus in order to address the business, in order to empower, to put everybody onboard and to achieve results for all shareholders, including internal and external stakeholders. Oman Cables is certainly a leading player within the cable industry with the ambition to be a leader in sustainability within the Sultanate and the region and is animated by 2 -- 3 important values, but above all, a vision, which is aiming to remain the leader in the industry in terms of quality and performance, always exceeding the expectation of our customers and shareholders. We have a very clear mission to enhance shareholder value and our outstanding customer and partner service, while providing integration of sustainable business development and innovation that this year, we call, Innovation for Sustainability. We will see a few times what we mean for Innovation for Sustainability. We can leverage on 3 solid facilities in master that are running at a very good level of speed and saturation in this period. 2 plants in Rusayl with [indiscernible] showing integrated PVC compounding plant. Also, we can count on 2 facilities outside the Muscat that are respectively pertaining to OAPIL, which is one of our subsidiary part of Oman Cables Group based in Sohar, producing rod and aluminum conductor essentially. And the second one, part of ACPL; ACPL, Associated Cables is our company in India based in Chiplun, particularly dedicated to specialty cable, instrumentation and control particularly. We used to say that during the latest years, we are getting stronger and stronger, thanks to the integration with Prysmian Group with our strategic and technological partner, we have people, innovation, excellence, solution, quality servitization, network, but today, also sustainability are really receiving a big boost from the movement of the integration. Integration that means continued transfer of technology and knowledge to the Sultanate through the empowerment of our people with the opportunity to offer them lot of program worldwide, but from this year also with the opportunity that Oman Cables is offering to Prysmian Group to have the capability of a new Sustainability Academy, serving the entire Prysmian Group worldwide is giving the opportunity to attract a platform of 30,000 potential people coming from over the world to be trained in Oman in our Sustainability Academy, which is effective from January 2023. Innovation, we will speak excessively later. Excellence, due to combined management and base practice from 150 years, provide solution, not only cable, but a very large product portfolio integrated services going from building wire cable to submarine cable through turnkey project, quality with the worldwide testing facility. Servitization, in order to offer our customer digitalized services together with our product network, we have 108 diversified plants in more than 50 countries that we can leverage on and that are becoming by the way extremely relevant for our intercompany close. In this moment, OCI Group is exporting from Argentina to Australia, thanks to this partnership. And last but not least, as I was mentioning, strengthening the Group commitment, the implementation to our 3 ambitions that has an ambition more in Oman Cables, and we will speak a bit later. Going on, we enter now in the second chapter of our meeting today where we try to analyze a bit what we see in our business environment, while starting a very, very brief analysis on what we see in the world in the MENA region. What is the relevant support our business is receiving from the green economy today coming slowly, slowly to our company with a dedicated deeper focus on sustainability. So what we see on the global economy? We see a situation that remains [ treacherous ] essentially because of the effect of the shock coming immediately after the pandemic, overlapped negative shock by the way, are still protracted today. These were certainly not supported by the Russian-Ukraine war that is entering the second year. And also the sharp monetary policy that was implemented in many countries worldwide in order to contain inflation. The situation seems to be still tough and even slowing a bit more in the second half of this year, continuing in 2024 with the persisting of inflation and the tight monetary policy. Certainly, the situation is not particularly interesting worldwide. We see that our analysis is showing for our country a better perspective. We do think that the region is certainly a bit repaired from this worldwide situation that is not really encouraging. And particularly in Oman, we see that among the GCC, the projected growth, especially in infrastructure, seems to support our business in this moment quite consistently. The data that we see on the left side of this table are in effect completely translated into our numbers, in our sales, in our opportunity, and we will see very clearly in due time. Many infrastructure projects, but as I was mentioning before also some interesting opportunity on the side of the green economy for the entire region. In this moment, we are participating to many relevant projects throughout the GCC. When we speak of Oman, for sure, which remains the most important market for Oman Cables, but also in Saudi, in UAE, in Kuwait, in Qatar, we are, in effect, progressing very well in terms of infrastructure, but also in terms of green economy. And this is in reality absolutely in line with our investment. For all of you who was present already during the previous meeting, you certainly remain that one of our focus -- one of our big project translated into concrete investment for this year was related to building a renewable excellence center, not only for the region, but for the entire world. And we are today absolutely ready, supporting the renewable business when we speak about solar, when we speak about wind, when we speak about hydrogen opportunity. So many opportunities in the region, some of them are absolutely served already by Oman Cables and many others coming, as you can see, we were just showing some of them. Concluding with an interesting development on our grid, certainly, the green economy requires a big boost of the grid, need a reliable and efficient grid. And this is what we assist in this moment in Oman where OETC, NAMA Group launched recently important tender in order to complete the North-South grid hardening, at which in reality we already participated massively with our sales this year and the previous year. If we continue with our presentation, we now enter in the third chapter, which is an important focus for us, dedicating a lot of effort of all the management of the company. What you see on the screen is nothing more than the cover of our ESG plan for 2023. That was prepared by Oman Cables Group management within the region because we really play sustainability at the center of our business through a journey that we undertake years ago that we formalized in 2021 with the definition of the climate change ambition in average to the science-based target initiative. And this for Oman Cables being part of the [ Indian ] Group means not only an objective, but also to place sustainability as the cornerstone of our development when we speak about growth strategy and sustainable growth. A growth that is in our stakeholder engagement a specific threat because our holistic approach to sustainability means to deepen a proactive dialogue with all our stakeholders sharing project, as we will share in a few minutes, experience need. And today, we may say that in our Group, all production processes take place with a view to sustainability. Our commitment is not only focused on operations, but on the entire value chain. And we work in this sense to anticipate the need of the Sultanate will illustrate in Oman Vision 2040. We want to anticipate the need of our customers, while strengthening our engagement with suppliers and focusing on continuous innovation, leveraging on our technological and industrial leadership to amplify the impact that Oman Cables Group can have and can generate on the community. We do, as I was mentioning, through restructured ESG plan with a steering committee that meet on a monthly basis and where each one take personal accountability for leading in a highly ethical way and fulfilling the social expectation. We have 6 teams with precise task that are carrying on numerous projects that improve net zero, circularity, innovation, value chain, sustainable finance and also sustainable HR. So in order to innovate not only in terms of product, but also in terms of approach for the long-term value of our Group and for the community. We have, as you see on the screen, 3 focus and 4 ambitions. Let me start with the ambitions, 4 ambitions; climate, social and innovation ambition, at which we add also a role model ambition. Having said that our target is not only to be a leading player in the cable industry, but to be a big player also in the approach to sustainability. And we have 3 focus to focus the entire value chain, not only what we do, not only what we produce, not only what we deliver, but the entire value chain, including all our stakeholders, which is why we are continuous deep in this approach to sustainability at all possible levels. The second focus is to pursue tangible results in terms of climate ambition, which is a big, big focus for this year if we want to reach the ambitious goal we have defined. And the third one, we want to secure return on our effort, while engaging our partner, our customer to do the same. If we proceed, we see the first ambition I was mentioning is the climate ambition. So sustainability, energy transition, decarbonization and all the numerous issue related to this ambition are now on the heart of the development of each company, no matter the size of the company. And this is even more true for us as Oman Cables where we are aware that a direct convergence between clean energy and digital infrastructure are essential to drive the business today and where we want to play a role of technological enabler in the energy and digital transition process, responding to global challenges over the coming decades. So with our business, we offer innovative solutions to decarbonize the world in which we live. And we are committed to having a concrete impact also in our operation by decarbonizing, reducing our footprint as much as possible, as you can see in the number detailed on this chart. So to reach important target, our Group want to find climate by aiming to reduce Scope 1 and Scope 2 emissions and Scope 3 emission by 28% by 2030 compared to a 2019 baseline and to achieve the 90% reduction target for Scope 1 and Scope 2 by 2035 and Scope 3 by 2050. All near-term targets were revised from the previous 2021 and the net zero target has been approved by science-based target initiatives. We have a second ambition, which is the social ambition. Our Group commitment in this sense also apply obviously to the social dimension where we are committing in creating award contest that is fair and inclusive, promoting initiative in support of the local community. We have the privilege to be leaders in a business that is enabling the energy transition. And so we feel the responsibility to innovate our product and our processes to make them possible with a lower environmental impact. And we strongly believe in the value of social inclusiveness. So we work that our solution, our product has a positive impact on people's lives and on the society. In this regard, we have a strong commitment, as you see, in terms of diversity and inclusion. The goal is to go, for example, in terms of gender equality to -- from 45 women employed in '22 to 47, 49 in '25 and then 50 in 2030. But we speak about social ambition not only in terms of general quality, but in terms of digitalization, in terms of local empowerment through our worldwide program when we speak about engagement and upskilling, inclusion and diversity and health and safety on top of our mind. And then we have a third ambition, innovation ambition, sustainability -- sustainable innovation is also a fundamental asset of our strategy and it's concentrated above all in the old product design. Our goal is to define increasingly green solution with limited environmental impact. And the concept of sustainability and innovation are for us today more and more hand-in-hand. There is no longer innovation that is not sustainable for us. And we think that there is no sustainability without innovation. So we innovate to achieve the set goals through our product. The goal of reducing the carbon footprint is also consistent with a simpler economy road map established by our Group, which provide for actions that aim to achieve a share of revenue deriving from sustainable profit equal to more than 50% in Europe and around 20% in the rest of the world in addition to a share of recycled content on polyethylene jackets, which is one of the relevant components of our business also in Oman Cables and copper by 2025. So I was mentioning 3 ambitions; climate, social and innovation, at which we added a fourth one that when we speak about being role model. And so the ambition to become a leader in terms of sustainability. When we speak about being a leader, we want to focus and bring to your attention the big projects we are driving and the strict governance we are applying to this thing of sustainability. Big project, I was mentioning the renewable excellence center to support the energy transition, wind, solar and hydrogen especially with a second big project in Sustainability Academy, which is already a reality, operating. Big initiative in terms of social impact stands to offer new opportunity to unemployed Omani women. We are about to launch the second edition of sustain, the first one was launched last year. And the fourth big project, the performance-based share system where all employees, 100% of Oman Cables employee today are shareholder of the Group through a performance-based share system that was launched for the first time last year and will be launched also this year. I'm proud to say that yesterday our Board approved the second performance-based share system that will apply to all our employees, even in the shop floor where if they contribute and they contribute effectively to the growth of the company based on specific target of performance, they will have the opportunity again to acquire gratuity share of the company that if they will take with them for 1 year will double in 12 months. So 4 important projects and 4 important pillars of our leading governance, at which particularly our Investor Relations is responsible. Jad Atallah is particularly following. So a dedicated plan and organization. I was mentioning before, the importance [indiscernible] of our plan structured. We are still committed with 45 sustainability ambassador for our region with 50 projects already identified, and [indiscernible] during the year with KPIs and investment. So this project in order to achieve, to sustain, to make it feasible, the ambitious target in terms of KPIs that partially initial and the related investment in order to make this project possible deployed during the year. These governance is also sustained by a sustainability management system and a report at which we are working. We are supposed to issue the first sustainability report within the end of the year. And a strong relationship and connection between ESG and Investor Relations, as you can clearly see from today's meeting. Leaving aside a bit our 4 ambitions, I want to conclude this chapter, while mentioning the 4 dimensions that are at the base of our KPIs, certainly the universal ESG's goal. Certainly, our materiality assessment at stakeholders' level that was conducted for Oman Cables Group at the end of 2022 that helped us to design, to draw our plan for 2023. The important technological partner, Prysmian Group, is addressing and supporting us in focusing particularly saving chapter in terms of KPIs, and you can see clearly on the table. But also, we are already looking deeply on the GCC guidance for listed company that are starting and we are very happy about this and starting analyzing the different chapter of environment, social governance and sustainability reporting, aiming to boost a solid, but also a concrete and structured approach by all listed company. And we are looking at it as an opportunity to participate to confirm our vision to become a leading player also in terms of sustainability. With this in mind, I will leave the floor to Rinke Kieboom, our CFO, for a deep analysis of our financial results for the first half 2023. Rinke, the floor is yours.

Thank you, Cinzia. Good afternoon to everyone. I would like to start with the slide showing you the sales in 2023 or first half compared to 2022. As you can see, the sales is a little bit lower than in 2022, but that's entirely driven by the metal prices. I should note, the metal prices are a major component in our sales prices and that's the reason why the sales was going down. If we look at the split between domestic export and intercompany, we do not see major changes. If we go to the next slide, you can see on the left-hand side of the graph, you see the first half of 2022, the copper prices. And on the right-hand side of the same picture, the prices of the first half of 2023, a significant difference in the LME prices for copper, causing the sales to be lower. And for aluminum, it's even a sharper difference first half of 2022 versus first half of 2023. So this explains why we have a lower sales in '23 compared to '22. If we look at the sales split by business units, we see in '23 that we have a strong performance in the business units, T&I, trade and installers cables. While we had some lower sales in PD, which was driven by some export sales we had in PD in 2022. If we move to the next slide, which is the margin split; and that for me is much more important than the sales. As you can see, in '23, we had a contribution margin of OMR 17.2 million versus OMR 12.9 million around in 2022. So very strong improvement in the contribution margin coming from all the segments. Here as well you could see that we have a couple of very strong, very big units -- sorry, business units contributing to this strong improvement of the contribution margin. If we go to the next slide, you see the revenues on the left-hand side. I already explained that you have a decrease in the sales almost entirely driven by the metal prices. If we go to the picture in the middle where you have the EBITDA margin, you see a strong improvement in the margin, driven by a product mix improvement, pricing improvement, and obviously, a constant focus on cost improvements through design to cost actions focused on fixed cost management. On the far right-hand side, we see the net income, which is an increase compared to the 2022 of 92%, driven of course by the strong improvement in the margin. And the EBITDA, as mentioned in the previous slide -- sorry, in the middle of the page, but also, we have very strong focus on the financial cost to get those under control. If we move to the next, we have the net working capital where you see that compared to 2021, we continued to have a very strong improvement. Compared to 2022, it's a very small increase, entirely driven by the fact that the last week of June was a holiday week. So we had some postponements of receivables, which were due during the holiday week, postponed into July, while we continue to produce in the holiday week to be able to supply our customers right after the holiday week as well. If we look at the net financial position, the bottom part of the presentation slide, you see a very strong improvement compared to June '22 and June '21, driven by of course the good performance of the company as well from a P&L point of view as well as a strong focus on working capital control. That was it. That's what we wanted to show. Any questions, please feel free to ask.

So now we will leave the floor for our participants if they have any questions. Please go ahead, raise your hand, ask your questions. Yes, Samir.

I have a couple of quick questions. First, your OAPIL subsidiary profit is at historical high level, could you elaborate more what led to that growth? And how sustainable they are?

Yes. What led to that good result is, first of all, the market conditions. The premiums on the aluminum were quite high compared to the past, so you benefit from that. But besides that, also the focus on the product mix, the efficiencies in the plant. So all of that -- and the focus on cost control, fixed cost control, all of those elements helped to improve the results of our affiliate. Your second part of the question was whether it is sustainable for the future? Yes, of course, we believe it is. We continue to have the strong focus. The metal prices and the premiums are an important part. So that is beyond our control. But for the parts we can control, we are convinced that we can continue in the way we're going and step-by-step implement further improvements as well.

Let me add, Rinke, to this certainly relevant information; also an overview of the market condition in terms of demand, in terms of trend. It is clear that we are in front of a relevant switch from copper to aluminum. This as a macro trend we have to consider is something that is not expected is there, in some latitude of the world even more. Second topic, always in terms of demand, I want to mention is related to the demand of aluminum that is required at our production level because of the renewable business. The renewable business, especially wind, is asking more and more aluminum versus copper. And this is a portion that we are already considering in our trend. If we look at our volume in this moment, we see already an important switch from copper to aluminium consistent and this will be for the future. On top of this, certainly, the situation created by the Russia-Ukraine war was putting Middle East at the center of some opportunity, and we are certainly taking advantage of this. We are increasing very much our intercompany flow at Prysmian Group level, especially in terms of conductor. So many, many relevant situations at which we are working effectively are showing that this trend is certainly sustainable also for the future, which is why some of you certainly will remember, we are increasing also our capacity in terms of conductor of plus 30% in our plant in Sohar.

Got you. So could you remind me about your hedging policy? Do you hedge? What percent of your commodity requirement are usually hedged?

Yes, we do hedge. We do hedge our metals and we do hedge our foreign currencies.

Is it 100% or is it a portion of that to the government?

100%.

Okay. Got you. And what's the capacity utilization at your various divisions in your copper and aluminum for the last -- for the first half?

A very big saturation, we may say in general -- generally in the plant. So with a very good efficiency, we are -- there is this space. I'm here to say a bit more, but we may say, we are certainly running at a very good level of saturation, both in copper and in aluminium.

I just want to understand, is there any -- like you mentioned, there is a 30% capacity addition going on at aluminum. What -- is there any such plan for your copper division as well? I just want to understand if there is any capital allocation that's going to happen.

In this moment, our relevant investments are completely disclosed and they are not considering an increase of capacity of copper.

Okay. Understood. One last question. Since you don't have much of CapEx program, is there any plan for that OMR 44 million cash you are holding because that's quite a big amount?

We are working on a good plan, yes.

Any other questions? Yes, George.

Cinzia and gentlemen, congratulations on the amazing set of results. Last time you have mentioned that you had a dream to double the profit and you are living the dream right now. Congratulations on that. But some of the questions that I have is on your margin side. Your T&I margin has improved significantly by around 3 percentage points during this half -- first half of the year compared to last year and even before that. So I just wanted to check what has been the contributing factors for that? As well as on the Power Distribution segment also, I'm seeing that the margins are improving significantly from 10% in last year to 15% and oil and gas also is improving. So what are the reasons that are contributing to this margin improvement overall? And particularly for the power distribution where you had a higher sales and at the same time you had a very high margin improvement. So can you please explain what are the reasons that are contributing to this? Is that a market factor or is it a company-specific factor?

Certainly, both of them. There are many, many reasons. I want to mention some of them that are referring to the famous dream you were referring to, which was part and which was the target and are under the scope of our Grow Project. To grow in a sustainable way requires 2 plan. One in grow. And second one, which is not a plan, but a journey in Sustainability. We are growing, it's true, through certain diversification of product. So different margin means a different mix of product through a different geography because we are boosting where in effect there are opportunity. And our competition is not so high or there are -- there is a huge demand with increasing prices. Certainly, a third element is related to a dynamic pricing, which is bringing a concrete effect. And then to a very structured approach, which is today for 2 years, from 2021 August onwards, identifying every week profitability meeting where we select, we analyze, we approve with a careful management, continuous careful management. This was due 2 years ago because of the COVID effects that were disruptive in terms of raw material with a huge volatility. And we decided together with Rinke to continue in this way. And I may say that this is in effect bringing good results. So many, many, many reasons for sure; justification, innovation and management. We can conclude like this.

Cinzia, but I'm not using -- for the last 3 years, you've been continuously growing tremendously. I look at the net profit and from second quarter in 2021 from OMR 1 million, you have continuously grown and reached almost OMR 5 million in this quarter. Just wanted to know what is your outlook on what could be the -- where could -- where do you see a target growth going? And how far we will be able to achieve this kind of a growth? And where are we seeing it plateau?

We were waiting for the demand, your demand by definition. We are fully determined to continue to grow. This is our strategy, no discussion. We are fully determined. We are convinced that as we are immersed in this energy transition, we are enable of this transition and the opportunities are clear and are there. So let's take advantage of this, anticipating the need of our customers, identifying the investments that are sustaining this growth. And I'm convinced that this will continue also for the next 6 months, 1 year certainly.

So which are the areas that you see the growth, particularly in terms of demand? Because I'm seeing, T&I has grown over the period for some time. But at the same time, there is the power distribution is taking over. Last year, it was power distribution, this year, it's T&I and oil and gas is kind of almost stable. And your intercompany business is growing significantly from OMR 5 million in last year it has reached almost OMR 20 million, OMR 21 million in this year. So which are the areas that you are focusing on for growth, particularly in terms of -- because we are in a commodity price environment, probably our revenues -- our top-line is very much linked to the price of commodities, but the margin is what I'm looking at. So which are the areas that might provide us a significant push in terms of market because we are -- you seem to be very confident in terms of margins and in terms of growth. So just of curious as to...

We are focusing on high value-added products for sure to continue to transfer technology to this country, but at the same time, we take care of the traditional business. When we speak about power grids, grid hardening, this is essential to sustain the energy transition and this is the history of Oman Cables. It is where we are expressing our excellence in terms of product. We don't forget infrastructure. So we are -- there is a boost. We have the product, but we are boosting particularly in renewable with this renewable excelling center. Oil and gas, we are dominating. We do think that renewable will not switch from one day to the other. And we are certainly introducing innovation -- green innovation that are making our business more and more sustainable. We don't forget design to cost that is essential for all our product and that is bringing also an important part of this increase in terms of contribution margin.

Interesting, very much interesting. And I'm seeing that you are betting big on renewables. So how are we placed for the [ Dukham ] projects that are being announced, especially hydros coming a big way in terms -- and Oman is coming up in a big way for the renewable energy and green ammonia project and the new energy era. So how are we placed in...

We have the product. We are ready to support. I repeat, wind, solar, hydrogen, we have all the technology within the Group and we are exporting here in Oman. We are introducing -- we are about to launch a second solar cable, very innovative, very resistant that we are launching in 4 countries of the world and Oman is one of these 4. So we are preparing. We really consider that -- consider very positively the focus that the Sultanate is making in the renewable, especially in hydrogen, and we are anticipating the need of this new market. We are there. We are ready. Part of our investments are in this sense.

Okay. You are ready, but are we seeing early inquiries or demand -- signs of demand coming from the companies?

I think no. If we speak on special cable-related for the hydrogen business, it is extremely early to speak about. But we see certainly a strong investment in term of grid hardening, which is essential and preliminary to any renewable business. So we don't have to consider only the special cable that are related to the business, but also to the entire chain, which is including grid hardening first, the infrastructure second and then the specific and special cable [indiscernible]. We are already there, for sure.