Avio SpA

MIL:AVIO

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Avio First Quarter 2023 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Giulio Ranzo, CEO. Please go ahead, sir.

[Giulio Ranzo, executive]

Good morning. Good morning to you all, and thank you for joining the first quarter results for Avio. I hope you all have the presentation in front of you. So I would give you, as always, an overview of the highlights of the first quarter. And then Alessandro Agosti, our CFO, will talk about the financials.

As a general remark, as you know, the first quarter is generally soft, but there are a number of important things that are worth reviewing. So if we go to Page 3, what we can report that we think is noteworthy is a record-high order backlog and an improvement in profitability. So in essence, our work to return to flight with Vega is expected. The launch of our Vega rocket is planned by August. And then we will have a Vega C by year-end following Zefiro 40, a second-stage firing test in June that we will perform to clear the way for the Vega C flight by year-end.

In the meantime, as I anticipated, we have accumulated in the first quarter, a record high order backlog. This is the highest net order backlog company in its history. It's almost EUR 1.3 billion. And so that provides a huge visibility for the future. And this is thanks to two main contributions.

One is due to the new development contracts, all of which are related to liquid propulsion technology development and the other one to defense products. As you know, for propulsion systems, for tactical missiles. In the meantime, we have seen some improved profitability, thanks to the lower level of energy prices that we have had this quarter compared to last year. The situation seems to be a little bit more stable than it has been across 2022 and this has definitely provided some relief on the generation of profit. Knowing, as I said, that the first quarter is typically very, very low in contribution to profit relative to the full year.

The cash position continues to be robust. It's a bit lower than at the end of the year, but already in April, it's going back up, some advances were paid a few days after the end of the quarter, so they don't show up. But what we can report to you is a continuously robust cash position. So as a result of that, we can confirm the 2023 guidance we gave a couple of months ago at the occasion of the reporting of the 2022 results.

So on Page 4, a recap of flight activity. The flight activity for Ariane 5, as you know, is nearing completion. So by the summer, I would say, in the next couple of months, Ariane 5 will perform its last flight, VA 261, and the program will actually end. And then Ariane Group will prepare for the maiden flight of Ariane 6. The date of which is not yet finalized by Ariane Group and the European Space Agency. We will see if it's by the end of the year, we will wait for their announcements. But all is being prepared for that event.

Regarding Vega, as you know, the schedule is as follows. By June, we will perform Zefiro 40 firing test with a new carbon-carbon insert to demonstrate that the new configuration using a different material is satisfactory. Then in the meantime, we will prepare a Vega flight, which does not use the Zefiro 40. So it's not affected by this type of complications. We will perform a Vega flight in August. And then we will go for a Vega C flight by year-end. So this is essentially as it was planned, and then we will see more details.

In the meantime, on Page 5, we can report additional commercial success of Ariane space in selling Vega on the market. We presented this slide also on the occasion of the year-end results, and we showed in green what is the backlog of launches that have been already sold for the next few years. Now the green ones that are already sold is growing substantially. Yesterday, Arianespace announced the sale of another launch for Clearspace. That's interesting. Because it will be the very first mission to embark a space degree, D-orbiting session to essentially take away some space debris from space. So a very interesting mission, and that is further filling the backlog for the years to come.

Some of the other flights for '26 and '27 are not yet contracted, but they are in sight. Some will be coming from the European Space Agency. So we know they're coming. But not contracted yet. So this is an extraordinary visibility on the future and you can see an opportunity for growth in the average flight rate. We will see how things will go because obviously, satellite sometimes slip in time in terms of their readiness to launch, and we also have our challenges to meet an increase in flight rate. But I would say it's a phenomenal motivation here to have so much backlog ahead of us to work on. So we are eager to come back to flight in August and prepare for a substantial increase in our rate for the years to come.

Then on Page 6, as we commented during the first quarter, we accumulated a number of orders for new technology developments, all of which relate to next-generation launcher technology all of which revolve around liquid propulsion systems at the end. So left to right, you recall, we contracted to develop a new space transportation system so-called with de facto and in-flight demonstrator of liquid oxygen methane two stage to orbit small launcher. So this we will perform by executing a couple of experimental launches to demonstrate the feasibility and flight of our liquid oxygen, liquid Methane technology. Then we have the development of a larger class liquid oxygen Methane engine with a 60-ton thrust class. Then we have contracted with the Italian space agency to develop a different system with storable liquid propellants, which we call multi-purpose green engine using entirely green type of propellants to perform sophisticated orbital operations, okay? So this will be fueling even more the versatility and the flexibility of the Vega system to develop more -- to deliver more satellite to space and to perform more orbital operations within 1 launch.

In addition to that, the Italian space agency has announced that we have been selected among other players together with Thales, Leonardo, Telespazio and D-orbit as a group of companies to develop an in-orbit service system to be launched for different applications and activities in space, including debris removal, but not only that, also servicing existing satellites for refueling operations and so on. So this is quite a massive effort within which we will be responsible for providing propulsion technologies and also power generation technologies. So we are very happy about this because this last piece completes a little bit picture of what we need for them to have a product range that fully meets the customer requirements for the next decade or even more.

On Page 7, very quickly, what is the status on our return to flight path. This is the Zefiro 40 motor that we have now integrated with a new carbon-carbon Nozzle insert procured from a different source and we have integrated that according to a new reinforced acceptance specification. So with much more controls around the suitability of the part relative to the specifications. So the motor is ready, as you can see from the picture. Now it's undergoing final acceptance activities, and these are on track. So in the next few weeks, we plan to ship the motor to the test range to execute the firing test in June. So the result of this firing test shall demonstrate that once we the part that has not performed successfully during the last flight that we have solved that problem and then the Zefiro 40 can go back to flight safely with a reliable material for the Nozzle throat insert. So we are on track. We will report to you between now and end of June, how we are, how we do with respect to this very important test. This will clear the way essentially for the Vega C flight by the year-end.

In the meantime, on Page 8, as you know, we have had quite some activities in the last 6 months around propulsion systems for tactical missiles. Demand for this type of products is steadily growing, and we are very, very happy about that. We reported that we signed nearly 90 million of orders for the delivery of Aster-30 propulsion systems. And as of today, we have an aggregate of around 200 million of orders for defense propulsion systems, which means that on the defense side, now we are covered at least for the next 5 years with a substantial revenue growth with respect to what we used to do just a year or 2 ago. And so this is very important because it also diversifies the risk within the portfolio of our revenues.

In parallel, we are very happy to report what MBDA has announced last week that the CAMM-ER system, missile system has been fully qualified in flight. I remind everyone that this is a missile system that has been developed with our propulsion booster. And so it will be delivered first to the Italian Army and then potentially to other customers. So we are very happy that this product now is entering essentially the production phase. And this fact is important because we fuel in the future. Additional orders on the production side that will go over and above those already accumulated for us there.

So all in all, you can see lots of different things, but I'm glad to report that we are going in the direction we had expected and with a faster-than-expected accumulation of orders that is on the safe side. Also strengthens the cash position and provides therefore, much better visibility on how to handle the rest of the year. I will now hand it over to Alessandro for the finances.

[Alessandro Agosti, executive]

Thank you, Giulio. Good morning, everybody. Let's move to Page 10. We report the key performance indicator for the quarter, in particular for quarter -- first quarter '23 compared to first quarter '22, except for netorder backlog and cash position, which are compared to end of December.

First of all, our backlog has grown principally for the new liquid propulsion technology development contracts and also for tactical propulsion system contributed with additional orders from As Giulio commented before, backlog has reached a historical record for Avio in this quarter.

In terms of net revenue -- are slightly lower than corresponding period of last year, mainly for the slowdown in P120 production for the new Ariane 6 launcher which have been partially compensated by the increase in tactical propulsion activities. EBITDA is higher than first quarter '22, mainly for lower energy cost and new development activity on LOX-Methane technologies. EBIT showed a better performance than EBITDA for completion of certain amortization or certain capitalized intangible assets last year. Finally, the net cash position is higher than typical first quarter, mainly for certain advances that we receive on bigger production batch.

Shall we move to Page 11. We reported a charge for energy costs. Energy costs have an impact in our accounts, basically for the cost of gas that is used to produce steam which is then used in the industrial production processes, particularly for crafting activity. In addition, we have electricity costs for large size business.

The slide shows the Gas price trend in '22 compared to '23. Gas price in Q1 '23, is remarkably lower than Q1 '22 and is also now expected to be stable for the rest of the year '23 compared to previous year. In particular, when we experienced, as you remember, a peak during the summer '22. The average price of gas is expected EUR 48, around EUR 50 per megawatt hour in '23 compared to higher than EUR 120 in the corresponding year '22.

Action that we have already implemented to mitigate energy cost in the short and midterm include a partnership with Analix that we discussed last year. Aim to invest in a thermoelectric steam generation plant and also to assess investment in the midterm in photovoltaic and solar plant. In the near term, we expect also to consider certain hedging on the price of gas to be -- to block the certainty of the cost for the rest of the 23 years.

In the next chart, we reported as usually the quarterly part of EBITDA and cash generation, which confirmed also in '23 as it was in the past, the penetration of contribution of both EBITDA and cash generation in the last quarter of the year, as you can see here, comparing the last year.

Then I give you back the floor to Giulio for the last comment on the guidance confirmed.

[Giulio Ranzo, executive]

Yes. So on Page 13, I would say nothing much in that. We confirm the guidance we had provided at the beginning of the year, maybe on the order backlog, it's worth mentioning that we are already beyond the maximum expected. But still, we have revenues to crunch between now and year-end. So that will be -- there will be the need to accumulate more orders to maintain this high order backlog, but we are confident that we can reach the expected targets and similarly for revenues.

Regarding EBITDA and net income in general, today, the situation looks marginally better than what it was at the beginning of the year. And therefore, all the difference between the energy costs of last year and the energy cost of this year, all else being equal, is incremental profit at the end of the day. So we believe we should be comfortable within the present guidance. Obviously, it's only the first quarter, so I would be cautious in driving too many conclusions too early. But of course, the trend is encouraging for the time being.

Regarding cash, we do not report cash targets because, as you have seen, sometimes, payments are such that a swing by 1 or 2 days will make the target completely unreliable. But what I can say is that we expect stability in cash and, therefore, maintaining a robust position, notwithstanding all the things we're doing in terms of investment and engagement with the supply for the new contracts.

So that's pretty much the wrap up of the first quarter, and we are open to your questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Martino De Ambroggi of Equita.

[Martino De Ambroggi, analyst]

The first question is on the energy cost. Sorry, if I missed it. But in Q1, could you quantify the change in energy cost. And second part of the question, if you could remind us what is implied in your full year guidance in terms of energy cost -- because I remember in the previous call, you mentioned that it was lower than in '22, but now probably visibility is a bit better.

And the second question is on the recent interview, Giulio, you stated that the military business will grow up from 15% to 25% of sales in 4, 5 years. So could you elaborate on this because I understand that there is the tactical business that is going up, but there is also the part of the satellite -- the finance military. So if you could elaborate on this, it would be useful.

And just a follow-up on this the profitability of the military business. Is it correct to assume it is higher than the average of the business?

[Giulio Ranzo, executive]

So let me start on the last question. We do not report the profitability of the business as such, and we do not comment because, as you know, this is also a concentrated customer base. So we cannot report what is the profitability by business line for this very reason. But I would say, generally speaking, is good. Especially if we go to higher production levels because as we have higher volumes, we better absorb the fixed costs and so the profitability growth with higher volumes.

So now regarding my interview, as you know the list...

[Martino De Ambroggi, analyst]

Giulio, sorry to interrupt you. the operating leverage of the military business, if it's possible because you are talking about growing volumes.

[Giulio Ranzo, executive]

I don't know. I cannot quantify on top of my head. We can let you know offline, if we can share something, we will. What I wanted to share with you is the following.

In the military business, we can manufacture many as 300 to 400 models per year, something like that. In the last few years, we hardly manufactured 40 of them. So it is clear that if you utilize your production capacity at 10%, it is not much of an operating leverage. With the orders we are accumulating, we will be using the majority of our production capacity in the current asset configuration. And for the years to come with some of the orders that are in, we will also slightly upgrade the production capacity, which means that we expect to run for the next 5, 6, 7 years, probably more at a pretty good saturation of our production capacity. And at that point, the profitability reaches the maximum we can possibly afford.

Now if we want to be a bit more analytical than the journalists, I believe last year in tactical propulsion, last year and the year before, we did less than EUR 2 million, okay? Less than EUR 20 million on something like 340 million revenue average is like 6% of the revenues, okay? And as you remember, we've always been in this range, 5%, 6% over the total. So I don't know if we will go as high as 25% of the share of revenues, considering also what you said that -- also the liquid propulsion activity is growing fast. But we will realistically at a minimum, triple that with the orders we have in hand.

So I believe this is important more because it provides an opportunity to optimize profitability than change in the mix because if we were to get to, let's say, 20% within the overall revenue mix is still not huge, okay? However, at this point, the profitability, it's pretty good just because you are saturating your capacity. And that's pretty much our consideration so far.

[Alessandro Agosti, executive]

On the energy costs, maybe Martino, I can. We -- as you know, as we discussed when we published the guidance for '23, we already incorporated in our guidance, the reduction of energy cost compared to the peak of 2022. In this quarter, we -- actual figures show an energy cost around 30% lower than the first quarter '22. And we expect, on average, the same reduction in a range of 30%, also for the entire '23 year. So this effect is substantially incorporating our guidance. Should the energy costs will be even lower than expected, which is the analyst expectation in the rest of the year, we can have some further benefit towards the end. But as you know, the price has showed over the last year, high volatility. So for the time being, we confirm the guidance that we published mid-March.

[Operator]

The next question is from Virginia Montorsi of Bank of America.

[Virginia Montorsi, analyst]

Just a quick one. How should we think about the saving of revenues for this year? I know you've talked about the slowdown from -- related to the Ariane 6 program, but how should we think about the next couple of quarters?

[Giulio Ranzo, executive]

Just 1 second. We will check a little bit what the evolution is, and come back to you shortly, in just 1 second. Well, Alessandro is looking at that to possibly put some more color. You know that the nature of our business is such that we tend to accumulate revenues and profits very much on the fourth quarter. And so there's little we can do to escape from this general trend. But now I see -- if Alessandro can be a bit more precise. We will double check, just 1 second.

What you have seen, by the way, from our presentation, the evolution of EBITDA and is generally very much on the fourth quarter. So similar for revenues. Revenues probably goes a little bit faster in the fourth quarter.

[Alessandro Agosti, executive]

Yes, it yes, we substantially have a trend in revenue that is similar to those of 2022 with a concentration as we discussed before in the chart for EBITDA similarly in the revenue. Basically, we do not have a significant change compared to the last couple of years in the progress of quarterly patterns of revenue.

[Operator]

The next question is from Bruno Permutti of Intesa Sanpaolo.

[Bruno Permutti, analyst]

I have two questions. One concerning the time lag between the Z40 firing test and the timing expected for the Vega C return to flight. I'd like to understand if the firing test would be the key event for Vega C return to flight. And in the timeframe between June and December, what are the other key activities on which we have to focus to understand how things are going.

And the second question was on the capital expenditure. I would like to know if you confirm that this period will have probably a peak around 40 million. And how was the first quarter as possible and -- how do you expect to -- what do we expect for the next 2, 3 years? So it is confirmed the declining trend after 2023, considering the order backlog, which is quite rich.

[Giulio Ranzo, executive]

So thanks, first of all, for your question. It gives me the opportunity to clarify a little bit how the return to flight program was put in place in agreement with the European Space Agency. So the Vega flight in August does not require to do any particular test. However, on the Vega flight for August, we are implementing a whole set of reinforced acceptance activities that we normally don't do. So we have been reviewing one by one the adequacy of the product of all of our suppliers with the European Space Agency and Arianespace. So we've been performing supplier audits and things like that. And this is burning a lot of time. This is why Vega is flying on in August and not earlier, okay?

The second aspect is that we will be flying on Vega in August a couple of satellites that were supposed to be on Vega C. So we had to refit satellites on a smaller rocket, not exactly an easy task.

Now regarding the preparation of Vega C instead, what do we have to do? We have built a new Z40 with a different Nozzle insert in a new carbon-carbon type, and we need to fire it at the end of June. Then after the firing test, we need to analyze the data coming from the firing test and verify that with this new carbon-carbon insert, the performance is exactly as expected. And this is very instrumental to know whether or not you can do the mission because you will measure what is the trust that actually the motor delivers. And so what is the pain you can lift, et cetera, et cetera.

So this analysis will take at a minimum the month of July and the month of August. And then if everything goes well, we will perform a checkpoint also with the European Space Agency and de facto issue what is called the de facto qualification. So modification of the motor with this new carbon-carbon insert. At which point, we will be in the position to integrate the Zefiro40 that will then fly in December. So it means that we start to integrate the motor for the flight in December, we start to integrate it in September. So maybe October, the motor is ready, then it goes to the launch pad and there you are. So that's pretty much the thing.

So what we're doing is 2 activities in parallel. On one side, we are working for the flight of Vega in August, which is unaffected by the story Zefiro40, but it's affected by a number of other checks we do, in particular in terms of auditing the supply chain and auditing even our own product in this, by the European Space Agency. And on the other side, for Vega C return to flight, we need to see what is the result of the firing test and apply those learnings to the mission profile of the next Vega C flight.

I hope I clarified this to you. And maybe I will leave it to Alessandro to talk about CapEx and order backlog.

[Alessandro Agosti, executive]

Thank you, Giulio. Bruno. Yes, in first quarter '23, we had CapEx in the range of about 5 million compared to 3 million in last quarter to first quarter '22. The increase is basically related to higher CapEx in Vega cadence in order -- in view of the increasing backlog that Giulio commented before in the chart 5 of our presentation. On a full year basis, we are substantially in line in terms of CapEx in '22. So in order of magnitude of 35 -- between EUR 35 and EUR 40.

[Bruno Permutti, analyst]

Okay. And do you expect that to be a level for the coming years? Or something could change or something has changed considering the dynamic of the defense business or the dynamics of the orders for...

[Giulio Ranzo, executive]

We are trying to remove any peak in CapEx in the next few years. So we will try not to go above EUR 40 million. The reality of things is that, as you know, as you are seeing, there is incremental opportunity everywhere. So there are more flights coming for Vega C, which we have never had because we have never had this backlog for Vega C. So we are funded already by the European Space Agency to do launch rate capacity, investment upgrades. And so we're fine we cannot exclude that there might be some additional CapEx.

On the story of tactical missile production also, we have funded to upgrade our production capacity. But yes, we cannot exclude that we may have additional CapEx. What we will do is we will try to limit this below the EUR 40 million, hopefully, max EUR 35 million in the years to come and maybe distribute differently over time.

I think you also had a question on order backlog, correct?

[Bruno Permutti, analyst]

Both related to the CapEx considering that the order backlog gains was expanded perhaps at a faster pace than that perhaps originally estimated. But yes, it was much related to that.

[Alessandro Agosti, executive]

Bruno, for the time being, we do not expect increase -- significant increase in CapEx to make the increase in order backlog, is substantially...

[Operator]

[Operator Instructions] The next question is a follow-up from Martino De Ambroggi of Equita.

[Martino De Ambroggi, analyst]

Just a question on the order backlog. You just touched in the previous question. But -- if I look at your Q1 backlog, you are already in line with the full year guidance. Is it just a matter of orders put forward or there is a potential upside for the current year?

[Giulio Ranzo, executive]

This is hard to say right now because it is true that timing went in a way that we got these orders a little bit earlier than we had anticipated. But between now and year-end, we still need to do some EUR 280 million of revenue. So if we were not to accumulate any new order, we would then go dramatically down with order backlog.

So to keep this leverage means we have to accumulate additional EUR 280 million worth of orders. And that is definitely possible because you know we have all of the wake of the orders coming from the European Space Agency, Ministerial Conference that is way higher than that. It's more than 700 million. Still, we need to crunch proposals. We need to negotiate the contracts with the European Space Agency. So I'm not quite sure at this point to what timing we can do. So it's early to say that we can exceed the expectation on order backlog. I would say that we should comfortably be within the guidance.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time. Back to you for any closing remarks.

[Giulio Ranzo, executive]

Thank you very much. We look forward to update you on whatever happens. I think one point we forgot to mention is that we are continuing and hopefully closing some of the activities we mentioned we wanted to do in terms of M&A in minority participation in technology companies. So these are just a handful of millions of investment that will be made, but they are strategic in particular, to execute against those new technology contracts so that we hope to execute in the next few weeks and to be able to report. And then by June, we will definitely immediately report to you on the results of the firing test. Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.