Avio SpA

MIL:AVIO

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Avio First Quarter 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. [ Navio Caspin ], Investor Relations. Please go ahead, sir.

[Unknown Executive]

Good afternoon, everyone, and welcome to Q1 2024 conference call. Together with us, there is Mr. Giulio Ranzo, CEO of Avio; and Mr. Alessandro Agosti, CFO of Avio. In a while, we will go through the presentation we just released on our website. At the end of the presentation, we will open up the Q&A question. As usual, Giulio, we will go through the main highlights and results of the quarter. And Alessandro, we will go through the main financial results of the quarter. Thank you for your attention, and I leave the floor to Giulio.

[Giulio Ranzo, executive]

Thank you Navio. Good morning to you all, and thank you for joining the call. So we report the first quarter. I would start from page 4 from the key highlights of what happened during this first quarter of the year. So most importantly, we are getting ready for our next Vega flight to occur at the beginning of September. This will be the last Vega flight of the original version of Vega. Then we will switch completely to Vega-C. We will launch Sentinel-1C for the European Commission. So we're getting ready. The launcher is already on site at the Guiana Space Center, and we will kick off the integration campaign sometime in early July probably. The Vega-C return to flight project is well on track for a flight to occur at the end of the year. So the sequence would be a Vega flight in September and a Vega-C flight at the end of the year, again, for the European Commission. And in view of that, we are performing by the end of May, the Zefiro 40 static fighting test. You may recall that Zefiro 40 is the second stage motor that we had to redesign to accommodate a new type of material for the carbon-carbon (C-C) of its nozzle. So the design has been successfully completed and accepted also by the European Space Agency. And as such, we will be fire testing it at the end of the month. So we'll soon have this milestone to verify that the second stage is ready to fly.Additionally, we have signed a new launch contract for Vega-C with the European Space Agency. It is to launch the Smile mission by late 2025. So this adds to the already rich Vega-C backlog. On the Ariane side, the Ariane 6 front, the launch campaign for the [ maintenance ] side is underway. The European Space Agency and [ Cannes ] have communicated that the [indiscernible] between end of June and end of July. So I'd -- likely be sometime in July. And we look forward to that. Obviously, that is a major milestone for our business. It should unlock our production acceleration in a way for the P120 boosters for the years to come. So a very, very important milestone and we'll be seeing the launch after so many years of development, this is really, really an important milestone. The other positive surprise that now is building up quarter by quarter is the growth in the defense propulsion business in terms of the size of the backlog and also the revenue acceleration. As you will see, and I will spend some time on it, the defense propulsion activity, it's growing really in production volumes, and that is very good because it adds at the time when the production in particular, P120 boosters has been somewhat soft in -- while we wait for the main flight. So that's a very positive trend that is now becoming a consolidated part of our journey. We've paid the dividend as planned by May 2. And when we look at the first quarter financials, Alessandro will go over it. I wanted to [ anticipate ] to you an important theme here. We have forwarded significant cash advances to our supply chain in order to enable revenue growth. In fact, you will see that in the first quarter, we have some 30% more revenues than last year. In order for that to occur, what we have done is we have taken most of our cash advances that we had accumulated, as you might recall, in the last quarters. We have forwarded that to the supply chain for it essentially to become inventory and to be able to let the suppliers go. This is largely something that we will continue to see in the next few quarters as an effect of the revenues accelerating towards the larger volumes that we will have to do in 2025. And so you will see really the production growing on that side. So overall, we maintain our guidance for 2024, and Alessandro will cover that in a few minutes. Moving to page 5, as I said, the Vega-C [indiscernible] is underway. Here, you see some photos of the Zefiro 40 motor on our test [ 10 ], ready to fire. The nozzle of this second stage motor has been purposely redesigned to accommodate the different type of carbon-carbon material that we are now using. The design has been checked in many different ways with the help of third-party reviewers to make sure that it is robust and that it would send a very demanding test as we wait to do by the end of the month. So I think this will be extremely important because we'll pave the way for a successful return to flight of Vega-C by the end of the year. On page 6, we report the signature by Arianespace of the Smile mission for the European Space Agency. This is to launch into orbit an important [ ESA ] mission for Solar wind Magnetosphere Ionosphere Link Explorer. So it's a scientific mission in a way. And it's one of the important missions for the European Space Agency that we envisioned to launch no earlier than the end of next year. And as you know, this contract was still signed by Arianespace where we anticipate the transfer of responsibilities and commercial activities from Arianespace to Avio in the months to come as an effect of the resolution adopted by the European Space Agency, targeting to redefine the governance of responsibilities within the European launches. So this is an important mission. It adds to our backlog. We are quite satisfied with that and grateful for the trust. On page 7, just a few photos of Ariane 6 finally on the launch pad. And many of you would know even more than I do but the [ maiden flight ] is ready to go. A lot of work has been done to prepare for the flight. So the latest hot firing tests have been performed by mid-April on the central core. As you know, the boosters don't need any form of testing, we've done extensive testing even in flight with Vega-C. So all of the rest is ready to go. Last few checks. Our experience says that last minute problems are always possible when you come along with a completely new system. And so I assume now Ariane Group is working intensively to prepare for the flight, but it seems to me we are going in the right direction for a flight in July. And therefore, we will wait to see this extremely important milestone, which, as I said, will unlock our production plans for the rest of 2024 and most importantly, for '25. So we are already preparing ourselves to ramp-up rapidly, production of the boosters to make sure that we can support the growth of the flight [ date ] of Ariane 6 in the years to come. As we know, Ariane 6 has a huge backlog of flights to be performed, something like 30 flights to be performed in the years to come. So we have already anticipated a lot of production. A lot of stuff is already in inventory, but we are preparing to further increase production to really make sure that we cope with the commitments on the contracts already signed and with the market potential that is building up in the meantime. One point, as I said on page 8 on defense propulsion, as you know, the defense propulsion was not in the last few years, an important part of our portfolio. But as you can see on the left graph, the backlog on this activity is growing very rapidly. It's now becoming a very important part of our backlog. And as such, I think this is really a great opportunity I want to draw your attention on because it's a production business largely. Out of €317 million worth of the backlog, maybe only 10% is related to development activities. Most of it is production. And as you can see on the graph on the right, the production volumes are growing steadily. Now why is this important? It's important because it helps to generate profit, to absorb fixed costs at a time when, as I said before, P120 production is not yet where it should be and also because it provides, as you can see on the graph, great opportunity for growth in the years to come, very rapid growth. So we are continuing to add orders. We have a lot of commercial activities in our pipeline. So we hope and count to further increase the backlog and therefore, have some upside potential even on the already rapid growth expectation for the years to come. So the volumes will tend to go well over 300 motors per year, which really will help in securing our targets for profit and for growth that we expect overall in the company. I will now pass the word to Alessandro for him to cover the financial of the first quarter. Maybe one important point, as you know, the first quarter is typically not very indicative of what will happen in the full year. As you know, I recall to everyone that most of the profit is largely accumulated towards end of the year and also the cash. So the first quarter is not very indicative. Yes, I think it's important to review that there are some key themes, positive themes that Alessandro will highlight it and important for you to follow. Alessandro?

[Alessandro Agosti, executive]

Thank you, Giulio. Good morning, everybody. So we move to page 10. We reported a backlog of €1.4 billion, which is the highest in the company history, reaching more than 4x the 2023 full year revenues, [ that is ] providing strong visibility in the medium term. For the backlog evolution over the last 4 years, showed a compound annual growth rate of almost 20%, as you can see in the graph. In Q1, '24, order intakes amounted to approximately €100 million, principally composed by €80 million of production orders, defense propulsion, as Giulio commented before. The remaining orders acquired the concerned development activities of Vega family. Following the recent growth in the defense order intake, I recall that we had €120 million in 2023. The defense has almost reached 25% of the total order backlog at the end of the first quarter, '24. So defense backlog is now half of Vega backlog and higher than Ariane backlog, waiting for the medium side of Ariane 6 scheduled in June, July, as commented before. 60% backlog is for production and 40% of backlog is for development activities. On page 11, we reported the trend of revenues. Revenues increased more than 30% compared to the first quarter of previous year. Such increase has been principally driven by the defense production activities and technology development projects. Defense propulsion revenues accounted for almost 20% of the first quarter ‘24 revenues. 50% of revenues come from production activities, 50% from development activities. So revenue from development activities grew by almost 50% compared to the previous quarter of 2023, thanks to technology development projects. Production revenue increased by almost 20%. On page 12, we reported main financials. The [ charge ] for the main financial for Q1 '24 compared to the Q1 '23. Backlog of €1.4 billion, as commented before, at the end of the quarter has been driven principally by defense propulsion production intakes of the quarter, net of revenues of the quarter. Increase of more than 30% of revenue, [an increase ] as driven by the defense propulsion production and technology development projects. EBITDA is higher than Q1 '23 as a result of contribution of higher revenues from defense propulsion production and technology development project basically. Non-recurring costs were mainly related to exploration of new potential business as it was in the previous year. EBIT, you can see we have a positive effect on EBIT, also driven by lower depreciation following the review of economic useful life of certain production assets in the second half of 2023, which were not included in the first quarter of '23. In connection, basically, with the phaseout of Ariane 5 and the [indiscernible] parallel with the result of Vega and the [ Pisin ]. Net cash position, as expected show a reduction in Q1 '24 compared to end of December, mainly attributable, as commented before by Giulio to the slowdown to subcontractors of certain advances received from customers in previous months, in line with the typical business life cycle as well as for strategic procurement of long lead items of Vega-C. The fluctuation is typical of our business. In fact, you can see in the next chart on page 13 that we had a significant reduction, up to €50 million in net cash position between Q2 and Q3, while in '22, there was an increase of around again, €50 million net cash position between Q3 and the year-end. The slowdown of advances received from customer to subcontractor also helped to support business activities in the revenues in the first quarter 2024, as commented before by Giulio. In page 13, we in the quarter departed of EBITDA adjusted show that the EBITDA is confirmed in particular to concentrate the contribution in the last quarter of the year. On page 14, we reported the capital returns paid in the first quarter of '24. The shareholders' meeting held on April '24, unanimously approved the Board's proposal of distribution of an ordinary dividend of €3.75 million and as well as an extraordinary dividend from available distributable reserves of €2.25 million for a total dividend yield of 2.55% which was proposed by the Board of Directors in March '24. The shareholders' meeting also approved the completion of the treasury share program, which started in 2019 for a receivable amount of €4.9 million. Then on page 15, we reported the guidance for the full year for the year 2024, which is confirmed, which showed that backlog is expected between €1.5 billion and €1.6 billion with a growth compared to 2023 between 10% and 15%, thanks for new intakes expected from the defense propulsion business. We expect also in 2024 to start the rollout of the backlog accumulated previously. Revenues are expected between €370 million and €390 million with a 10% growth versus '23. Though again, it is expected in the defense propulsion activities and technological development projects as we see in the first quarter '24. EBITDA reported expected between €21 million and €26 million with a 10% growth versus '23, thanks to the backlog rollout to unlock production economies of scales basically from the €120 million. Net income finally is expected between €6 million and €10 million, with a growth rate between 10%, 20% versus ‘23, thanks also to the marginal factors of financial charges and taxation as it was in the previous years. This is the summary of the financials. I give back the floor to [indiscernible]

[Unknown Executive]

Yes, we can open up the Q&A session at this time.

[Operator]

This is the Chorus Call conference operator. We will now begin the question and answer session. [Operator Instructions] The first question is from Andrea Bonfa of Banca Akros.

[Andrea Bonfa, analyst]

I got a couple of questions related to defense propulsion and in particular, if there is any development on the Narew contract, which is normally very big and could have a very material impact on your backlog? And the second one is a more general comment from your side. I mean, in the light of, let's say, a sense of urgencies or lack of missile stock across, I think, European capitals, I mean how much flexible are you in order to accelerate ‘24 and ‘25 production? Because also looking at some comments from the French Minister of Defense, they are asking a very quick acceleration on delivery on missiles. So if you could elaborate on that.

[Giulio Ranzo, executive]

So thank you, Andrea. So the Narew contract has been signed by MBDA, and they have communicated that in public. Now they are in the process of flowing this down to the suppliers. So we expect and are hopeful that by -- within this year, this will be flown down to us and that we can cover some initial activities that we have to do for 2024. Then of course, in terms of converting that -- so I mean, a good chunk of the backlog, we should be able to book within 2024. Then of course, revenues will pick up in '25, '26, '27 and following years. In these slowdowns, there's a little bit of bureaucracy to go through, but it will come. So we don't have to worry too much about it. Now in terms of production growth, we have flexibility. Consider that this year, as we have reported on page 8, we are targeting something like a 20% increase in production volumes on the defense side. We may go even slightly beyond that, but let us also remind us that we have grown already some 30% last year with respect to previous years and so on. So I think we can grow. We can most probably even double these volumes, but not on a year-to-year basis. So it will take a little bit of time. This is why on page 8, we have provided for you, for the years to come, a little bit the trend of what we expect in production volumes, but we have left also some margin for potential upside. Why do we do that? Because as I said before, within the backlog of defense propulsion activities, we also have some products which are in development. The products are not yet qualified. So once we complete the qualification of these new products, we will be able also to add additional production coming from these new product streams. So there is quite some flexibility. It is also important to note that defense production capacity in our plant was there for several decades. So we already have production assets that have been significantly underutilized in the past few years when defense demand was significantly lower. But now we are reactivating lots of production lines that have been somewhat stopped for years and now are coming back online relatively quickly because we have to adapt, of course, we need tooling and stuff to the new productions, but the assets are there. So I think to answer your question, we have quite some flexibility in growing volumes.

[Andrea Bonfa, analyst]

And if I may, on the other potential upside opportunity of your page 8 slide, is that included also the [indiscernible] upside and the U.S. potential business?

[Giulio Ranzo, executive]

So definitely, the problem with these programs is that, as you know, most of them are classified, they are not covered by confidentiality related to the armed forces. And that's the reason why we cannot talk about them until we are given authorization to do so. But indeed, we are pursuing, as we have commented before, additional backlog to come, both from the exploration of new market opportunities and new customers in the U.S. and also within Europe [indiscernible] with armed forces. The problem with defense is that when we are working with original equipment manufacturers, already communicating this program is difficult. And when you work for armed forces, it's even more difficult because they are most likely protected by classified information requirements. So we know we have to drive you as to what the expectation would be. So as soon as we are authorized to share more about what we're doing, we will do.

[Operator]

The next question is from Martino De Ambroggi of Equita SIM.

[Martino De Ambroggi, analyst]

The first question is on the short term, focusing on Q1 results. I know your business cannot be evaluated on a quarterly basis. But just to have a rough idea, what are the reasons explaining the low operating leverage considering that the defense propulsion significantly grew and my assumption, it is more profitable than the rest of the business. I don't know if it's correct or not. So just to understand what are the blocks in the bridge justifying the low operating leverage in Q1? And specifically, if you could elaborate on the energy cost in Q1 and the updated projections for the full year? The second is still on the tactical propulsion. I was wondering if based on the strong volume growth, maybe you have to or maybe your customers are asking -- your customer, single, maybe multiplied in the future, but is asking for price reduction offsetting the -- or partially offsetting the volume growth? And the third question is on the P120. So assuming that Ariane 6 maiden flight and Vega-C back to fly is all okay, what could be the production of boosters in '25, '26? And what could be the benefit in terms of profitability because of fixed cost absorption?

[Giulio Ranzo, executive]

Let's start from the first one relating to the first quarter. Again, the first quarter is typically not very negative. You know now if you look at the results of the last few years, the first quarter and to some extent, even the first half have been typically very soft in terms of the amount of profit we report. And the reason is, generally, we take a little bit of caution in recognizing profit until we see how the year is going. This year, in particular, as you know, we have a number of things which are on probation in a way because on the Vega side, we have the Zefiro 40 test, preparing the return to flight by year-end. It's an intense program. It's an expensive program that we are working on, and we still need to see what is the result. So if we have maybe some contingencies before we release them, we want to make sure that the test goes in the right direction. And on the other side, the return to flight program has somewhat slowed down the Vega production for next year more than we wanted to because on the side, for example, of Zefiro 40, we have started preparing the production for, of course, for 2024. So we have manufactured already the motors that will fly by year-end, but not yet those of 2025. So that's why also the Vega production will ramp-up after successful completion of these tests. The P120 production, it's extremely low now. I mean it's below 10 motors per year. The reason being, as we explained before, that the delay accumulated in the Ariane 6 program was such that we have essentially filled all of the possible inventory capacity. So we could not manufacture anymore. So paradoxically, in 2023 and 2024, we will manufacture fewer P120 than in 2022. And now once the maiden flight is done and successfully as we expect, we will -- first and foremost Ariane Group will use the P120s that are available in stock already up their own site. But then they have already anticipated and forwarded to us a request for ramping up again the production quite rapidly. Now we do not know yet what is the ramp-up do we expect. But give or take, we should go back to some 15 booster production overall next year in '25 and maybe 24, 25 in 2026 and then reach full production capacity by 2027, give or take. Now these things needs to be adjusted. More stocking capacity is being prepared by Ariane Group at the long side. So we will have more capacity to store already manufactured P120s and this will facilitate of course, growth in production. And also will provide them more flexibility to grow the flight rate knowing that they have more boosters in stock. Now on the tactical propulsion [indiscernible] price reduction, well, I would like to say that with a little bit of caution, but given the huge imbalance between supply and demand, I don't think price is going to be the primary driver of discussions with the customers. There is such a request that if we could manufacture twice what we do, I think the customer will absorb it. So we don't have so much discussion on the pricing. We have much more discussion as Andrea Bonfa was saying before on how fast you can possibly ramp-up. But as you know, industrial activities, you cannot triple production from one year to the following one. You have to implement that gradually. We are ramping-up production at a rate of 20% or more. We will try even to improve with that, but we cannot double production from one year to the other. So I don't think price would be a primary driver of concern. And that's -- I hope I have answered all your questions. Energy costs. Energy costs have started well at the beginning of 2024. So the cost of energy has been somewhat lower than last year. And so this may provide some tailwind for us in 2024, if this trend remains, which obviously, we don't know, depends on a number of variables. What I can report is that you see the first quarter, we had a sharp increase in revenues, which is also the result of higher production activities. Now when you do higher production activities, you obviously have a better absorption of fixed costs. So if this trend consolidates across the quarters, then I think we will have a positive effect on a better leverage on the energy costs. We are also -- we have also implemented, as Alessandro has already anticipated in previous quarters, we have also implemented a number of initiatives in energy consumption reduction. So for every production hours now, we consume less energy. We have implemented changes in our energy plant that are optimizing a little bit the energy consumption. So that may provide some tailwind by the end of the year. But as I said, with a word of caution because this is just the first quarter. Yet, this is our target to work on the unit energy cost to make sure that if we ramp-up the production that will result in a source of operating leverage, of course. So now maybe we will see by the first half, if this trend consolidates, and we will report to you maybe more precisely where we stand also with that in particular.

[Martino De Ambroggi, analyst]

Giulio, if I may, a follow-up on the non-recurring costs. You mentioned that -- if I understand correctly, the majority, if not the whole amount is referring to the U.S. initiative, the €1.8 million in the Q1. And I was wondering if the €7 million that you project for the full year are mainly, if not entirely due to this initiative?

[Giulio Ranzo, executive]

Well, a good chunk of this is for this initiative. As you know, we continue to invest. As a matter of fact, I am in the U.S. at the present time. And that takes effort and patience and persistence. So we think it's an investment definitely worth doing. So as soon as we can share more about it, we will. Okay.

[Operator]

The next question is from Bruno Permutti of Intesa Sanpaolo.

[Bruno Permutti, analyst]

I have a question related to capex. I wanted to understand if with the possibly changing tactical defense business outlook, your capex guidance and your capex expectations will have to be updated? So what you see in -- you said that, okay, you have available capacity right now, but looking a little bit beyond the next 2 years, 1, 2 years, what you are assuming? And then if you can update us on the timing for the passage of commercial responsibility for the Vega-C program? And also when you will be at [ regime ] in terms of setting up the structure you need for the services operations that you're going to assume in the next years? So if you can update a little bit, if we will see some additional personnel costs still in the coming months related to this transition and also which are the margins that you expect from these activities?

[Giulio Ranzo, executive]

Okay. So let's start from capex. No, we do not anticipate sharp in cases in capex due to additional defense production activity. These are all government contracts in the end, and most of them typically contain within the price, the provision for incurring whatever capex is required for tuning on the production lines and so on. Moreover, I would say that I have directed the team this year to be extremely disciplined in capex to keep the capex no more than the level we really need to make sure that we control our cash and that we really focus on those elements of capital expenditure that provide the highest returns. So no expectation for sharp increase in capex in the quarters to come. Now, the timing for Vega-C transfer of responsibility from Ariane Space Arianespace to us, we are debating with Ariane space and the European Space Agency. What will likely happen is that we will start a period of transition of responsibility from Ariane space to us, which may take about a year or so, 1.5 years, within which we will run in parallel. And then at some point, all this responsibility will swing on our end. We do this to make sure that we provide the best continuity of service to the customers and that we -- the transition is smooth, again, in their interest to have efficient operations and so on. Of course, we are preparing to set up an organization to carry out commercial activities. But the activities that Arianespace conducts on Vega-C are not only commercial, they also are related to mission preparation and service to the customers of [indiscernible] side.And so we are preparing for this organization, and we will hire more people for sure. But at the same time, we will also book on our side and build, let's say, a portion of the revenues that were until now incurred internally in Arianespace. So how much profit improvement we will see, especially during this period of transition where we would have to do a big half-and-half between [ ESA ] and Arianespace. So I honestly don't know. But in the medium term, we expect to have an improvement on the profit side, of course, I mean good part of the reason why we are transferring these responsibilities is to seek for synergies between these service activities that were formerly performed by Arianespace and some of the activities we do that have many similarities. So we can probably integrate these type of activities into something that is less expensive just by the sheer fact that the competencies are the same, and therefore, we can optimize the size of the team.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time. I'll turn the call [indiscernible]

[Unknown Executive]

Thank you all. Thank you.

[Giulio Ranzo, executive]

Thank you all. For any questions, please feel free to reach out to us. Thank you, everyone.

[Operator]

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