Fincantieri SpA

MIL:FCT

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the Fincantieri First Quarter 2018 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Giuseppe Dado, CFO. Please go ahead, sir.

[Giuseppe Dado, executive]

Yes, good morning ladies and gentlemen, and welcome to our first quarter conference call. As you know, as we introduced at the end of March, we have recently updated our company's strategic outlook and business plan and I believe that the results of the first quarter, we confirm that these results represent an important first step in confirming the growth path set out in the plan.

So let's go on and see the presentation and look at these results. Starting with Page 3, as I said, the Q1 2018 results are in line with the business plan 2018-2022 targets and we booked revenues up 11% versus first quarter of 2017 and a growth in the EBITDA margin of 22% from 6% to 7.3%.

Total backlog is slightly increasing with respect also to the end of last year and with respect to the first quarter of last year. We close at EUR 27.7 billion, comping roughly 5.5 years of revenue -- of 2017 revenues of course. The EUR 27.7 billion are split between EUR 22 billion roughly in backlog with 104 ships, up from EUR 20.8 billion in Q1 2017 and a soft backlog of EUR 5.9 billion.

On the commercial side, the cruise business, the cruise ship business is still very, very alive and active, lots of negotiations going on and we had further commercial developments in this business with an agreement for 6 cruise vessels to be built for Viking Cruises. With this agreement, we are up to 16 cruise vessels either built or under construction at the [indiscernible] yards of Fincantieri for this cruise operator.

We also through Vard at an order for further 2 ships to be built for Ponant, a French owner, and also Vard signed a letter of intent with Viking for the design and construction of 2 special cruise vessels with an option for 2 more. Another smaller project in terms of value, but very important for us because the Ship and Repair Conversion units of the Services division, under contract with Grimaldi group and this contract will entail the lengthening and refurbishing of 2 cruise ferries, the Cruise Roma and Cruise Barcelona which were built by Fincantieri -- built and delivered by Fincantieri back in 2007, 2008.

The operational performance is sound. We delivered in the first quarter the Carnival Horizon out of Monfalcone. We just delivered a couple of weeks ago another ship out of Sestri for the luxury brand Seabourn of the Carnival group and we are going to deliver 3 more ships, 3 more cruise vessels by the end of the second quarter and one more we have in the fourth quarter.

We can see Page 4 as I already described the orders and deliveries, and on Page 5, we plot our order intake which was totally at over EUR 1 billion. Of course there is big difference compared to the order intake of the first quarter of last year, but as you know in our business there's no such thing as seasonality when it comes to order intake and/or revenues, and we have to recall that in the first quarter of last year EUR 3.2 billion of the EUR 3.5 billion were related to a large contract signed with Norwegian Cruise Lines for 4 ships plus 2 options. We mentioned before that the order intake brings the total -- the backlog at EUR 21.8 billion with a soft backlog of roughly EUR 6 billion for a total of almost EUR 28 billion of work.

On Page 6, we can see that the backlog deployment -- we can see that we further increased -- in the first quarter of this year, we further increased visibility in cruise with one more delivery in 2022. Right now we're up to 4, we expect to go to 5 and we have 27 vessels in backlog. Not only this is pretty unchanged with respect to the end of last year, and we also added 2 more ships in 2020 for Vard. We have a total of 104 ships in backlog at the end of March 2018.

On Page 7, we plot revenues and EBITDA by segment. Again, growing -- revenues are growing with respect to the first quarter of last year and we expect this path to continue throughout 2018, although to a lesser extent with respect to the growth we did book last year with respect to 2016. And of course, we are still in a solid growth path in terms of EBITDA and EBITDA margin. As you can see, results -- overall results compared to the first quarter of last year are improving.

Notably, the largest chunk of the improvement is on the EBITDA and EBITDA margin of shipbuilding, that's where most of the growth in terms of revenue comes and also the growth in terms of EBITDA and EBITDA margin. And while in the systems and components business and in the offshore business, although in the systems and components revenues are growing, the mix of revenues is leaning more towards the captive business at this point in time while we wait for the growth of the after-sales services and of the contracts in the naval services. So it's more towards the captive business, therefore you see margins going down a little bit.

When it comes to the offshore, we see an improvement the growth in revenues and this is thanks to the fact I believe that the diversification strategy in the older acquisition is flowing down to revenues at this point in time and we can -- we expect to see revenues growing further although this diversification strategy has not yet translated into better margins because the operational let me say machine of the yards in Romania and the yards in Norway is still yet to be streamlined I would say.

Since I pretty much commented the segments, we can skip Page 8, 9 and 10 and go to Page 11 with net working capital and net debt. Features of first quarter of 2018 compared to the end of last year show a net decrease and it was negative at the end of last year, is still negative, net working capital, but to a lesser extent therefore an increase of needs for financing the growth in revenues. You can note indeed that work-in-progress net of advances from customers is growing, we get less trade receivables due to the cashing of the delivery payments for cruise vessels, but we expect net working capital needs to develop and grow throughout the year and on the other side we expect therefore the net debt position to increase slightly towards the end of the year.

As with the outlook, we confirm the expectations and the guidance on 2018 results. We expect them to be in line with 2018-2022 business plan targets. On shipbuilding, we have total deliveries for 10 units of which 4 cruise vessels and 6 naval vessels. We're going to see the Italian Navy's fleet renewal program fully operational with the first delivery I believe planned for 2019 and the Qatari project will be by the end of the year full-blown with design engineering activity.

In offshore, we see and the older acquisition of this first quarter confirms it, we see the implementation of -- further implementation of Vard's diversification strategy and we will enhance our focus on products with greater potential. We announced -- Vard announced recently the acquisition of an order [indiscernible] for the construction of a cable-layer which we believe is a very important commercial step in the diversification strategy of Vard and it's signaling the market that notwithstanding the situation in the offshore -- energy offshore space there are still opportunities to be tapped in the markets of specialized vessels as a whole. We are still in the path of deploying synergies with Fincantieri and also wait for the cruise business and we expect the margins to deflect benefits of the expansions.

In the Equipment Systems & Services, we confirm the growth trend thanks to the backlog deployment related to the naval programs. And we are implementing already commercial and organizational actions to ensure a stronger foothold in these geographies that are strategic for the development of the after-sales services and systems and components services.

So as I said before we confirm the guidance with a revenue increase between 3% and 6% versus 2017 and EBITDA margins at -- we will print approximately 7.5% and net debt between EUR 0.4 billion and EUR 0.6 billion.

And now I'm happy to take questions.

[Operator]

This is the Chorus Call conference operator. [Operator Instructions] The first question is from Monica Bosio with Banca IMI.

[Monica Bosio, analyst]

Just 2 questions; one is on STX. Do you have any further update on the STX deal finalization? And the second question is on the order intake. The soft backlog is amounting to roughly EUR 6 billion. Should we expect that the soft backlog would be converted into firm orders by the end of the year? And can you just give us some specification on the composition of the soft backlog? Should we assume that a soft backlog is now including the agreement with Viking and the letter of intent of Vard? Thank you very much. Plus the conversion for Grimaldi.

[Giuseppe Dado, executive]

So first question is quick and easy, no, we don't have any updates on STX. Second question, order intake and soft backlog, we stated before there is a big, big difference between the order intake of first quarter of this year and the order intake of first quarter of last year, but this -- no means -- I want to reiterate message, by no means we can see a slowdown, we see a slowdown in commercial activity as I said before negotiation in the cruise business and I would say to a certain extent although the markets have different dynamics in the naval business are still -- there are lot of commercial initiatives going on and the markets are too buoyant. The soft backlog, yes, you can expect converging of the soft backlog into backlog by the end of the year, maybe not all of it, but because within the soft backlog we have a mix of things. As we said always, we have the options on vessels that are already acquired and those options have expiry dates that go beyond 2018 for some projects. For instance, we have the options on the Italian fleet renewal program that have -- expire beyond 2018. At the same time, we don't have for instance the Viking ships in the soft backlog yet. Okay?

[Monica Bosio, analyst]

So it's on top?

[Giuseppe Dado, executive]

It's on top, yes.

[Operator]

The next question is from Matteo Bonizzoni with Kepler Cheuvreux.

[Matteo Bonizzoni, analyst]

I have 2 question. The first one is on the guidance for 2018. We have seen in the first quarter a growth rate and also an EBITDA margin expansion that is well above what you see for the full year, so 11% up the revenues and 130 basis point up the EBITDA margin. The reason why we should assume that you are going to hit the guidance and not going above is that is because in some way in the second half you will have a more challenging comparison base or just can you help us to understand during the year what kind of growth trajectory we should see. This is the first question. The second question is as regard net income margin guidance. I have -- we have seen that you are not referring anymore to the net income adjusted margin between 1.8% and 2%, is there a specific reason? And if I may come back to the ForEx that created a lot of noise after the business plan presentation, the ForEx hedging issue, just to understand the technicality, just a couple of question. So I understand that you are hedging 3 ships to be delivered between 2018 and 2020, so you have sold the U.S. dollar versus euro forward at a very specified rate. In an environment of weakening euro dollar, so weaker dollar compared to euro, you should have a positive marked-to-market of this derivative, just can you help on understanding what is precisely happening here? Can you confirm that is just non-cash and why you decided to include it, the adjusted net income when other companies that have such issues decided to exclude this volatile issue from the adjusted net income and they just put into the reported one?

[Giuseppe Dado, executive]

First question, I borrow your words, Matteo, yes, in the second part of the year, we'll have a more challenging comparison base because if you recall last year, in the first 2 quarters of 2017, we lagged behind with respect to grow targets and we had -- we declared and we actually had a very strong pickup in revenues in the third and fourth quarter. Therefore, you see higher growth than expected now and you will see this growth rate go down towards the end of the year because, yes, second part of 2017 was very, very robust in terms of growth, okay? So no need to worry there. On net income, yes, we did not confirm the guidance on net income on the first quarter simply because we do a limited reporting on the first quarter results, but I can tell you I don't see any issue in confirming the guidance also on net income for the year 2018. So targets remain untouched there. On the ForEx hedging issue, let me start all over, yes, correct, we did hedge 3 vessels. The contracts are denominated in U.S. dollars. Those 3 vessels are going to be delivered respectively in 2019, 2020 and 2021. Therefore -- and those vessels in dollars were fully, fully hedged, okay? By selling U.S. dollars at a slower rate and of course the expiry date of this forward contract is exactly -- exactly matches the expected cashing rate -- date of the payments on the contracts including the delivery payment. Now what happens when you do this under hedge accounting, I repeat it, we apply hedge accounting, so we strictly follow accounting principles in connection with financial standards when it comes to booking revenues in a currency that's not the functional currency of the group and when it comes to booking the effect of hedging contracts. When you do that, you basically freeze the value of the revenues and therefore you don't bring in volatility on the top line and on the EBITDA margin. You bring in stability because revenues are frozen, are not anymore subject to the fluctuation and the volatility of the foreign exchange rate. You book below the line, below EBITDA, these -- what accounting principles call the interest rate component of hedges, okay, and it mainly drives this from the interest rate differential between the 2 currencies, okay, and what you do, still according to accounting principles in our business, you flow the difference through P&L based on percentage of completion, okay, that is why you see most of this effect concentrated in this year, next year and 2020 because of course we delivered the 3 ships in 2019, 2020 and 2021, period.

[Matteo Bonizzoni, analyst]

And this is non-cash?

[Giuseppe Dado, executive]

No, it's not cash component.

[Operator]

[Operator Instructions] The next question is from Giuseppe Mapelli with Equita.

[Giuseppe Mapelli, analyst]

I have 2 question. The first one is a follow-up on the last one. Can you share with us what is the estimated impact coming from this interest rate component of the hedging that you discounted in your forecast for '18 and '19 and also '20, considering also delivering in '21? And my second question is regarding the Viking contracts, can you share with us why it's not yet considered as soft backlog as -- if I remember well during -- let's say, in the press release, it seems to me that the contract was let's say finalized?

[Giuseppe Dado, executive]

As this brings me to correct what I said before and yes, Monica, the Viking project is in the soft backlog. Sorry about that.

[Unknown Executive]

About the hedge.

[Giuseppe Dado, executive]

Sorry, there was another question?

[Giuseppe Mapelli, analyst]

Yes, the first question was on the amount of hedging impact below the operating margin discounted?

[Giuseppe Dado, executive]

No, we don't -- we don't -- we prefer not to disclose that. I mean we gave you the guidance on net income as I said also to Matteo, I mean net income in -- adjusted net income includes that impact.

[Operator]

The next question is from Gabriele Gambarova with Banca Akros.

[Gabriele Gambarova, analyst]

Just a couple of questions from my side. The first is on equipment service, systems and services. You have this margins scaling down a bit. You said it's a matter of mix, more captive, so I was wondering if it is possible to have an idea of what could be let's say the -- an adjusted EBITDA margin for the business of Fincantieri Marine Interiors, just an idea, a rough idea what could be the margin going on? And then you also mentioned lifecycle management services, with special reference to the Qatari contract, so I was wondering if you could explain me a little bit what does this mean considering that you are still in the design and engineering phase of the Qatari vessel, so I was wondering what does this mean? And...

[Giuseppe Dado, executive]

Okay, first question is easy. No, we do not -- rather not to discuss margins within -- of this different products and services between systems and components. When it comes to lifecycle management, as you know each of the 2 main naval contracts that we signed in the recent years, Italian Navy and Qatari Navy, have a life -- a service component called the lifecycle management. And what it is this? It is the full maintenance and servicing of the ships for 15 years after delivery of each vessel. Therefore what I said when those programs further advance and we start with the first deliveries, you're going to see the services component kick in, but of course before you see these effect flowing down to revenues and margins, you are going to have to wait deliveries and when it comes to the Italian Navy renewal -- fleet renewal program, the first one is due 2020, '19 and for Qatari, it's 2020 or 2021, so you're going to have to be patient there.

[Gabriele Gambarova, analyst]

Listen, just a follow-up on this; I read on local newspaper that you may -- you might let's say have a few logistic problems with all of these contracts flowing from the Italian Navy -- from the Italian Navy, from the Qatari Navy to your [ Mujano ] yards basically. Is this something that worries you? I mean there -- is there really say an overflow of work there, is something manageable?

[Giuseppe Dado, executive]

The workload of the group as a whole is massive. And our business is complex, but we believe we have the right set up in order to both globally and locally to develop this workload. With specific reference to that yard, we are setting up some CapEx in order to improve the logistics of the Mujano yard in order to be able to deliver on the projects.

[Gabriele Gambarova, analyst]

And my last question is regards Australia, the Sea 5000 program. Is there any further update vis-à-vis what we -- what we knew during the last call, I mean do you an idea of -- on the official deadline for that program?

[Giuseppe Dado, executive]

No, we expect results pretty soon, but no further developments there so far. We keep our fingers crossed.

[Operator]

[Operator Instructions] Mr. Dado, there are no more questions registered at this time.

[Giuseppe Dado, executive]

Okay, thank you. And have a good rest of the day.

[Operator]

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