Fincantieri SpA

MIL:FCT

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Fincantieri First Quarter 2022 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Gallia, General Manager. Please go ahead, sir.

[Fabio Gallia, executive]

Thank you. Good morning, everybody, and welcome to the first quarter presentation. I'm here with Giuseppe Dado, our CFO; and our team, and we will guide you through the first quarter results 2022.

We can start saying that it is a robust set of results. Revenue came in at roughly EUR 1.7 billion, excluding pass-through activities with an increase year-on-year of roughly 15%. Contribution has been positive and consistent across all segments. EBITDA is roughly the same measure around 17%. It's reached almost EUR 120 million with a margin of 7%. This confirms operating profitability and confirms also the resilience and the ability of the company to face unprecedented increase in raw materials and the challenging condition in the supply chain, and I would say, an overall business environment.

Net debt at south of a billion, EUR 940 million to be precise, broadly in line with year-end '21 and within last year figures. Notwithstanding CapEx, capital expenditure plan is going on -- is proceeding according to plans and higher revenues. The backlog is quite solid. Total is around EUR 34 billion with 111 units, representing a multiple of 5x plus our '21 revenues. While the backlog is EUR 25 billion with 93 units.

Ships delivered in the first quarter. There are 5 ships, and they've been delivered in 4 different shipyards. And I'm also saying that diversification and consistency across the different business lines and different geographical footprint is one of characteristics of Fincantieri. CapEx, as I said before, is mainly devoted to building and strengthening our U.S. shipyards capabilities, upgrading our yards in Italy, investing in new technology.

Production volumes are coming in around 4 million hours. That's very, very high productivity level. And I would say, as a general comment, even considering that we do business with foreign clients, which represent almost 90% of our revenues. And this represents -- I would say confirms the resilience of our business.

If we flip to Page 6, we have some comments regarding the business update. As I briefly had this report, operating performance has been consistent across different segments. Delivery in first quarter has been over the sixth Princess Cruises in Monfalcone, enable the construction activity for the Qatari Ministry of Defense continue the regular speed as anticipated with the launch of the fourth corvette and the delivery of the first OPV unit in the quarter. Activity also for Italian Navy program has seen the delivery of the first PPA, which is the first of 7 units, and construction activity for the first 2 of the generation of submarines for Italian Navy has also started.

I would say very constructive news coming from the Offshore division, thanks to the competitiveness of our subsidiary, Vard, in building a market-leading position in international level and vessels for offshore wins. We've also been awarded a new contract of 6 marine robotic vessels for Ocean Infinity. And in the last division, ESS, we launched the construction activity for MSC terminal in PortMiami.

Strategic ESG initiatives, you can see it at Page 7, but we are fully committed on 4 different axes. We would like maybe just to highlight the fact that we continue to work and commit ourselves in, I would say, wide range of partnerships from decarbonization to digitalization to ecological transition. We signed a few memorandum of understandings, one with ENEA regarding energy transport and circular economy; with RINA for decarbonization of port infrastructures.

And regarding people and society, we pride ourselves with remembering -- reminding that Vard has offered its facilities in Romania to accommodate up to 250 Ukrainian refugees; the launch of School4Life, along with other important Italian companies basically to combat the need issues, which is an important and harsh one in our society. And we also launched, as announced a few months ago, a corporate nursery program.

We've also been working with our subsidiary, NexTech, for an agreement with Almaviva and Leonardo to offer digital solutions applied to dynamic monitoring for the security of Italian critical infrastructures.

Last but not least, we had an agreement with BNP Paribas for issuing a sustainability-linked guarantees facilities related to the achievement of 2 KPIs regarding energy consumption management and a sustainable supply chain. You know how important the supply chain is for us. And a key part of our effort is also to involve all our suppliers, most of them in our efforts.

Page 8, you can have a picture of our ratings and awards just to confirm our efforts to become a model of excellence, embracing social, environmental and government topics.

Page 9, we have deliveries and order. We already commented before, just to highlight the fact that we've been working for different ships for delivery, and we've been also managing to acquire new orders of roughly 0.5 billion. And the majority of this, I mean, that was the Offshore division represents the bulk of these orders and acquisitions.

In terms of backlog, Page 10, you can capture with the glimpse how diversified our backlog is, how deep in terms of duration. And that allows us to say that we have a long-term visibility for our backlog, both cruise and naval, and the diversification of our wind offshore operations allowed us to be very constructive for the future, considering also the development of which -- and investments, which are expected in the next few years in order to drive this energy transition process.

I will hand it over to Giuseppe for financial results.

[Giuseppe Dado, executive]

Good morning, everybody. I'm on Page 12 now. A quick comment on order intake. We already went into it, but what we need to note is the very positive pickup in order acquisition with reference to the Offshore and Specialized Vessels. And you will see it also in -- this result has been consistently going on through the last quarters, and it has had a very important impact on revenues.

Backlog visibility is north of 5.2x current revenue. So it's still very good, notwithstanding the lack of new orders in being the cruise segment for the moment.

Revenues on Page 13. We grew roughly 18%. You can easily note that the bulk of the revenue growth comes from the Naval shipbuilding activity and offshore, which doubled revenue with respect to the first quarter of last year. And of course, also Equipment, Systems & Services, thanks to the consolidation of the INSO acquisition. We do expect, of course, cruise revenues to grow throughout the year. Therefore, don't take this first quarter as a reference for the year 2022 when it comes to cruise revenues that are still in a growth gap at least for this year 2022. 86% of revenues, we said it before, come from international clients, confirming our truly global footprint.

As with EBITDA on Page 14 and 15. EBITDA growth roughly mirrors the growth in revenues. You saw that -- you can see that we did roughly the same production hours as last year -- the first quarter of last year. We are working in full production capacity at this point in time. And the growth, of course, comes mainly -- I'm on Page 15 now, mainly from higher production volumes, which we have to say differently from the production of projects that have higher margins, let me say. And this is the contribution of the revenue growth, notably of the Naval segment.

And of course, also when it comes to shipbuilding, of course, in improvements also in operating margins, thanks to the fact that we are still reaping the benefits of all the efficiencies and change management that we implemented in the past few years. But as we said, also in the past conferences, allows us at this point in time to offset and compensate the very important, I would say, increases in commodity prices.

CapEx program is proceeding as planned. We still are in the tails of the investments in our Italian shipyards, notably, Marghera and Monfalcone, through these investments should phase out this year. And we have a very strong activity in the United States in order to be ready to start the construction of the frigate program for the United States Navy.

As with working capital and net financial position, basically, the 2 figures are roughly and broadly unchanged with respect to last year. We do expect, as I said, a pickup, very important pickup in the second part of the year of the cruise revenues as we expect to deliver 7 vessels this year and 7 cruise vessels next year. Therefore, you're going to see net working capital levels to increase. There's already evidence of this. If you look at the work in progress, it has increased by roughly EUR 800 million in the first 6 months, notwithstanding the delivery of one cruise vessel.

And it's also evident that we finance the bulk of this growth to construction loans, which have increased from roughly EUR 1 billion to EUR 1.5 billion. Therefore, net financial position is roughly unchanged. Of course, we reiterate the message of being able to fully support our net working capital needs with our funding sources. And all our funding sources, not have no covenants at this point. And at this point in time, also, we do not have any major exposure to foreign -- sorry, to interest rate risk as we are fully hedged.

Now I'll turn the word back to Mr. Gallia for the outlook.

[Fabio Gallia, executive]

Thank you. And just Page 19, you can have the illustration how we see our near term and a few comments on the longer-term prospects. Regarding the segment cruising represented the majority of our business, there are a number of information here, but I think it's important to highlight the fact that booking trends for 2022 and 2023 are in line with '19 levels at higher prices. That bodes well for comeback and new investments, and we can confirm that we are expecting for next year the orders should things go better and faster, there might be also some, I would say, consolidation regarding these expectations we have.

We also know that public information regarding the companies which are listed saying very clearly that they turned positive regarding what is the short-term prospects. And above all, they all confirm that it is a long-term business, which is about to grow and expand is share in terms of household expenses as far as the travel destinations are concerned.

Clearly, the industry that is fully committed to net carbon neutrality, and we say so because a lot of our investments and efforts are about becoming better and faster than others to adopt and provide clients with ships which have a technological edge versus competitors regarding the commitment for this carbon neutrality path.

On Naval, you know that the global spend in defense reached $2 trillion plus, and the unfortunate events over the last few months are pushing defense in this field at higher level, and it's true to say globally and created impacts also our continent and our Europe.

Just to give the major comments. We are exposed to basically 3 business lines: Cruising. Cruising is a sector which historically outperformed GDP growth. It's cyclical. We are being able to cope with COVID. Now we're coping with the conflict in Ukraine. But long-term trends are solid, and we have very robust, competitive positions versus our competitor. So we look at the long-term prospects in this field, which is about to enjoy our technological edge, our industrial culture and the investments we're doing in order to provide better and more and more ESG compliance vessels.

Defense. This business is going up, and there will be an acceleration in investments. So again, we're exposed to a sector with a leading competitive position in surface vessels, and we're also about to strengthen our positions in submarines.

Offshore. Offshore has been through hell and back because it was basically exposed to oil and gas. The sector lost roughly 90% of its revenue base. We've been able to use our competencies, our experience, our technology. And in order to reorient the business model and exploit the bloom in investments, particularly regarding offshore wind farms, and we have been building a leadership position at worldwide level.

Clearly, that is also possible to the strong culture of the companies, which also prove how resilient it has been so that we can confirm, assuming no further relevant deterioration in geopolitical and global situation. Long-term growth and profitability can be preserved or defended by the company. We can expect solid revenue growth, which is about to increase, exceeding '21 levels with solid marginality despite what is happening at the commodity prices.

So in a nutshell, [indiscernible] this capacity to face unforeseen events and exploiting and leveraging a stronger competitive position we have in the global market and a very strong industrial and cohesive culture.

Thank you for your attention, and happy to take your questions.

[Operator]

[Operator Instructions] The first question is from Monica Bosio with Intesa Sanpaolo.

[Monica Bosio, analyst]

The first one is on the Naval defense business. I'm not asking if you are getting or no further contracts, but can you comment on the main tenders currently underway in the sector? And on top of Italy and U.S.A., where do you see further opportunities for Fincantieri?

And my second question is on cruises. In occasion of the full year 2001 (sic) [ 2021 ] results, the group was not seeing any new orders in cruises in 2022. Do you still keep this with this view? I know that you do not comment on press rumors, but it seems that Norwegian lines aims to ask for new cruises. So any color from this would be helpful.

And the very last is on the Equipment, System & Service area. Can you give us just a rough indication of the breakdown of the division? Or at least how much is the infrastructure business? And do you have any down payment in this area?

[Giuseppe Dado, executive]

Okay. Thank you, Monica. Giuseppe speaking. So on our defense business, at this point in time, we are pursuing some commercial leads, but we rather not be more specific than this on what leads we are pursuing as competition is very fierce amongst European players. We are -- still have a healthy backlog to execute, the 2 programs we have in execution, one for the Italian Navy and one for the French Navy. And we're going to start as to our U.S. operations, U.S. Navy program. Those 3 programs give us very good visibility for the future. And you've seen in the numbers right now that activity is picking up in terms of revenues and also in terms of margin.

We do expect a change in the appetite and demand for our vessels in the defense business as the geopolitical situation is in a turmoil, I would say. And therefore -- and also, let me add, you said maybe beside the Italian Navy, but the Italian Navy has some development programs under study for what we gathered.

In cruise, there has been press rumors about an interest of NCL for new vessels. I do not comment press rumors. But we said during the call, the cruise business has been growing above GDP growth for years, has proven to be very resilient to sudden shocks and to the economic cycle. Of course, by also listening to what our clients say, the recovery is underway in terms of passengers, in terms of resumption of passengers levels, especially for 2023.

Of course, uncertainty is still linked to what will happen during the winter, if there will be a new pandemic wave or not. Therefore, there are still a few question marks. But we still believe, even under these circumstances, that all the acquisition will resume if not in 2022, we feel about 2023.

Of course, I forgot to mention that the cruise operators that are listed, they raised huge amounts of capital either through equity and debt and high reforms. They believe there is still a need to, let me say, sort of repair their balance sheet for the near future.

But if I take from the CLIA study on passengers forecast and if I plot also the current capacity plus the capacity growth embedded in the deliveries for next years, we -- if we plot these 2 lines, passenger growth and capacity are going to meet in 2026, 2027. That means there could be the need -- there's going to be the need for the capacity. If you need further capacity in 2026, 2027, I think 2023, 2024 are the right times to make new orders. And it's purely analysis based on numbers and forecasts. We're going to see more items.

Be it that, Equipment, Systems & Services, we'd rather not split your indication of EBITDA margins within the segment. But we can tell you that roughly 30% of the total revenues is related to the infrastructure business. And then there is a very important part related to the interiors for ships, which is roughly 25%. And the rest, 1/3 is on support systems for combustion systems for the capture business. We are thinking about improving and giving more disclosure on this segment, but we still haven't taken the decision as you say. Okay?

[Monica Bosio, analyst]

Okay. Sorry, and about down payment in infrastructure business. Do you have any down payments at least yet?

[Giuseppe Dado, executive]

Well, we have some projects ongoing that we have been paid for. We haven't announced our -- or closed any major, major project. Usually in this business, though we do not experience what we see in the cruise business. We have paid the milestones, so it's a more Naval-like in terms of payment business.

[Operator]

The next question is from Alessandro Pozzi with Mediobanca.

[Alessandro Pozzi, analyst]

And the first one is on margins. I think it's great to see that you still managed to deliver a 7% EBITDA margin despite, as you mentioned, the commodity...

[Giuseppe Dado, executive]

Alessandro, can you speak a little louder because we can't see you? I don't know if it's the line, the volume or both?

[Alessandro Pozzi, analyst]

So I was saying it's great to see that you managed to deliver a 7% EBITDA margin despite the raw material cost price pressure. And I was wondering, can you give us a sense of what that has been in Q1 and what the margin could have been using, let's say, flat cost versus Q1?

And just a follow-on on this, there is a consensus basically that probably we are reaching peak inflation right now. Is that what you see? I mean do you expect inflation to moderate when you talk to your suppliers? Or do you expect inflation to basically carry on throughout to accelerate or stay where it is throughout the year?

[Giuseppe Dado, executive]

Alessandro, well, commodity price inflation has been going on since last year. It has reached higher levels in the past few months also due to the war in Ukraine and Russia. We saw it in the prices and in the numbers. Since March, steel prices have increased further. And also the visibility of supplies in terms of quantities and price is very, very, very limited in time. We're not in a situation in which we were 2 years ago, 3 years ago in which we could plan, make orders with a 6, 9, 12 months visibility. Those times are over.

What EBITDA levels would have had if -- with no price, with no inflation on commodities? Probably for the first quarter, I would say 0.5 point higher, so more in the 7.5, 8 range. Also last year, last year, probably the price inflation has costed us between 0.5 and 1 point of EBITDA, 1 percentage point of EBITDA.

But what is remarkable is that we are able and thanks to, as I said before, what we did in the past and what we're doing now being in a very difficult production environment. Let's not forget in the past 2 years, we worked under pandemic in a production model that is very intensive in terms of labor, so let's not forget this.

We were able and we are able to maintain the spend in this guidance, we are able to offset price increases. At this point in time, we are factoring -- in our forecast, we are factoring prices that are higher than last year. And I think we have taken a prudent stance in this full year 2022.

Of course, we don't have the crystal ball, and things can worsen, things can improve. So I made reference to what you said. Are we at the peak? I don't know. I really don't know. So in my forecast, we're taking the peak prices as a forecast. And notwithstanding this, we are pretty, pretty confident of being able to maintain these margin levels throughout the year.

[Fabio Gallia, executive]

Just let me add one comment to what Giuseppe just said. In the long term, we think that energy prices are really out of equilibrium, any equilibrium models you can find. So we don't have crystal balls, clearly. But to my expect that the price levels will normalize, and you can have the sense of the effort that we can still put in place in order to improve profitabilities in this period through pandemic, through supply chain disruptions. It's not just price. It's having the availability of materials and clearly, a credible spike in prices.

Investments which we have been doing were about to continue, and the economy scales we're enjoying. So that, I would say, allows you to somewhat predict when things -- if and when, clearly, things will normalize, that our earning capabilities, the engines which are underlying the competitiveness of our company are stronger than ever, and importantly, are stronger than anyone else in the sector.

[Alessandro Pozzi, analyst]

Okay. Just to remain on the inflation theme. I know your orders at the moment are, of course, because of crude are on the weak side. The orders that you are going, so basically that you are booking right now in Q1. Are you able to pass to your customers the increase in raw material concentration with the new orders? Or do you expect to offset the raw material cost inflation in the future just based on higher efficiency?

[Giuseppe Dado, executive]

Well, now we're sending a very low amount of all the acquisition for the first quarter. The answer is yes. We are able to pass through clients in new orders at least to pass through clients the price inflation. Otherwise, by no means we would be able to reap the benefit, of course. And when it comes to new orders, the renegotiation process involves several things. Technical specification, of course, are in first place, and there is a mix of things. Therefore, we do balance everything out, but I do not expect us to experience important margin pressure on new order intake.

[Operator]

[Operator Instructions]

[Giuseppe Dado, executive]

So thank you. If there are no further questions, thank you for your attention.

[Operator]

Excuse me. This is the operator. We have a question from Gabriele Gambarova with Banca Akros.

[Gabriele Gambarova, analyst]

Sorry for the late question. Regarding the offshore business, this very strong growth recorded in Q1, I was wondering if we can take this number as a reference for the remainder of the year, so if we will see a similar growth in the coming quarters. And also what you see for -- what you envisage for margins?

And more or less, let's say, same question on ESS. I understood that we can't consider this number, EUR 359 million number of revenues as new normal. I was wondering on margins, if you have any comments, any indication on the 2022 expected performance.

[Giuseppe Dado, executive]

No. The first -- the answer to your first question is no, we do not expect revenue to fully double in Offshore and Specialized Vessel year-over-year. The revenue growth has been going on also in previous quarters. Of course, this is a very important pickup. I remember last year, order acquisition in this segment was very good and mostly focused on wind offshore, which is and good and beyond expectations, I must say.

Also, what do we need to appreciate notwithstanding the bulk coming from wind offshore is the modification of order intake because we have wind offshore as the bulk, we also have vessels for the fishing industry. And in this quarter, we have the continuation of orders for robotic vessels, which are very small vessels that enjoy some degree of automation for a company that does research, deepwater research. So again, no doubling of revenues year-over-year, but still good growth.

To say, revenues, as I said during the presentation, don't take the cruise revenues quarter-over-quarter as a reference for the year because we do expect a double-digit growth in cruise revenues as well. Again, the ships -- the revenues we're going to book this year are related to the ship we're going to deliver in the second part of the year 2022, but mostly related to the 7 vessels that we are going to deliver in 2023.

And the average size -- this is also the reference I make for the potential comments on net debt levels. Also the size of the vessels in terms of technical size and also cash inflows size of ships we're going to deliver in 2023 is much higher than the size of the ships we're going to deliver in 2022.

On ESS, I'd rather not give you further details on margins. As I said before to answering to Monica's question, we do believe that time is right to be more analytical and give more disclosures that we're still taking our time.

[Operator]

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

[Fabio Gallia, executive]

Thank you all. Thank you for attending this presentation. Have a good day.

[Giuseppe Dado, executive]

Bye.

[Operator]

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