Fincantieri SpA

MIL:FCT

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the Fincantieri First Half 2018 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Bono, Chief Executive Officer. Please go ahead, sir.

[Giuseppe Bono, executive]

Ladies and gentlemen, good morning, and welcome to our first half results conference call.

Once again, I am here to present to you a great set of results to prove yet again the strength of the Fincantieri [ mission in -- and ] our top of class execution capacity. We [ generate projects ] and that the larger ships being delivered. Today, the press have reported that we are the first company in [indiscernible].

First, let me point out that progress towards the business plan target is well underway. Our number's [ prudent ]. We are [ prudent ], obviously. Fincantieri [indiscernible] to become one of the top players in the world shipbuilder sector even more than it is today, but you know it.

In addition, I am especially proud to present to you a backlog [ that has never been ] this large, not only because it break a record [ today ], almost of EUR 30 billion of the total backlog until the end of June. But in the 1st of July, we achieved extraordinary success [indiscernible] billions [ of euros ] in agreements and that allow me to underline, we try and enter for the first time in our history.

Also, let me underline that, further, with the 6 ships ordered in July, we'll be the first LNG cruise ships that Fincantieri will build, cruise ship that can [indiscernible] built in the 5 years [indiscernible] for the [ Italian ] company.

So we have the [indiscernible] for this new [ proposal ]. As for the financial result, revenues margin [indiscernible] we expect to last year, and we are confident to achieve the result for the full year 2018 that we announced in March.

In its current form, Fincantieri will guarantee stability of the work and margins for the years to come, and it will [indiscernible] in the consolidation on the European shipbuilding effect.

Regarding the [indiscernible] and the government agreed to -- the agreement with the French government some months ago. We are now awaiting the final approval from the antitrust authorities. On the agreement with the Naval Group, [indiscernible] set the proposal to government in the beginning of July [indiscernible] for the agreement of 27th of September 2017.

Finally, I'm delighted to underline the result next year in the [indiscernible] because we have -- the backlog [ of the total portfolio ]. But I wanted to say you that [indiscernible] we have a strong management team [indiscernible] very motivated to reach the result. As the director, as you know, we have [indiscernible] to continue to give the motivation, the [ drive ] and motivation to the team.

Thank you. And now I would now like Giuseppe Dado take you through the financial results. Thank you.

[Giuseppe Dado, executive]

Good morning, everybody. Giuseppe Dado speaking. We'll go through the presentation starting with Slide #3.

Well, as you can see, all the P&L metrics show substantial improvement vis-à-vis the first half of last year. We had revenues up 10%. EBITDA has further improved, both in absolute terms and in margin at EUR 183 million, with the margin of 7.3% compared to the 6.3% of first half last year. And we had an adjusted net profit of EUR 39 million.

When it comes to backlog, yes, we have beaten yet another record. We had a backlog that reaches almost EUR 30 billion, EUR 22 billion in firm orders, 99 ships with deliveries up to 2026 and a top backlog of EUR 7.8 billion as of June 30.

We had very, very good commercial successes with the acquisition in the first 6 months of the year of orders and options for 9 cruise vessels. But let me also note that in July 2018, we did acquire an order, as Mr. Bono says, from Tui Cruises, which is a JV between Royal Caribbean Cruise Lines and Tui Voyages in Germany for 2 LNG-propelled cruise vessels. We also [indiscernible] with Princess Cruises for 2 -- another 2 LNG-fueled ships. Those ships will be the largest ships ever built by Fincantieri. And NCL confirmed the option for 2 additional Leonardo Class ships within the contract that was signed in the first half of last year.

In addition to this, Vard acquired orders for 3 additional expedition cruise vessels. We can say that in the month of July, most of the soft backlog...

[Giuseppe Bono, executive]

[ The project is ] Leonardo. It's different from a Leonardo company.

[Giuseppe Dado, executive]

Okay. We can say that, considering the events in July, we say the most -- more than 50% of the soft backlog that you see at the end of June has been converted into backlog during the month of July. We have yet another 3 months of -- 6 months of accrued operating performance in Shipbuilding with the delivery of 6 units, 4 cruise vessels and 2 naval vessels.

Other events. Finally, this week actually, Vard shareholders approved of the delisting of the company, so we are under exit offer right now. That will expire, at the moment, beginning of August, August 8.

First quarter of this year, we signed a share purchase agreement with the French state for the acquisition of a plus -- a loan of 1% of the share capital of [indiscernible].

And finally, net debt has slightly improved at EUR 264 million.

If we flip the pages, you can see a snapshot of the main orders. So the 2 cruise ships for Viking is our #9 and 10 for them. Then the Silversea Cruises, but we already spoke about this. And in Vard offshore, we had 2 expedition vessels for Ponant and 1 cable-laying vessel for Prysmian and 3 offshore patrol vessels for the Norwegian Defence -- for the Norwegian Navy actually. This is a very important order in Vard as diversification strategy because it signals the entrance in the naval business.

On the delivery. So in Shipbuilding, we had 6, 4 cruise vessels and 2 naval vessels. We still have 1 cruise vessel to go in -- at the end of October.

In Offshore, we delivered 10 module carrier vessels. And the first expedition cruise vessel was delivered to Ponant in the month of May.

If we move on to order intake, we already pretty much discussed about it. What I'd like to say here is the new record levels that we have reached in order acquisition and backlog, that is a very good sign of strong commercial strength. And within the backlog, the acquisition of the new -- all the new clients in the cruise space is a very important achievement for us. The new client is part of the RCCL world, and RCCL was the only main cruise ship operator that we didn't -- we have never [ catered ] so far in terms of newbuilds.

On page 7, the backlog deployment. We added yet 2 more ships in -- when it comes to Shipbuilding in 2021 and 2022. The naval backlog deployment is stable. And we did add a new vessel also in Offshore in Vard. We have a total of 99 ships in backlog as of June 30, 2018. We add 10 more if we consider also the contract and agreements signed in July, 25 vessels in cruise, 30 vessels in naval and 44 vessels for Vard, out of which 9 of these 44 vessels are expedition cruise vessels.

On Page 8, revenues are up 10%, as we said, compared to the first half last year. We did have a very important growth in revenues, as forecasted. Growth in revenues in Cruise, which right now stand at 46.4% of group's total. We have 9 units under construction, with 4 units delivered in the first half of this year. Last year, we had 3 units delivered and 11 units under construction in the first half 2017. Of course, the units we have under construction right now are, let me say, larger and better in terms of margins. We also note -- we can also note that the growth in revenues in Offshore and in the naval business with a ramp-up of the program for the Italian Navy and also the starting of the production activities in the project for the Qatari Navy. We actually cut the steel of the first vessel for the Qatari Navy on Monday.

In Vard, yes, we still implemented the diversification strategy, and this is generating an increasing production volumes. [ Especially ] in the remaining yards, we see growth notwithstanding the negative effect of the euro [ knock ] exchange rate, that weights roughly EUR 25 million in terms of [ revenue ]. We also had substantial growth in revenues for the equipment systems and services segment, 41.4% increase versus last year, thanks to the workloads related to the Italian Navy and the Qatari Navy.

EBITDA margin, I'm on Page 9 right now. EBITDA margin has improved and increased 16% from first half of last year, with most of the improvement coming from the Shipbuilding segment. This is due to the construction of cruise ships that have higher margins; ships acquired after the crisis, we can say that; and the positive contribution of the naval business.

Margins in Offshore have decreased, but this reflects the continued process of adjustment of the production structure and the diversification strategy and a one-off event Vard has written off a ship that was in inventory and that for which there are several commercial leads for potential sale in the near future.

The margin in the equipment systems and services reflect the change in the mix of products. And it is heavily influenced by the strong growth in cruise volumes, notably the production and engineering of cabins.

We go to the net results. And of course, the improvement versus last year reflects the improvement in the operating performance that we saw with the EBITDA. We did have an increase in finance expenses due to the increased unrealized foreign exchange losses related to a loan that we have in Brazil. The loan is denominated in dollars, and the dollar strengthened vis-à-vis the Brazilian reais.

And when it comes to the extraordinary nonrecurring items, we did have provisions for litigation on -- for asbestos claims, growing at EUR 32 million. Cost for Vard restructuring have booked at EUR 3 million, and they were -- those extraordinary items were partially offset by EUR 4 million of profit coming from the disposal of a stake of a company.

CapEx are at EUR 44 million, 1.7% of revenues. Most of them, EUR 27 million, are related to the Shipbuilding segment, notably the CapEx we are taking to upgrade the operating areas and safety standards for the 2 main Italian yards in Monfalcone and Marghera, but also in Sestri and Ancona.

Intangible CapEx are related to the development of new technologies for the Cruise business and new IT systems.

Net working capital, negative at roughly EUR 200 million. And this reflects the delivery activity in the first 6 months, 4 cruise vessels, I reminded. We also had the decrease in trade receivables because we cashed in the final payments for the cruise ships delivered in the same period. We also had a decrease in construction loans that are down EUR 140 million roughly with respect to last year, first 6 months of last year. This is only Vard construction loans. The -- Fincantieri S.p.A. does not have any construction loans in place at the moment.

Net financial position, EUR 264 million, and of course, most of it short-term financial liabilities, although we have a substantial cash position at this point in time. And this reflects the first 6 months of delivery in notably the Cruise segment.

As with the next part, the next -- second half of 2018, we confirm our business plan target. And so the revenues will increase compared to last year between 3% and 6%. EBITDA margin will be at 7.5% approximately, and the net debt in the range between EUR 0.4 billion and EUR 0.6 billion.

When it comes to the segments, we expect to deliver 5 more units in Shipbuilding, of which 1 cruise ship and 4 naval vessels, most of them in the U.S. The Italian Navy's fleet renewal program is fully operational, and yes, the start of production activities related to the Qatari order is already ongoing. And we have this milestone event on Monday, the cut of -- the first steel cut for the first vessel.

In Offshore, we have a continuation of the construction activities related to the important backlog acquired as a result of the diversification strategy. And of course, as I said at the beginning of the conference, the very important order for the Norwegian navy, we continue to focus on execution with a target of improving margins in the medium -- in the short and medium term. And of course, in the oil and gas, in the core Offshore activity, the oil and gas sector, the crisis is still ongoing. I mean, we haven't seen any new orders coming specifically from that business. And of course, this has an impact on the order intake, although, although, when it comes to order intake, diversification strategy has paid off for Vard so far.

In the equipments systems and services, we confirm the growth trend thanks to the deployment of the backlog related to the naval programs and the higher volumes for the production of cabins and public areas, which is -- those volumes are driven -- the growth is driven by the growth in the Cruise business.

As it comes to numbers, I already -- I already gave you the guidance before, but I can reiterate the message. So the increase between 3% and 6% in revenues. EBITDA margin, approx 7.5%. And net debt, between EUR 0.4 billion and EUR 0.6 billion.

And now [indiscernible] we are happy to take questions.

[Operator]

[Operator Instructions] The first question is from Monica Bosio with Banca IMI.

[Monica Bosio, analyst]

I have actually 2, 3 questions. The first one is regarding the second quarter EBITDA of the Shipbuilding division. If I did well my math, in the second quarter, the EBITDA of the Shipbuilding amounted to roughly EUR 86.4 million, with an EBITDA margin rising from 6.7% to 8.8%. The first half in the Shipbuilding division delivered an EBITDA margin at 8.5% from 6.5%. So from my point of view, this is a big improvement. And I was wondering, if we assume that the Offshore would not go down anymore, and if we assume a reasonable trend for the equipment and system services, I believe that there could be a bit of room for an upside on your guidance. Am I right? And the second question is on the memorandum of understanding -- of agreement with the Princess Cruises for the 2 LNG ships. The press didn't indicate any value for the contract, the potential contract. I was wondering if you can give us some rough indication, and if the memorandum of understanding of agreement is included in your [ soft ] backlog. And the very last question is still on the LNG ships. These are relatively new ships in terms of technology. Just your feeling about the execution, and if there could be issues as in the cases of the prototypes or the problems, potential problems might be completely different and manageable.

[Giuseppe Dado, executive]

Monica, on your first question, is there room for an upside? We'll see. The improvement in the second quarter of 2018, we have delivered several ships, and we can say that the delivery of these ships was successful, both in terms of having the client happy and having Fincantieri happy. And you see that also in the margins, that's why we are happy. That's what we work for. So it's -- we did confirm the guidance because we believe that this is where we were going to land, thanks to our performance at this point in time. Princess Cruises, the value was not disclosed, and I'd rather not -- [ doesn't intend ] giving you any indications. Of course, we can tell you that the price was, of course, consistent with the size and the delivery time of the vessels and, of course, the technology embedded in it. LNG ships are new ships in terms of technology? Yes and no. Because as Mr. Bono said before, we already had an experience in building and delivering an LNG-propelled vessel many years ago, that was 4 years ago. It was a ferry for a Canadian state-owned company. Therefore, we believe there are not many risks embedded in it, despite -- notwithstanding the acquisition of this new [ prophesied ] ships, the backlog is still very well-balanced between prototypes and sister ships and it's distributed through time that gives -- that allows us to plan the engineering activity and the construction activity in order for it to be smooth and very well executed.

[Operator]

The next question is from Matteo Bonizzoni with Kepler.

[Matteo Bonizzoni, analyst]

I have 3 questions. The first one is on the evolution of your [ flow ] margin. We have seen the EBITDA turning from plus EUR 9 million in Q1 to minus EUR 2 million in Q2. So you have highlighted several, so let's call it sort of one-off issues. Can you a little bit elaborate on what we should expect over the next few quarters for the Offshore? The second question is on the asbestos litigation, let's say, cost that you had, EUR 32 million, EUR 33 million in the first half of this year compared to a much lower EUR 19 million in the first half of the last year. Also in this case, can you a little bit elaborate the reasons for this sharp pickup, and what we should expect going forward? And the third and last question, should we expect the memorandum of understanding which brings us with the last 2 big LNG cruise that you announced on the 20th of July to translate into order by the end of this year or after that?

[Giuseppe Dado, executive]

I'll start with the third question because I remember that I did not answer to Monica's last question. Monica, the order for Princess -- the MOA for Princess was not in the soft backlog as of the end of June. And the MOA agreement, Matteo, is binding, and yes, we expect it to be converted into orders by the end of the year, okay? When it comes to the evolution of the Offshore margins, of course, we're striving to improve operational performance in Vard. We hope that also through the delisting of the company, we can be more, more effective, more thorough in improving efficiency there. First half of this year suffer from -- suffered also from a one-off event related to the write-off of vessels in inventory. As I said before, we hope to realize a sale on these unsold vessels, and this will maybe not improve the economic performance because, of course, the write-off is reflected already in the P&L, but improve the financial performance because realized inventory is positive from a cash standpoint. When it comes to the development of the margin, we expect to [ reap ] benefit from the diversification strategy, from the improvement in the learning curve. And also I mentioned 2 times before, the acquisition of the order for 3 naval vessels from the Norwegian Navy can bring, let me say, an improvement in margins through a better mix, since, as you well know, margins in the naval business are a little better than the commercial business. Asbestos claims, as you know, we cannot provide a clear guidance going forward. Those costs are related from claims. And basically, we booked EUR 32 million because we had several claims opened against Fincantieri. And we have to make adequate accruals and provisions based on the historical cost either of the settlement or the sentence in the Court. So we will, I mean, we proceed on an accrual basis. We will see how things evolve. But at this point in time, we can't make any specific forecast with regards to asbestos. Of course, it is a problem that should be addressed at a national level. This is what we think.

[Operator]

The next question is from Giuseppe Mapelli with Equita.

[Giuseppe Mapelli, analyst]

I have some questions. The first one is on -- is again on the devaluation of inventory performing Vard in the second quarter. Can you quantify the impact of this write-off? And always related to this point, can you remind me how many vessels are in Vard's inventories and, let's say, the likelihood to be sold in the next -- in the [ next ] future? And my second question is on workload on Vard's shipyards. Do you feel that current backlog is sufficient to reach a decent work on all the shipyards? And I'm particularly referring to Brazil, where I think that you have a -- mostly finished all your contracts.

[Giuseppe Dado, executive]

Vard has disclosed in their financial statements -- has disclosed that the write-off in the backlog in the vessels in inventory was NOK 122 million, roughly EUR 10 million. That's my answer to the first question. There are other vessels in the inventory that have already been written off at the end of last year. Again, we hope to realize the sale of some of the vessels within the next quarter, actually the third quarter. And this will bring, of course, not a benefit from the P&L standpoint, but a benefit from a balance sheet perspective. Offloading unsold vessels for us means also offloading that related to those vessels, construction loans. Therefore improving P&L, at least from the financial charges standpoint, okay? When it comes to the workload, order acquisition throughout the group has been at record levels. We -- when we go through the different geographies in which we operate, of course, Italy is working at full steam. Romania is working at full steam, and we have to increase production there. We have a mixed situation in Norway related to the fact that some yard cannot be used for cruise vessels. And we still have to, of course, start the production of the naval vessels. When it comes to the deal, we still need to deliver 1 pipe layer for [indiscernible] and 1 LPG carrier for Transpetrol. And yes, these are the last 2 ships that we have under construction in Brazil. We are making considerations, but it's a bit too early to say what we're going to do with Brazil, also because we are participating at a tender for the naval program in Brazil and we'll see what happens there. So we'll keep you updated as these develop.

[Operator]

The next question is from Gabriele Gambarova with Banca Akros.

[Gabriele Gambarova, analyst]

The first question is on financial charges. Is it possible to have your best estimate on financial charges for 2018, also considering you're hedging on the U.S. dollar? This is the first question. The second question regards [indiscernible]. There were rumors of something more than [ rumors ] that [indiscernible] may consider to possibly sell its marine system division, the submarine division. So I was wondering if, hypothetically, since you are basically a part of [ PKMS ], you would ever -- you could consider any, let's say, move in the field of submarine considering that your ongoing partnership with Naval Group does not consider submarines in the scope of the alliance? And then the last question is on the SEA 5000 program in Australia. So if you could [ very quick ] make a few comments on it, on the lesson learned and specifically make a comparison with the [ FFG(X) ] program in the U.S. Basically, you feel more comfortable with the U.S. program than you were with the Australian one?

[Giuseppe Dado, executive]

Yes. I'll take the first question on financial charges, and then I'll leave the word to Mr. Maestrini and Mr. Bono. Financial charges estimate, you can easily do the math by, I mean, by taking the message that we confirm the guidance both in EBITDA, EBIT and -- or both in EBITDA and adjusted net results before extraordinary items. We keep that guidance, therefore financial charges will be accordingly. Okay?

[Giuseppe Bono, executive]

The alliance with the Naval Group, obviously, [indiscernible] summary because we need to consider that alliance is [ better for the ] European consolidation. We have, and I will [ reiterate ] this whole group, this agreement for the future. I think that, in that evolutional to go to take the 2 company [indiscernible] to build a partnership or partner for the new project [ assumption ]. This is [ normal ] by the Naval Group. If [indiscernible] [a position to sell ], [indiscernible] obviously, we need to study to participate [indiscernible] [ on the regional ] [indiscernible] [ refer to the consolidation of European ] [indiscernible]. For Australia, I will consider that the deal was [indiscernible]. I separate the U.S. [indiscernible] from Australia. We are basically in U.S.A. We supply the U.S. Navy for a longer period while [indiscernible] in Australia is [ a little calmer ]. But the decision of the government, of the Australian government, was [ basically compared the design of the ship ].

[Operator]

[Operator Instructions] The next question is a follow-up from Gabriele Gambarova from Banca Akros.

[Gabriele Gambarova, analyst]

Possibly, a nasty one. Last week, there was a fire onboard of your Vulcano LSS ship in La Spezia. I was wondering if you could give me a little bit of information on this accident. Are you covered by insurance, I guess? We have, I mean, there could be any consequence of this accident?

[Giuseppe Dado, executive]

Okay. Yes, we have important fire onboard the Vulcano, but full assessment also by the relevant authorities is still ongoing. And we're waiting both for an official report and for the assessment, of course, for the [ fees cost ] assessment done by our technicians. Of course, the company is fully insured in order to cover such events. And as of now, again, it's a bit early to fully evaluate the situation. As of now, we don't see any material impact on the accounts. Again, we are fully insured to cover such type of events. It's very unfortunate. And of course, it's good news that nobody was injured, first. It's very unfortunate event. But it happens, and as it happens, rarely, of course, the company is insured.

[Operator]

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

[Unknown Executive]

Okay. Thank you very much, everyone. Have a nice day.

[Giuseppe Dado, executive]

Bye-bye.

[Giuseppe Bono, executive]

Bye-bye.

[Operator]

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