Tesmec SpA

MIL:TES

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Tesmec Results as of March 31, 2020 conference call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Ambrogio Caccia Dominioni, Chairman and CEO of Tesmec. Please go ahead, sir.

[Ambrogio Dominioni, executive]

Thank you. Thank you, everybody. We apologize for this early conference, but due to the new COVID-19 procedures. Yesterday, we had a busy day we kept the 2, Shareholder Meeting and the Board, and we complete our procedure late in the afternoon. And we were obliged to postpone our normal conference from the afternoon to this morning. In this situation, we -- I am happy to be here with you because basically, we are going to concentrate our presentation on the 2020 first quarter figures. This is important for us because in this period, the priority for us first of all was to give safety and health to our personnel. But now we have to talk about business.

As we have already confirmed, the impact on coronavirus on this first quarter is important because basically we had 2 month of substantial lockdown. And this was basically a pity because our market was growing, and in effect, our guideline for the market situation. But we expect to have a 2020 improvement due to the decision of our key clients that are taking action to improve the business. Normally, the financial situation of the market is not easy, but our normal client are people connection to public utilities and basically stronger players.

The priority for us in this period were to -- an evaluation of the impact of the market. We have taken, after that, all the actions necessary to modify our organization to be able to work in this difficult environment. And for this point, if you go to the Slide #5, we have taken a lot of action to be able to work in a safety condition and to work in a flexible way. No doubt, the impact on our Italian operation was strong, but on -- the organization was always working during the period. For this reason, we can confirm that the first quarter is not going to have any significant impact on the year. But no doubt that now going on, we have to think that things have to change.

For this reason now, going to more specific to the business. I will transfer to Mr. Mosconi and Mr. Carlo Cassia, who are going to discuss to you what is our situation in the business and to try to clarify what our guideline historically and for the next futures. Thank you.

Mr. Mosconi, if you can.

[Paolo Mosconi, executive]

Thanks, Mr. Caccia. Good morning to everybody. Yes, we give you the main facts that we had in this difficult quarter, starting from Stringing business division. A few words, we are present on the market. We had the opportunity to enter in the specific market with all the new product lines that we developed in the recent years. And basically, for the construction equipment, we have a double range of products, the traditional hydraulic and the full digital machine that is a substantial gap with the competitor.

Then for refurbish activities, for maintenance activity, we entered basically more in the U.S. with the new methodology, and we have a big -- successful in the first quarter. And for the underground distribution line, we are present now with full electric machine.

Going faster to automation, I ask Carlo to support and to give the -- Carlo is the new automation manager, and so you can explain the fact of this period.

[Unknown]

Of course. Good morning, everyone. As per technique automation, we saw a first quarter with figures that were a bit lower than expected, just because of, of course, COVID situation. But very important news is that basically during this period, we completed some, let's say, development both technological -- so in terms of new solutions for both the primary and secondary substations in the technological solutions. And we saw the award of important tenders with the Italian activities, such as in [ Eterna ] that basically will give us a very positive outlook for the next, let's say, for the next coming quarters and also for the next coming years. Later on, when we will see the, let's say, the key drivers for the future quarters I will go more into details. Anyway, consolidation of technological solution and the opportunities, let's say, new opportunities, new concrete opportunities with the Italian activities.

I will just...

[Paolo Mosconi, executive]

Thanks. Oh, sorry.

[Unknown]

Oh, no, no, no. I will transfer it to Paolo to go on with the Trencher.

[Paolo Mosconi, executive]

Yes, thanks, Carlo. So coming on the Trencher's business unit. We had a strong impact on the production due to the lockdown of the COVID, but also we suffered about the logistic difficulties to delivery the orders and the machine ready in the warehouse due to the difficulties to -- of the transport. However we -- in the period, we can say that the main sectors that are, first of all, fiber optics connected with fiber-to-the-home installation and 5G are there. And so we are one of the main player in the U.K. and for the future in North America.

The second sector where we are active and the machine and the equipment and the services will be ready to start is the surface mining business focalized in Africa. And I have to underline that in the period, we had a strong increase in the request of services on the rental basis of the machines. So we increased our presence also this -- in this -- we have also this offer for -- to -- that help us to cover the markets.

Going now on the railway. What I'm -- we are in the period, we are in the final setup of the -- our diagnostic vehicles, and we obtained all the certification with our RFI. And I would like to underline that we were, and we are very active on the commercial side and so following our strategy of internationalization, we participated to several tenders basically in Central Europe and in Asia. And we expect to have the result in the next weeks, i.e. get out of the period, but it's important to underline that we were selected as a supplier in also diagnostic tender of RFI to supply for diagnostic trains.

So I -- at this moment, I give the phone to Marco to show us the numbers of the period. Thank you.

[Marco Paredi, executive]

Thank you, Paolo. Good morning, everybody. Moving on Slide 11, I will show the main KPI of the first quarter 2020 of Tesmec Group.

In this conference, we introduce a new reference in our KPI metrics, linking that to the latest acquisition of a Tesmec Group data service company. Acquisition performed in mid-April, directly committed to the rental business.

So we introduce a pro forma in green, as you can see in the table, in the matrix, to compare the result. If you look in the first quarter, as a general overview, obviously, Tesmec have been impacted by the coronavirus, COVID-19, as several company over the world. You have to consider also that March for us, Tesmec is the main quarter of a -- of -- the main month of the quarter in term of invoicing projects. So this lockdown -- the lockdown blocked these projects.

So go through the result. We can start from our revenue. So Tesmec recorded pro forma revenues for EUR 34 million comparing to EUR 49.8 million for the last year. I repeat, we're talking about pro forma revenue. Instead, if we consider the statutory report, we talk about EUR 31.8 million as a comparison. I repeat, I said decrease has been offset by the business lockdown -- the lockdown in production, in the transportation of good, and also this lockdown activity concerning the commercial activity due to the period.

But I would like to just underline a valid point that although the drop, the group has maintained its backlog. That is the point. So we stopped it, obviously, for 1 month, more or less 1 or 2 month in this period for March and April. But our backlog is still alive and strong. We can say that the outlook over the year is better throughout the end of first quarter. And so we came in later, maybe in the outlook, we underline the point about this positive outlook of the year.

In term of performance -- in term of pro forma EBITDA, the Tesmec record EUR 4.1 million comparing to EUR 5.7 million end of March 2019. So if you see in percentage, our percentage is better than compared to last year. So the operation of this tender are related to the wholesale related to the rental business. So that's why Tesmec decided to proceed in this way to purchase this company because better generated -- really impact in terms of EBITDAs.

Obviously, if you come back to the reduction of turnover, this reduction of turnover impact in term of -- in terms of margin, we have not enough margin to cover our cost. We reduced, obviously, our EBITDA. We reduced our EBIT. Obviously, what we want to do. We are ready to do whatever it takes to reduce the necessary cost. In fact, starting now from the month of March, the group undertook all the necessary action in order to contain its fixed cost. And we see the impact of it after the spread, starting from the second quarter of this year.

If you move in the different line, you see that the profit before tax is negative. One of the many but obvious result are the negative exchange rate -- the negative exchange difference of the year, mainly linking to the Australian dollar, but also some other currencies like ruble and rand that are depreciated in March. In any case, we see that the Australian dollar, starting from April, is recovering. This is the depreciation impact of end of February and March. So our expectation is better impact in the second quarter of the year. We talked in any case about EUR 1.2 million of unrealized -- exchange -- negative exchange rate. That is one of the positive way to see this result.

In term of net financial position, we are considering the critical situation with [ local ] revenue and the [indiscernible] [ community ] of the first quarter from Tesmec Group. We can say that our -- we are able to reduce the impact of COVID. So as well in the -- we are the end -- there is no impact to -- lower impact in term of net financial positions. So we had a net financial position of EUR 120.6 million (sic) [ EUR 121.6 million ] comparing to EUR 118 million end of 2019.

If you move in the Slide 12, we tried to underline or to describe the impact in the different businesses. Obviously, all the business record a decrease of revenue but all the reduction are 2019, in some ways to the COVID. So I mean the lockdown, and I mean the block and the lockdown.

For the energy business, you see that we have an impact in productions and logistic blocks. But our backlog is [indiscernible] in fact we are shipping the EUR 38 million of backlog and of which EUR 18 million related to energy automation.

I have Mr. Carlo Caccia still on the floor. We have an opportunity -- great opportunity in energy automation over the next month, even the next year. So that is why we want to underline the EUR 38 million of backlog.

In term of Trencher, you see that our performance has been affected -- impacted by the slowdown, the logistic -- the slowdown in logistics activities, the block of the production and also for rental in Marais, the block of the rental activities. So the block of all the project connected to the FTTH project, at the end of the project is really a construction project.

We're confirming our order backlog was around EUR 61 million end of 2020. This backlog is linked mainly to the mining activity, to the FTTH activity, to the rental activities.

So just to reiterate the point that concerning the revenues of the rental activities, obviously, you've seen that the fact that we introduced a concept and we purchased for service, show us that, that is the good solution of the group because the EBITDA in percentage of revenue is better over the last year. So better than last year. So that is one of the point -- one of the discussion we made in April when we proposed to the market this acquisitions.

In term of the railway, we can see that our activities are connected mainly to the tender. And the decrease is linked to the slowdown in operation and not for other reasons apart from the block. Because in any case, our backlog is EUR 82.8 million and that we -- obviously if you look at -- in the future, we had an important impact about the new tender. The new tender that -- we are selected as a supplier from RFI. But also, as Mr. Mosconi say, we have a great opportunity in different area in the world to increase this backlog.

Moving the slide -- in the Slide 13, I would like to read -- to show again -- reiterate the point about the aggregating number of the Tesmec Group with the 4Service. This -- I repeat, this is pro forma. Because this pro forma data -- I don't know proposed to be consolidate account of the rental business in the Tesmec Group. Obviously, the real impact to obviously result in the Tesmec Group, we elaborate in June, in the second quarter, obviously after the application date. The application date was the 23rd of April.

In any case, just probably to give you some flavor, we see inside [indiscernible] that the EBITDA percentage is better than the last 3 years. So that is the greater opportunity of this year. We are in a negative period but obviously if you see the backlog, if you see the opportunity concerning the rentals and the [ FX ] that Tesmec operates in the main strategic sector of accounts around the world, obviously, we can see some positive impact over the year.

Moving on to page -- to Slide 14. We reiterate again the real message, our backlog. So we have energy, and I repeat, EUR 18 million of the EUR 38 million are connecting -- are connected to the energy progression -- energy automation. The trencher, we are -- we had 4 great direction. So I mean the rental activities, I mean the mining activities, FTTH and 5G. For the railway, we don't show here the latest information because it's preliminary. In any case, that is not yet awarded -- fully awarded, but we are confident. So we see that in the future, this backlog increase will increase of EUR 50 million, 5-0 million euro, to the tender related to RFI. And also, we -- our expectation is the new -- the new opportunities in the area mentioned by Mr. Mosconi.

In term of geographical and sales spread, we maintain more or less our presence in -- nevertheless, we reduced the turnover due to the COVID.

In the Slide 16, we see, again, the impact of the exchange -- negative exchange rate. But I reiterate the point, the negative impact come from the Australian dollar and minority currency like ZAR and so on. And our expectation and also according to the floor that, for example, Australian dollar is recovering is depreciated impacted -- impact in March.

If you move in Slide, in 18, skipping the Slide 17 because it's connected to the -- this Slide 17 is connected to the result of EBITDA. And in this case, obviously, we already explained in the Slide 11. So moving on in the Slide 18, we see that in general, we have an impact in net invested capital concerning the net working capital and the current -- noncurrent assets.

The net working capital, obviously, if you move in Slide 19, we see the real flow that related to the net working capital, the inventory and the work-in-progress contract are increasing over the period. Obviously, we are -- we weren't able to deliver our goods -- finished goods ready in our stock. So we have this impact. So our expectation is to reduce the inventories, the work in progress over the year. We mitigate this impact with the increase of the days related to the trade payables. For the -- in term of net financial position, we are stable. As we say, the impact was lower than the first quarter of the last year.

And now I think that I can pass the floor to Mr. Caccia to go ahead with the outlook 2020. So Mr. Caccia?

[Ambrogio Dominioni, executive]

Thank you, everybody. Probably not to disturb too much to you because it's early in the morning. We will now give you a short idea what we intend to do. In our guideline, a lot of concept have already been clarified. And due to -- as I said in Page #1, if you go to the Slide #24, we are going to talk to you about the figures -- the expected financial figure of the year. Probably in this slide, I will give back to Mr. Paredi that help -- he is going to help me to tell -- give us -- you idea of what is going to happen in the second quarter and the next quarters. Because basically, I think it's important to understand what we are trying to do in this year.

[Marco Paredi, executive]

Okay. Thank you, Mr. Caccia. Exactly. If you go to Slide 24, we see the 2 main KPIs that we want to share with you. It's the turnover and obviously the EBITDA. The turnover in the first quarter and in the second quarter, obviously, the result will be affected by the spread of the coronavirus and also in this phase of May is a warm-up phase. Obviously, we cannot say that we are able to perform as the last year. But we had a great -- we had the great opportunity to, in any case, to mitigate and to be positive also in the second quarter. So to turn around also, already turnaround in the second quarter.

The first quarter -- the third quarter and the fourth quarter, obviously, according to our backlog, we are able to record -- recover the gap in -- about the alpha. And in any case, we need -- in any case, we estimate general result less than 2019 due to the fact that we lose this -- we lose 2 months of substantial lockdown.

In term of EBITDA, we have all the necessary -- we put in place all the necessary action to contain our cost, to put action on our saving. And obviously, as we already explained in April and also if you see the pro forma comparison, we have a -- we improve in term of margin due to the rental activity.

For the turnover, as already Mr. Caccia and Mr. Mosconi explained, we have -- we operate in the key sectors. So the 5G, digitalization, diagnostic, artificial intelligence, cybersecurity and energy transition. So that is the heart of the tech market. And thanks to this sector, thanks to the backlog, to the rental business and the fact that we operate in our market segment, we are confident not only for the 2020, but also for the next year, so for the year turnaround that all of the economy around the world are expecting.

But in term of EBITDA, our target is to rationalize the cost to do -- to take all the necessary action to reduce the cost. We have some costs, obviously, due to the period that have gone down, and so that is a positive impact. But we are working also to grant that this impact is also for the future. In this period, obviously, we underlined the fact that we, in some country where Tesmec work and in which -- in where the Tesmec has a subsidiary, there are some also operating grant from the local government that can help us in this period.

Mr. Caccia, I pass the floor to you.

[Ambrogio Dominioni, executive]

Excuse me. If you go to Slide #5, I will pass the time here because basically I want to talk to you as the CEO of the company but also as a shareholder. Because no doubt that in this last period, we gave a lot of communication, probably more than in the last 3 years, but it was mandatory to try to explain what we intend to do. We are now in this COVID-19 situation that was not expected, but we can guarantee you that all the stakeholder in the company, from the worker to everybody, give us a strong contributor to go on.

As a shareholder, we had -- we were in a difficult position because we were obliged to give a guarantee to the company independent from the help from third parties. For this reason, the strategy that sometimes was probably was not fully understood is that the decision as a shareholder, was to take a decision to enter in a share -- in a capital increase procedure that in a way, we -- it is going to be done in the interest of all shareholder, minority, majority, and we think that this is a must to have a strong company for the future.

This will create a better balance between equity and financial debts, and is going to give us a strong support to the drive of business that we're expecting to have in the future. For this reason, we -- as we have anticipated, we are on the way to review our business plan and due to this corona. But also, try to focus in the better way what are the guidelines of our development, and we want to be focused on the key driver in top technology area.

We confirm, as Mr. Paredi told you, that in the parallel way, we're acting also on -- to give guarantee that our liquidity and our financial position will be under control. And we have been announced yesterday -- we were not part of this communication, but we took in the first way, all the decisions taken in Italy, France and everywhere, to have a strong support in liquidity. And we are in process to guarantee to have the full capability to collect all this financial support due to the rules -- internal rules. We have the right to have a strong support from this state-relying guarantee that 5- or 6-year credit line proposition.

For this point, you have to expect the first 2 quarter, we are under preparation. We are expecting to close in the first quarter all the liquidity contract that are going to be in our rights. For the second part of the year, we are expecting to prepare this business plan. And the last quarter, we are willing to try to, if the market is a positive, if everything is positive, to take action for the increase of equity that was approved yesterday by the Shareholder Meeting.

I hope that we can explain in the future why we do that and what are the payback we're expecting as shareholder from these actions. No doubt that for -- as a representative shareholder, again, we guarantee that we will support the company because we think that this is a company that in this current situation can have a stronger -- a strong future.

So now coming back to Slide #26 that is basically we -- I don't -- I think that we have not to repeat again. We can explain that the increase of equity is maximum too, but we have the amount. The condition, as I've already announced in our press release, is going to be confirmed only after the business plan approval. And I -- we guarantee you that all this case of equities is made to have a stronger future and not to go to have a strong impact on the financial position. Because as of today, due to the action taken by the cost reduction and cost control and everything, we are expecting year-end that we are going to generate cash from our normal business.

But no doubt that in this volatile market, that basically, we don't expect any future impact on COVID-19. But probably we have to address the situation to come back. We have to be a strong company because the future is not going to be easy for anybody.

For this reason, just to come back probably -- but -- and just to complete, probably if -- Mosconi, 1 or 2 short points, what are the key drivers for next 9-month business?

[Paolo Mosconi, executive]

Right, okay. Thank you. Yes, we start from Trencher. So the key driver for it to grow are connected basically on the following points. First of all, the development on the fiber solution for fiber-to-the-home and 5G. And we are ready with the technological -- the integrated solution for Europe. U.K. first, but moreover, in U.S. Unfortunately, due to this environmental condition, we slowed down in the first quarter. But we expect the important opportunities, important projects in the second part of the year in this sector. So the interconnection with fiber will be one of our main sector. We have a clean and faster solution ready for U.S. and so we are completely ready to start.

Second, we are connected to the mining. We -- thanks to the recent [ actor ], we put our brand as one of the main player to support the mining in the bauxite business, for example. And in Africa, we have 2 types of opportunities. We have the machine there, and there are big request of services to support, to manage the -- our equipment. And then let me say that we have a big expectation from the rental business because in the next future, we expect that will be performed with the solution of renting and services on machine connected to the difficulty to make CapEx -- or for the short term of the -- some projects.

If we move now on the Stringing, let me say that we have a huge opportunity for the future based on 3 main points. The first one is that the project are all there. We didn't receive 1 cancellation of the project and we expect a very high demand, very high request due to the short-term timing to perform the project in the second half of the year. This is the, let me say, a short-terms driver of growth. But in the medium terms, we are preparing -- we prepared and we are preparing 2 important action. First of all, a revolution in our sector from technical and technological point of view. Our strategy is to increase the technological level and to create important gap with the competitor. And so to stay on the top of the technology. In fact, we are ready with the green -- so-called the green range of machine, and we are ready and we are working and we have the first successful in U.S. with the new methodology, safety methodology for refurbishment of the power line that will be an important driver for the future.

And the third, and not less important, is our strategy in 2 key markets. First of all, in North America, we are present. As you know, we are present since beginning of this century. But now we -- our brand is one of the main -- or the main technological brand. So we have -- in the next 3 year, we expect it to grow and, let me say, to double or more than double our presence on the market.

And recently -- and the second key market is China. Recently, we received, let me say, a brand recognition from the main player of the Chinese market. As you know, the China market is the biggest in the world and the state grid of China is the biggest utility worldwide and the more technological. We will request to have a collaboration with one of the main player, state-owned company in China to develop technology in line with the Chinese request. So tailor-made solutions.

We started in April, March -- in April, the first approach with this possible partner. And we have, in our hope to 3, 6 month to see if we can reach the agreement and to enter into different project in the Chinese market.

So on the energy automation, we have with us, Carlo Caccia. I will ask him to give the outlook of this of this sector. Very important one.

[Unknown]

Yes. For the energy automation business, I -- just to summarize the key drivers for the future, that means for the next quarter, but also, let's say, next year and next few years. I divided the key drivers into, let's say, 2 main areas. Let's say, technological key drivers and market key drivers.

In terms of technological key drivers, basically, our future growth path is basically driven by big investments in the -- on mainly in the utility markets, in some drivers such as cybersecurity. That means basically a total renovation of the installed solution in a grid and also a total renovation for the new solutions for cybersecurity requirements.

IoT opportunities. Basically, IoT is a very discussed topic. Basically, most of the utilities are already starting to define technological solutions where we as technical automation are, let's say, bringing our proposals, both in Italy and outside of Italy. And other technological driver, I would say, is the start in our -- at the beginning in our new product portfolio of the supply of integrated solutions. So not only devices and components, but also integrated solutions for primary substation automation.

In terms of markets, let's say, on key drivers in the market perspective, there are 2 main topics that would be very much discussed in the next few months and years. That are basically -- one is the project that [ AML ] is bringing to Italy, that is called [ DSO 4.0 ]. That will be, let's say, yes, a total renovation of the Italian grid in the next 2 or 3 years that we see a huge demand for our solutions. And the other one, in also [ AML ] is purchasing so many [ utilities ] around the world, especially in South America, especially in Brazil. And we're expressing very strong action of standardization of marketing components worldwide that basically will give us an opportunity for bringing our solutions, not only in Italy, but also in all the, let's say, in end markets in South America.

I'll leave the floor now to Paolo to go back again to the drivers for railway business.

[Paolo Mosconi, executive]

Thanks, Carlo. Yes, very, very briefly, the outlook for the rail business is very positive. We are proceeding with our strategy to propose solution in line with the medium-term request. So for us, the safety of the railway infrastructure will be one of the must -- is and will be one of the must for the future. In fact, we are investing in developing the next-generation diagnostic vehicles. As you know, we -- from the vehicle itself, we have all the -- our platform are certified in Europe to run on the tracks in Europe as a train. And nowadays, we have also, let me say, the new generation of diagnostic devices and platform to be -- in fact, have been chosen from RFI as a selected supplier -- or the important tender is a confirmation that our technology is on the top in this moment and we will push on this direction.

The second pillar is the internalization. And in the first quarter, we are participating, and we are in the final stage of more than 5 internal -- international tenders outside Italy and for a total value of between EUR 60 million to EUR 70 million. And we expect to close some of them in the second quarter. I think these are the 2 main strategy. So we expect to grow in the next 3 years in an important way in double digit.

So I close here our presentation, and I ask if there are any question.

[Operator]

[Operator Instructions] The first question is from Alessandro Tortora with Mediobanca.

[Alessandro Tortora, analyst]

Yes. I have 3 question, if I may. The first one is -- if you can come back, I understood that visibility for sure in the, let's say, short-term dealing in, let's say, with the COVID-19 is slow. But if you can give us an idea of how the business is restarting in these weeks with, let's say, the easing of the lockdown, at least in Italy.

And if you can also give us an idea of the impact of the cost efficiency action you mentioned before.

The second question is on -- just an idea if considering the shipment blocked, I would say, in the last part of March, if you believe, just from a qualitative standpoint, if the second quarter would be, let's say, less worse than the first one in terms of sales decline?

The third question is on the CapEx side. You mentioned the cost efficiency. I would like to understand if you believe that -- also on the CapEx side, I see in this first quarter, let's say, some CapEx spending in terms of a quick development. If you believe that also on this line, you will be able to contain the cash out?

[Ambrogio Dominioni, executive]

Thank you. I -- if I will be supported by Marco to give you the figures. The visibility on the short-term is that COVID-19 in the first quarter was totally unexpected. Opposite working in the period, we were trying to organize exactly how the second period of the year were -- was going on. For this reason, the situation is different country by country. No doubt, Italy was one of the country that was the first to enter the problem, it is one of the last that is going to go down -- out. Opposite, if you look to U.S. market, the U.S. trend there is the same situation. The economy is difficult, the pipeline business is very, very tough. But the U.S.A. market is moving, especially in this area of energy and fiber, they are pushing to grow.

For this reason, the impact on revenue is going to be less in this second quarter and probably due to the delay we had in shipment -- that is totally connected also to shipment. We are supposed to have open ports now in Italy. And for this reason, especially in the month of April, we were able to ship a machine that were ready from February. But due to the holes due -- especially to the problem, the highway problems connection to Genoa and Savona, we were ready to ship machine also if the production staff is basically only beginning of May. For this reason, the -- on volume, the second quarter is going to be much better than the first and probably in line with the last year situation.

On cost efficiency, there are 2 ways to make cost efficiency. We are expecting to have support from external authorities, basically in the Anglo-Saxon country. They don't give financing, but they give free gift contribution. And this has an impact on our figures in U.S.A., Australia and New Zealand, basically it's around [ 1.8 million ] on these 3 country. And we expect also to have the same contribution in France because basically, there is a support given by the state that [indiscernible] is paid by -- is officially paid by the public for the coronavirus situation. In Italy, the situation is different. We took action and basically was internal action possible to improve our efficiency, and we have agreement with our union and worker to reduce vacation period -- to reduce -- basically, we are supposed to work everybody and to work them in a better way, in a flexible way. This can have, for us, a huge impact in -- on our efficiency cost in the second part of the year. And also, we are going to have to finalize in this day a general agreement with basically all the valuable part of the salary is going to be, for this year, frozen, and waiting the final year result. This can have a huge impact in the early -- probably Paredi can go explain in a better way.

[Marco Paredi, executive]

Yes.

[Ambrogio Dominioni, executive]

About CapEx side -- on the CapEx side, we are keeping different way. What is mandatory to have a result on the short term, we are going hopefully to push what is hopefully something that is not the priority, we are going to cancel it.

No doubt that we were in the process now on digitalization of our organization, and this is for us and now a must because due to this question of smart working and everywhere -- the other thing is we are working in different way. And if we survive it's because we have made in last year, a huge investment in our IT situation and changing our software application.

Marco, if you can do better in cost savings situation.

[Marco Paredi, executive]

Yes, yes. About the cost saving, as Mr. Caccia is saying, we have a different action running there. First of all, for sure, obviously, we want to take opportunity from the grant from the government -- operating grant from the local government. But the real point that we have 2 kind of cost, 2 kind of route that we can consider. One is related to the [indiscernible] that are coordinated to be faster than [indiscernible]. So people cannot move around the world, we can say, so we are very -- we're reducing cost in travel, we'll reduce cost in other -- in ferries and [indiscernible].

The real -- instead, the real activity that we are going to do with the management is the contain -- or the constrain of the cost over the projects. And we are going to analyze the structure around -- inside the company to have also a benefit in the future. So we have different impacts. So operating rent, agreement with the union, and obviously, for the future we need to maintain our cost, thus more flexible than today. So there are 3 -- these 3 line that we are working on.

[Alessandro Tortora, analyst]

Okay. And just -- if I may follow up because, clearly, let's say, you discussed during the presentation on the contract, the one with RFI. Can you give us an idea of the time frame in the sense, do you believe that the contribution of this contract would be, let's say, much more evident, I guess, in '21, '22? Just to understand the time frame of the contract execution.

And if I may, considering the experience you have in Italy with FFI, what is the pricing scenario outside abroad? Does the client outside Italy, recognizing, let's say, this certification, the quality of the product in terms of pricing in that sense? Does the price, let's say, a bit better in outside of Italy or not?

[Ambrogio Dominioni, executive]

Can I give you a short summary? About the timing, we -- in Italy, we talked about -- a lot about timing, about bureaucracy, about things like that. You know better than -- that Italy is a strange country. We have to do everything tomorrow. But after that, there are always delay. This is anyway a medium-term contract. That means, it's a long-term because the vehicle we won is a total brand-new vehicle that is the first -- buy more the vehicle that is a diagnostic vehicle, but is both with electrical and diesel profile motorization. This is basically for the technology that in the future is going to be a friendly technology everywhere.

So there are technological drivers everywhere that are going to come. No doubt that this question of carbon-free situation is moving all the railway business views -- what we see, the majority of the rail are made with diesel engine motors. Now everybody is moving to electrification.

For this reason, it is not a direct impact on what is going to happen abroad, but is a general trend everywhere. And due to the fact that we are in the railway business, because we are coming out from our energy business, there is a strong integration business between rail, energy and automation. Basically, the driver everywhere are digitalization, clean, carbon-free and everything. For this, we are expecting a huge trend of a growing business.

The second big point, that we are the last in the business, and we were lucky to have won the last maintenance tender that has an impact would be through -- on our revenue, but the big tender of 88 vehicles. We are the first company in Italy, and one of the only one in Europe that has the certification of the last [indiscernible]. So safety reason, I think we made 4 or 5 years of user job to have certified vehicle. We are going to have the first starting from June this year, probably June or July, 3 platforms that are fully authorized to move in EC market. That basically, after that in conformity, every country can accept or can modify. But the big business has been -- already been done. And this is now a must because with the new safety rule, especially coming out of the accident that happened in Europe in the last 2, 3 years, and due to this COVID situation are moving.

Just to give you an idea on the last vehicle, the only one that have been certified to be COVID-compliant with the new rules of distances on the personnel. So basically, the problem coming in and probably if we are ready and we are flexible, we can have a fast-growing business in the next year also in an unexpected way. Because this safety problem now everywhere, and maintenance now is a priority for everybody, because the maintenance made in a safety way is one of the key driver of our products.

[Alessandro Tortora, analyst]

Okay. Okay. And then on, let's say, just if I may, on the broad, let's say, opportunities. I guess EBITDA is down to -- sorry, cash, let's say, the outlook there. Do you believe the competitive landscape outside Italy -- how is it? Do you believe you can get, let's say, better condition -- pricing condition there?

[Ambrogio Dominioni, executive]

Let's say, we are -- as Mr. Mosconi told you, we are working currently that basically 5 year in delay related to Italy. So basically, we are now working normally traditional vehicles. So basically, the must is quality and delivery. But no doubt that the impact is going to be on the medium-term because the market is not moving so fast.

The railway business is slow-moving and basically, the traditional market. No doubt that the experience we had in the tender that we closed 3 years ago, is [ what we have ] now. Because basically now, we are [ designing ] the vehicle that have been closed in 2016, 2017. For this reason, we are expecting to have a strong push in the diagnostic business study from end of 2021. Because they have to accept, they have to understand that to go on. But no doubt that the general trend is that everything is going to be digitalized. We are going to talk about artificial intelligence, we are going to talk about a lot of point. But the impact is not immediate.

[Operator]

[Operator Instructions]

The next question is from Enrico Coco with Intermonte.

[Enrico Coco, analyst]

Two questions, please. The first question is about the sales outlook. I would like to understand if you could provide an outlook for the second quarter trends compared to the -- around the 30% drop we saw in the first quarter. So you expect the second quarter, which will be more or less in line with this 30% drop or would be worse than this? And related to this sales outlook, I also would like to know the timing of the backlog conversion in the Trencher business. You have around EUR 60 million backlog in Trenchers. So I would like to understand what kind of revenues you will convert in the second quarter from this backlog.

And then the second question is on the railway business. And it's about the cash flow profile of this business in terms of working capital. I assume that it's a really capital-intensive business. You are growing a lot. And my question is around the cash flow profile of this new contract, if short-term will increase significantly the working capital of the group and then you will recover after? So I would like to understand this, how the cash flow will be affected from taking a lot of new contracts in railways.

[Ambrogio Dominioni, executive]

Thank you. We start on this last one. That is the most difficult reply that we have to give you. No doubt that railway is a capital-intensive business, and we have to be careful. The -- what we can confirm to you is that the most difficult situation was, especially with new order, the certification process. Because basically, for every new tender, you have to have the prototype accepted, and after that, when you start producing that the project is going to become cash positive.

The big investment is already processed, let's say. And the impact is on end year figures that basically, just to give you an idea on every invoice we do in RFI with 40% of the amount is frozen, waiting the final certification. The final certification are expected to come in the next month. And basically, we had already in the end year figures more than EUR 5 million, EUR 6 million frozen due to that reason. No doubt that we have to be careful. And what is more good for us is to have the country accounted. The situation is changing. The country that basically are paying very, very fast, accounting that's somewhat difficult.

In a way, we are expecting to have -- to keep the situation under control, especially now with traditional vehicle. Hopefully, with the big project of RFI -- is mainly connected to the timing of the closing and to the timing of acceptance. What is this tender? An important point is that there is a strong part of the tender that is a service providing. Let's say, we have to guarantee 10-year use, and a part of the price is paid cash -- by cash when we do the service. So this is a problem that, in a way, we are pushing. The good point for us is that this deposit is expected to be with a much better profitability due to the fact that with acquisition we've done in south for diagnostic system, we have basically in-house with the full process. We produce our sales vehicle, the software and also the diagnostic devices. For this reason, this tender is to have a strong profitability.

About the first question, and after that, the timing trend -- timing for the conversion, we'll go back. Probably -- however, we are not -- we are expecting to be much better than the first quarter because, no doubt, the first quarter for us, we were not ready. And the mix of sales, the plan of this management team -- remember that our trend -- expected trend before COVID was to have a double increase in our budget this year. And for this reason, probably Mr. Paredi can give you a better situation, business unit by business unit. But the final result is going to be less than this year, but in line with last year. Paredi?

[Marco Paredi, executive]

Okay. Yes, about the outlook in -- of the second quarter -- you mean the second quarter, Mr. Caccia, no?

[Ambrogio Dominioni, executive]

No, no. Full year, full year.

[Marco Paredi, executive]

Full year, full year. So obviously, if you look at the full year, we have a great opportunity, which is in the Stringing activity. We already -- the backlogs are higher than the last year. Obviously, we have to take care about the blocks of the [indiscernible] activity in March and April. But in any case, the backlog is higher than the last year. So our expectation is to do the result in line with 2019.

In term of energy automation, I think that essentially the backlog are unrelated so that we cannot can share the same result of the last year or something more.

In term of the railway, it's obviously -- thanks to the backlog, we had a pipe that can allow us to say that we can be more or less lined up with last year. Maybe some of the new order that we are going to catch with the help of [indiscernible] in the first quarter.

About the Trencher activities, we need to divide the perspective according to the different area in which we work and in where we operate. For example, if you look about the France Marais activities -- the rental activities in France are speeding up in April. Obviously, that's connected to the project about digitalization, energy, FTTH.

In term of sales, we need to consider the fact we have maybe some drop comparing last year in term of sales, the total amount over the year. But this impact will be mitigated, thanks to the rental activities. I mean in term of rental activities, relates to a full-service. So we can propose to the market a solution that can postpone the choice for the customer to buy the machine in the next month. So they tried -- we can follow the market and we can propose the right measurements.

[Ambrogio Dominioni, executive]

Excuse me.

[Marco Paredi, executive]

Yes? While...

[Ambrogio Dominioni, executive]

Excuse me. One of the major points, we have been requested not to give specific numbers because we have a risk of a second wave of pollution. So we're in [indiscernible]. So basically, as a market, we have it fully covered basically. Hopefully, we don't know exactly what is going to happen between October and November if the corona 19 (sic) [ COVID-19 ] is coming back or not.

No doubt that basically what we expect reasonably, and we are fully organized also in our factory. If something is going to happen, we are now organized not to have a lockdown. So basically, we are working in modules. We have all the safety devices installed. So basically, also if something is going to happen, we think that we can stay open for -- we are not going to have a lockdown in our production.

That is a must for us because we have strong commitment, especially in this alpha, to work, because basically, we are already delayed in our deliveries.

[Enrico Coco, analyst]

Yes, thanks. My question was also because we wait for the business plan -- the new business plan in the late summer. My question was more focused on the short-term outlook. So for the second quarter, if the sales trend that you expect will be much worse than around 30% growth that we saw in the first quarter. And again, for the second quarter, how much of the EUR 60 million backlog will you have in Trenchers, will be converted in revenues in the second quarter?

So my question was on -- the trend was more on the second quarter.

[Ambrogio Dominioni, executive]

Maybe it was a misunderstanding. For the second quarter, we expect it to be much better than the first quarter. First, because we have a short-term backlog, and as I told you, we have start -- we had a lockdown in April, but we delivered the machine that we stocked in March. For this reason, we are expecting to have a strong increase. Especially, the only market that is, in a way, moving now more to rent than to sales is U.S. market because we are changing our mix of sales because U.S. market, there was an impact on oil and gas. And oil and gas now is going to move out.

So we are moving now to infrastructure, mining and fiber. But no doubt that of this EUR 60 million, compatibility -- with the capability to deliver, we're expecting to be with the sales in line with the prior year. That means that we are going to more than double-digit increasing compared to the first half of the year.

[Operator]

The next question is from Giuseppe Grimaldi with Mediobanca.

[Giuseppe Grimaldi, analyst]

I have just 3 questions on my side. The first one is on the business front. If you can give us an update on what your competitors are doing at the moment? And the second one is what do you expect in terms of contribution for the rental business for the year? If you can give us a figure on that? And the second -- the last question, very quick, on financial. Do you see any -- an improvement in the working capital in the second quarter, given that you can send -- basically, the shipment has -- activity has restarted?

[Ambrogio Dominioni, executive]

Thank you. About competitor, as I told you, we are surprised, but there is no moving now. I don't know why, but we are looking that as an Italian company, we were the first one to oblige to face huge problems. And we are moving probably faster than our competitors, generally speaking.

And this is -- the reason why is because, basically, we have been impacted before all the over about the situation. And one of the point that is coming up, probably, sorry, I don't know if it was in our presentation that our product basically connected to digitalization, automation are the one that are now driving the market.

About the rental, we see that the rental business is growing. Dry rental, wet rental, especially because the CapEx situation for everybody is a problem. No doubt that on the short period, you can see the impact. But we have to reorganize a little bit our business model we -- it's depending a lot about the decision.

The impact on rental can be very strong in the second part of the year when we expect it to be better organized. Now what we -- as you have seen in the first quarter, the rental is giving us stabilization. What is now -- the second bit that is coming out, and we're expecting to have probably an improvement where there is a certain tendency to buy second-hand machines than to buy new machine. So basically the option -- so due to rental, we are willing to develop a secondary market for our used machines. This is a must in -- especially in a market like Africa, that they are now very in short to money. And due to the devaluation, the situation in certain country, that is going to be very difficult. Just to give you an idea, in South Africa, the devaluation was more than 25% of the currency. So there are situations that are not so easy. And for this reason, we are expecting to have an impact, especially in this area with rental, with purchase option, different way of approaching the market.

About working capital, no doubt there is a commitment to decrease working capital. One of the point that is, in a way, opposite is [ decrease ] volumes. And what we are obliged to do now, especially in the tendency of the liquidity procedures we are underway to work on our working capital, to try to pay as soon as possible our supplier. Because one of the most critical point in this tenders is that especially the small-site company in the northern region of Italy, have a very, very strong program in liquidity. And for this reason, the program is especially connected to the new [ sets of ] line and everything, is that we have to give priority to pay in advance to our supplier. Maybe with cost reduction, but no doubt that we have to give the liquidity to the market. Because basically, the situation in Italy is going to become, especially in the second part of the year, very difficult. And for this reason, we are -- our top priority now is to give a strong support to our supply chain because basically they are very flexible company, and there is -- the system in Italy is reacting as they can but the financials -- the rules and the brokers is not giving support to small- and medium-sized company in this situation. So our priority now is to have a strong supply chain to be ready.

[Operator]

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

[Ambrogio Dominioni, executive]

Thank you. Thank you, everybody. We hope that we have given an open access to our company. We are available for everybody. And no doubt that we are expecting to have a better future than what was it like in this last 3 months. But we will do our best, we guarantee you.

Thank you.

[Operator]

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