Tesmec SpA

MIL:TES

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Tesmec First Quarter 2022 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, everybody. This is a great opportunity for us to organize this conference. The first quarter is closed, and we are pleased to announce that the figures of the first quarter are positive. No doubt, that is for us a good -- a very important challenge because we are working as you see everybody, not an easy environment. We are coming out from a COVID period, and we are now in a different situation that basically we have 2 emergencies that we have to face: first one is inflation in connection to a weak supply chain situation; and second, the new situation in Ukraine that basically can have an impact on the future of Europe.

Regardless for Tesmec, the fact that we are on the way to go on in a positive way is basically a very good success. And for this reason, probably I will transfer you to Mr. Mosconi, to reconfirm what is our strategy, what is -- what are our main topics and what are basically our priorities as a business. The second step after that, we will disclose all our figures. And as of closing, we will give you the outlook of the figures that are going to be communicated by CFO, Marco Paredi, that we are giving you the outlook of the next future.

Thank you, everybody. I will now move to Paolo that is going to give you a communication about our strategy and our product efforts.

[Paolo Mosconi, executive]

Thank you, Mr. Caccia. Good afternoon to everybody. It's Paolo Mosconi. I show you the main topics, the impact that was coincide this quarter. As usual, we start from the Trencher, from the Trencher, that is our main business unit. And then I will start with the full -- the main points in our opinion, that is a rebounding of the U.S. market in line with the [indiscernible]. You understood -- you know that last year was not the best year for you, you will say, but this year was -- the starting of this year was very, very positive.

The second point that is important for our future strategy, is our reorganizing of the Middle East areas, in particular, Qatar and Saudi Arabia, where we -- now we are in better control of the 2 companies, and we are expecting these 2 markets, important growth for the important project in infrastructure for the future years.

Let me say to you something regarding the product development. In particular, I'm proud to announce that we finalized the test. If you go to Page 12, we finalized with the positive results of the test of the low-impact methodology to lay the fiber optic in open area. So with all the methodology being imposed and we are on the test phase, but we already collected important commercial succession. And at the same time, we are developing with our technological team the new methodology to diagnostic -- for the diagnostic, digital diagnostic of the infrastructure. So this is something coming from the product from the railway that we developed last year. But now we have application also for reduced road for digital mapping of the areas.

Then we go now in the energy sector at Page 13. We -- here, we have the result, a good result, basically strongly in the Western countries, especially in Australia and in Europe. And we had a very important order acquisition in Middle East area due to the recent project for underground infrastructure and in particular, relining projects. In this sector, we are facing some critical impact of our supply chain in some aspects. And so we had some delay in delivery that impact on the number, but we have a plan to recover these delays in the second half -- the second quarter of this year.

On the automation, the automation part of the business that is on Page -- Slide 14. We consolidated our position, and we improved our position in Italian market, both with our product line -- traditional product line, and also with the innovative solutions for the substation automation. Let me say that we have a stronger position in the 2 main utilities in Italy, Terna and [indiscernible]. Also in this sector due to the crisis of the electronic component, especially in the semiconductor, we have a big challenge to deliver the important orders that we have in our portfolio and the order that we are acquiring in this moment.

Then if we go to the third business that we are managing, that is the railway. Here, we -- in line with our main line of our industrial plan to -- continues to -- our expansion in the new markets. And after -- outside Italy, after Czech Republic, France, Israel, we signed an important collaboration in the first quarter in Egypt with one of the main player of the railway infrastructure or constructor in that country. And this is important because -- very important because Egypt will be the chain of -- the theatre of a big project for railway interconnection.

We obtained also some successful on the product point of view. First of all, we obtained the final certification for our 140-kilometer per hour vehicle from the Italian authority, and we are in process to obtain also in Czech Republic, and the forecast is to have for the end of this year. And that's, let me say, that I can say that we are also developing a new generation diagnostic vehicle that is on the track in this day for the final test, for the financial factor. And the new of this solution is that is an integrated vehicle to optimize the quality of the diagnostic devices.

Now we can go on the numbers. I will leave the floor to Marco.

[Marco Paredi, executive]

Thank you, Paolo. Good afternoon, everybody. If you go on to Slide 17, we show the main KPI of consolidated financial report of the first quarter 2022, by comparing to the same period of the last year 2021. As of recording an improvement in all the economic indicators compared to the previous year. And in terms of point of view, we have a lot increased comparing the 2021 in terms of net France acquisition, but better than the closing of 2021.

Terna recorded a better performance, thanks to the result of the railway, energy business and the turnaround of the American market for the Trencher sector in the first quarter of 2022, recorded EUR 53.9 million against EUR 49 million in terms of revenues. In terms of marginality, we increased our EBITDA to EUR 8.3 million against EUR 7.1 million, with percentage on revenues of 14.8%. Tesmec was able to maintain an EBITDA around 50%. Although the group has been affected by the general context, it means in terms of inflation increase of material and energy.

If you go down in the different KPIs, we see that the EBIT record the results of in terms of EUR 2.9 million, 5.3% on revenue against 1.4% over the last year. In terms of differences in exchange rate, we have an impact in term of U.S. dollar of this period, lesser than compared to the previous year, but in case the performance in terms of U.S. dollar and all the currencies related to the U.S. dollar balance, the negative impact of the first quarter of [indiscernible].

In terms of interest rate, we show that we have a decrease from EUR 1.4 million end of quarter 2021 to EUR 1.2 million and last quarter we are -- if you look the net income and net income, we achieved EUR 2 million of result against EUR 1.1 million of the first quarter of 2021.

In terms of net financial position, the result has been partly of the variation of the net working capital. It has slightly increased comparing with previous year quarter, but is better than the closing of the year 2021, that was EUR 121 million. Obviously, in the net finance operation impact the level of stock that the higher the same level of the previous year and of the previous year. And the increase of the receivable for the sales of the company close and end of the quarter in March.

Moving on to Slide 18, we show the results of every business unit of the group. The first one is the Energy business. The Energy business record an increase of revenues. We recorded EUR 12.7 million against EUR 10.8 million. And the EBITDA, in terms of absolute number of percentage, is less than the first quarter of 2021 due to the impact of the raw material and freight cost increase, but we are in process to handle the situation in a different way. Obviously, first of all we try to revise our price list in for the Stringing division -- and for Stringing segment instead for the energy automation, we are working with our clients for some reviewing in terms of medium-term contract.

In the same time, we are looking at a different way to try to supply our products. So we find different solutions in terms of supply and supplier. In the new way, we confirm the performance in terms of backlog, because the backlog increase in again also, again, in our -- in this quarter. We are around EUR 100 million. And now we talk EUR 98.5 million, of which EUR 79 million are related to the energy automation. Also, the second quarter is positive. So is positive backlog acquisition. So it means that Tesmec operates in the right segment related to the -- to a different plan to relaunched of activities in different countries where the group operates.

In terms of financial, we have pleasure to inform that we have an important rebound of the U.S.A. market after the negative performance of the previous year. The U.S. market started with better performance comparing the previous year and the budget. So that is a good point for the Trencher division. In terms of revenues, we achieved EUR 32.8 million against the EUR 31 million of the previous year. And the EBITDA is 40.6% against 44.4%. In terms of percentage and turnaround of EBITDA on revenue, we are slightly the 40 percentage around the year. Obviously, also the Trencher division has been impacted by the increase of raw material and freight and the criticality in suppliers. So that impacted our business in the sales and projects, but in the case, we are able to maintain around 14% of EBITDA. In terms of backlog, we talk about EUR 77.7 million of backlog.

The last one is the Rail business. The Rail business has an important increase in terms of revenues, thanks to a different mix of products and contracts with higher margin, thanks to the kind of a daily project that we provide to our customers. Also, the Rail business has been impacted by the variation of the material and of energy. And also in this case, we are working to revise the medium long-term contracts to redefine in current way the margin of the current projects. The confirmed order backlog was end of March, EUR 113.4 million.

Moving on in Slide 19, to summarize energy as well in terms of backlog. So the group achieved EUR 289.6 million of backlog. As a general overview, Q1 has been a good quarter in terms of the order collection, of acquisition and also the first, second quarter for -- maybe for the 3 business, it look very, very positive.

In the following slide, Slide 20, we show the geographical spread of Tesmec. Obviously, in Italy, with the focus is for the Railway business and the Energy Automation. For Italy, we underline the fact that also the financial division has been partly positive since the different incentivization from the 4.0 plan that involved with Italy government, the Italian government. Instead the U.S. and the European market is more linked to the activity related to the Trencher. We underline in a refresh and restart activity in Middle East, as we already mentioned in the previous conference call, and also in Australia. For the Energy, we have important order acquisition that impact the different percentage of year.

In Slide 21, as we did start after our share capital increase, we underline the situation of the revenues, other recurring versus nonrecurring. The recurring is one of our pillars for our plan 2021, 2023 in terms of consolidation of the business. We see that the percentage of recurring is increased from 46.6% over the last year, 52.1% of this year. I remind you that the recurring activities are registered a product per part services and all the long-term contracts for the group.

Moving in Slide 22, we show the impact in terms of EBITDA and obviously, the increase of the Railway business of EUR 3 million of turnover. And consequently, EBITDA impacted the result of the year and the EUR 8.3 million of EBITDA of the group.

In terms of financial statement, in term balance sheet, we see that in Slide 23, the net working capital increase. And one of the main topic is related to the start that is stable compared to the end of the last year. Tesmec tried to face the current criticalities in the supply also in term of level of stock. So we try to purchase a maximum quantity to be able to supply the product in the second part of the year.

The second point that impacted the net working capital was the increase of receivables that related to the sales that we closed end of the -- end of the matter of the first quarter, I mean March.

In Slide 24, we see the waterfall related to the net working capital, and we see that the inventory is stable to 20 -- EUR 83 million. And work in progress, it's EUR 13.2 million is more or less in level of the sum of inventory of work in progress in end of 2021. We have an increase of the trade receivable and the net impact between the receivable and the trade payable is timing on the remaining point of the 2 topics.

Looking in the Slide 25, waterfall related to the net financial position. We see that we generated EUR 9.1 million of operating free cash flow, that's the balance. Then the variation of the net working capital of EUR 5.7 million and the [ EUR 3.1 ] million of CapEx. I remind that in our net financial position, we have EUR 23.2 million of IFRS 16 related to the building and the fleet of the Trencher division.

Now I pass the floor to Mr. Caccia about the outlook of the group.

[Ambrogio Dominioni, executive]

Thank you, everybody. Outlook is very important now because basically, as we told in the last release, we are in this period of May, in the position to make an evaluation on what is our current situation, what our outlook for the -- what is our outlook for the year 2022.

As everybody know, the global market situation is totally different from what it was last year. The 3 key points on which we have to work, firstly, inflation rate. That means that basically, after 4 or 5 years of substantial stabilized pricing, we are obliged now to face a new situation that were starting in the last quarter of last year. We have a strategy now to try to compensate the increase of cost basically on 2 key lines. On long-term contract, we are making a renegotiation with our, basically, client or the full pricing to have a recognition of the cost increase and the situation, specifically in Italy, due to a huge support given by the official authorities is the proceed that is going on [indiscernible] committed to have a full recognition of our cost increase.

In the private business, obviously we have to be competitive, and we are facing a situation worldwide that in a way is more difficult, but due to our good mix of products and due to the fact that basically, our clients are working in infrastructure and mainly in Energy business, we have -- we are able to transfer partially the increase of cost in our selling price. No doubt that the second area where we are working full, working is to try to be best cost efficient, and we are making a strong push to keep under control the cost and to be more efficient in our production process.

The inflation rate we are facing now on cost is between 12% to 20%, and we think that this is not going to have an impact on our full year -- full year profitability. About shortage of material, that is a point that is really important, especially in electronics and in electrical products. We try to diversify our product portfolio. And due to the good planning situation, we are trying to give recoveries to our long-term planning. No doubt that, in a way, a good support for our production process is that we had, beginning of the year, a good inventory. And for this year, we can get -- we have a substantial guarantee that all our production plan can be in line with our expectation of revenue.

In the current month also, we are making planning for next year for long delivery items and the coverage also for next year is important because basically in the cooperation between all the supply chain or our key supplier recognizing us in 4 key components, attractive production planning, that this can be helpful because we can manage in a better way our future. In this area, the development of the new ERP system will be a strong support for us because we are making a global planning, and we have a good vision of what we do.

Last but not least, for our outlook is the situation in Italy where recovery plans can have an impact on this technological business. This can be a good opportunity for our product line, mainly railway and automation, because basically we are in the key sector, transportation, railway infrastructure and digitalization of the energy system. And for this point, we are expecting very good results in the second quarter, and we are expecting very good order intake possibly before year-end. And this can have an impact on our medium-term perspective.

Due to all these factor, if you go to Page 29, we are able now to give you what are our fees and what are our expectations for the current year. As per volume independent from, we think, and we have a commitment to be better than EUR 240 million. We came in, as you remember last year, from a full revenue of EUR 194 million. And basically, this growth is distributed everywhere and has a small impact on our organization because we have already organized to do that.

We have a very good performance, technically good performance if the supply chain is going to be positive in the Europe energy. We have Railway business that is growing very fast, especially with new technology. And in the Trencher business, we are mainly very strong in the area, Middle East where basically the new oil price and the new raw material prices are giving a huge impact in the economy. As we anticipated, we have reorganized our business in Qatar and Saudi Arabia that can be probably 2 driver count in our business. The first big growing country are United States and. As everybody know, United States had a less impact on all European problems and the economy for our business is growing very fast.

On profitability, as we already told, the first quarter was positive, but not probably a little bit less in our expectation, but we're expecting for the next quarter to come back to be better than 60% EBITDA, with the fact that basically we can have a better efficiency and transfer to the increase of cost to price. This 60% is the medium target. We are expecting on a medium term to have a strong increase in profitability mainly in the area of railway and the energy automation. Basically the area that we have better perspective to grow very fast in profitability.

As a net financial position that is one of our key factor for discussion to the market is, as you have seen, the first quarter was cash positive. That is normally good news for us because normally in the first quarter, we are losing cash. But we are expecting to have a strong increase in our position, mainly connection, if we are able to close all the backlog and leave all the new host that for payment for public clients are going to be affected. This can have for us a good impact for the year-end. We are not giving the right figure because there are too many volatile factor that can have an impact. But we no doubt that our commitment is to go with a lower financial position at year-end, and that can be a very good move because basically, with in case of EBITDA, we are going to be near to 2 in our multiples in the area of debt to ratio.

That is in a way and after that, as we are not to make any updates, we confirm our next year to that but basically, probably before September, we are going to review this historical because the next year, probably that we will have an impact on inflation rates and volumes that can be a positive thing for us. But as of today, we can confirm that we are in the range that we already confirm in our increase of equity, that our targets are between 275 and 219 volume and 17% to 18% in the financial EBITDA.

I think that if there are no extra news, we are open for any question because basically, I think that finally, this is a good opportunity for us to disclose.

[Operator]

[Operator Instructions] The first question is from Enrico Coco with Intermonte.

[Enrico Coco, analyst]

Yes. My question is on the outlook. On the -- about the EUR 240 million guidance for sales this year, my question is how much is -- comes from the backlog? And how much is new business. So what kind of visibility you have on this new business? And on the profitability side, I'd like to ask, given the fact that you assume an improvement in the profitability. And my question is how much depends on the mix, so the growing importance of railway. For example, I noticed in the first quarter railway had a margin of 20%. So how much is the mix from the railway and energy, how much depends on the price increase you expect to add in coming quarter?

[Ambrogio Dominioni, executive]

Thank you for your question. About the EUR 240 million, mainly, we have different business and different approaches. As of today, the majority of the backlog, especially in the railway and in automation that basically the total is already in the backlog. And basically, we have a backlog that is you see the figure is for more than 1 couple of years. Mainly after that, there is a bread and butter business that is going to grow, but it's an extra business.

In the Stringing, the backlog is one of the -- in the best position. Our limit is that we have a shortage in the supply chain. So we can't react faster to the market and the business of Stringing specifically. There are a lot of orders that are with short delivery because basically a continuous business and consumer growing path. In this area, we consider the mainly [ 97% is up to a dollar ]. We have a full coverage, and we have to cover -- whole fully cover the last quarter.

In the Trencher business, we have a long-term contract for service. And for this reason, we have already covered and we were mainly also for selling machine if we consider the orders are not finalized or with the payment guarantee. We have a full coverage in the year. Now this is a must because basically as of today a delivery for the big machine, Trencher machine new order is mainly 12 months. So basically, we have a backlog that is giving a coverage, but probably in certain area risky conditions that we are not going to receive the advanced premium. But as of today, the type of machine we produce are already identified, and we have extra coverage for the future business. So basically EUR 240 million in the 3 business that's mainly a full coverage.

About profitability, improvement is, no doubt there is a mix improvement because basically, railway has a better profitability in all of our business, and our expectation for the year is that the 3 quarter with an increase compared to last year of more than 40%. And that is one of the issues for revenue improvement. The second improvement is that mainly in the Stringing, that the first quarter, we have a problem to release the machine with new prices. We are on the way now where our backlog is with new prices that are mainly based on the new cost.

No doubt the old -- the figure we provide -- and this can have an impact in connection to the main situation. We are not expecting out of any possible point that estimates of costs are going to happen. But as of today, this figure are provided with a cost increase of around 15% as we told you. And basically, we can come back to a better situation.

Where we are in a good control opposite in our operational cost because out of energy, our operational costs are under control. For this reason, especially in Italy, we are expecting to improve our performance. So for this point to be better than [ 16% ] is for us a commitment. But in our opinion is that we are expecting something more.

[Operator]

The next question is from Emanuele Negri with Mediobanca.

[Emanuele Negri, analyst]

I have 3 questions. The first one is about the recognition of extra costs you had from RFI. My question is when should we expect to see this recognition, which is the rough amount you expect? And is it included in the guidance you gave for 2022?

Then about the inventories. You talked about some efficiency actions you expect to do on the inventories to improve the NFP by year-end. What kind of efficiency action you expect? And how does this relate to the shortage we are serving on the market?

And third one about the debt situation. What do you expect for the debt by year-end in terms of revenue profile refinancing or other kind of operation you expect to make on the debt on that part?

[Marco Paredi, executive]

Okay. Mr. Negri, for the RFI, we are in the final discussion. We are preparing all the documents. There is an agreement with the manager of RFI, and we will have the final meeting in the next weeks. So we hope facing also the bureaucracy inside of the RFI to close in -- during the next, this quarter, in the 30th of June. We are discussing to have the complete recovery of the increasing of cost that we faced in 2021. And this is the first stage, the second one, but we will start probably after that we closed this, will be the discussion for the recognition extra costs for 2022.

[Paolo Mosconi, executive]

About the inventory, for sure, we have a high level of inventory end of 2021 end of the quarter in terms of efficiency. We mean that now we are able to enter our stock around the group because we are the main inventory are under the same system, in the same ERP. So we are able to move to adopt the contracts where we leave them according to the different needs and according to the different product we have in U.S., France or in Italy in terms of production.

Obviously, now in terms of supply, we have a longer-term or early time, if you want to place a new order. But in any case, we try to create synergies among our suppliers and to find solution according also the different business.

So -- and now we look summarizing, we look -- we have a big opportunity in our stock to be ready to answer our customers faster than our competitor. And in the same time, we're using our new ERP system, we are able to check list our order and our inventory on demand, all of the company. So we have a centralized activity for Trencher division. That is the main business unit diversified in terms of geographic point of view.

And in terms of supply, we try to -- we are looking to find solution, among similar solution, among the different business unit. Looking at different -- also different opportunity in the Far East. In terms of refinancing, we -- in this moment, we are discussing our partner, a financial partner to see if there were some opportunities to refinance the medium-long term loan. And we are working as we did in the 2021, there is some opportunity. And we will disclose probably in the next closing.

[Operator]

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

[Paolo Mosconi, executive]

Thank you.

[Ambrogio Dominioni, executive]

Thank you, everybody. We are pleased to close this conference. I hope that if you have any extra question, we are really available for you. And we have to say thanks to our team that basically has allowed us to have this positive first quarter. Thank you, everybody.

[Operator]

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