Tesmec SpA

MIL:TES

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Tesmec Results Ended at 31st of March 2024 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]

Good morning, good afternoon, everybody. We are pleased to be here to make presentation of our first quarter result. This is for us an important year because as you know, we have closed last year with important commitment about what we have to do to face the changes in the market, what we have to do to take the opportunity that are bigger and change in environmental, sustainability and the digitalizations. The first quarter was an entry point of the year. This was not an easy quarter for us because we were in line with our expectation but no doubt the things that working properly, there are things that are not in line with our expectations.

One important point here is -- and if you go to the Page 9 of our presentation, we want to have a highlight of what we have done, what to do, what are the products that we are making, what are the things that we are expecting to have better results. Coming out as a general point, we are -- as per volume, the first quarter is normally entry point of the year. So the quarter is in line with our budget but we are expecting to do much better in the second part of the year. The second referring quarter.

We had started a lot of actions to improve the governance in critical areas for our company. So we have changed our organization in U.S.A. and Australia, combined with the reinforcement in [indiscernible] and we try to have a better planning. The area where we are better performing now is the export business, normally Middle East area, Africa and [indiscernible]. Middle East is growing in negative situation because as you know very well, there is a situation in Gaza that is not positive but generally speaking, the market is reacting in a positive way because the impact on our key area that is in a way South in the second step but [indiscernible] is not impacted by this situation.

We are expecting much better results in the current part of the year particularly [indiscernible] for renewable energies and pipe installations. The contribution generally speaking in our [indiscernible] that is focused on energy is that our traditional energy is growing very well. We have minor problems with a certain time but we are expecting in terms of energy very good volume in the year with the first quarter with positive. During the year, we are expecting [indiscernible] what was impacting our profit and losses that we have.

At the same time, we organized in our operation for this point. The first quarter was very important because we have closed 1 factory in Italy, we have fully reorganized our manufacturing [indiscernible]. This has an impact on our first quarter sales because we are best to make an investment in logistics and reorganizing. But at the end, we expected to have a very strong impact in the future part of the year.

What was not positive are 2 reason, which are connected to finance, due to higher interest rate our financial costs have been increased. No doubt that we are expecting with a long-term and committed to keeping balance the situation. But on the short term, the interest rate has a huge increase. And this -- and second is the impact from the net financial position due to the mainly slow movement in certain, especially in Italy, more in connection to P&L funding and the delays in payments that were expected to be in the first part of the -- first quarter probably are going to come during the year. This is an important point because no doubt, our financial position that was expected to be better, was not in line with our expectation but has [ noting ] impact on our forecast.

That is, in a way, the general situation with us on and now to Mr. Mosconi that can speak more in detail about the recent action for the business unit what we intend to do or where we are.

[Paolo Mosconi, executive]

Thank you, Mr. Caccia. Good afternoon to everybody. We can start from a Trencher division that is the most important for our company.

Slide 13, please. For the Trencher business unit, the quarter was a good quarter. We grew both in revenue but will be in better in the profitability. In fact, we have a strong increase in our EBITDA. Thanks to 2 main factors. One, our internal network spread all in the key [indiscernible] are working as per our expectation. And the second important factor is that our solution -- integrated solution for energy installation and for telecom application and for pipe are, let me say, at the state-of-the-art of the technology for the underground infrastructure these days. So we had good result in Middle East especially in Qatar and Saudi Arabia but we expect to grow also in the other country of North Africa and in the second part of the year in the Europe.

Then if we go to the Rail, Slide #14. We had, let me say, not easy quarter due to delay in the bureaucratic procedure to start with a new contract that we signed last year. So we decreased in the revenue, and we did -- we try to maintain the profitability working on the cost. The key effects on the quarter was quite important for us. And in fact, we received the first certification outside Italy for our vehicles in Europe that is in Bulgaria. We started the mass production for the Bulgarian Railway Authority. We delivered the first batch machine and we certified the machine on the Bulgaria area.

And the second important factor that I will -- I underlined is the positive static test to the new generation Stringing machine that is a very technological machine. We completed the construction and now we are in the phase of testing. The first one of the static one was positive.

If we go very faster to the third business unit, Energy. Energy did a good perform -- very good perform in the quarter. We increased both the revenue and the marginality. And I underline that we did this. This result in a quarter where we moved the production of the stringing machines from one site to the main one in the Saudi. So we had also some inefficiency that will be recorded during the next period.

This result are because we formalized our offer in, let me say, important key markets like Australia and North America, markets that gave us a higher marginality. And for the automation, we are in -- now we have, let me say, we start to collaborate in the mass production also with Italian peso. So now we have 2 pillars -- good important pillars in Italy. One is the DSO panel and the second one is [indiscernible]

And I -- we prepare and we are involved in a huge opportunities in Italy and in Europe, specifically in France for important tenders for devices for pre control and automation of the primary substation that we will give us important contribution to the growth of the sector.

These are the main facts. Now I pass the floor to our CFO, Ruggero Gambini.

[Ruggero Gambini, executive]

Thank you, Paolo. Welcome, everyone. So again, making reference to the presentation that is available for download on our website, Investor Relations section. Page 11 brief comment to P&L, just to summarize the consolidated effect of all that our Paolo Mosconi just represented. Revenues grew in the quarter by 3.2% against last quarter -- the third quarter of last year. This is a result of a very positive performance as per Mr. Mosconi just mentioned, of the Energy business. And to a lower extent, also the Energy division, but more than offset the cited temporary downturn in the railway segment.

At the same time, if you go down to the operating line of the P&L, you will appreciate a 20% increase in EBITDA level and in term before depreciation growing for EUR 7.5 million last year to EUR 9 million this year. Total profitability of sales grew by something more than a couple of percentage points. This is the first signal of the first initiatives of mix improvements and fixed cost containment that were mentioned by our CEO.

Let's keep in mind that following what was already anticipated the level of sales of the first quarter is not representing the maturity sales throughout the year. We are pointing out at a level of at least EUR 70 million to 75 million. And based on that objective this -- the full year effect of the benefits in terms of quality of efficiency expected throughout the year and based on actions already started, we are clearly pointing out at a number much higher than that and in line with our -- with the forecast that we're already anticipated.

Clearly, again, as was anticipated, the key burden that affected the first 3 months of this year is represented -- was represented by the weight of financial charges. So based on that, we closed with a loss of around EUR 1 million, which is still a loss. So we know first quarter for what -- based on what was already explained is the weakest of the quarter. But clearly, the comparison on one side with the first quarter of last year, and as well as with the expectations based on backlog and short-term sales expectations of the first coming quarter corroborates our estimate for a far much stronger economic performance throughout the year.

Now again, a brief comment just to close on the financial situation. So economic results improving financial results. If we go to Page 23 of the presentation. Here, we offer as usual, a very brief the quantitative representation of our free cash flows, excluding the variation of the IFRS 16, I already have a chance of commenting this nature and the impact of this post and the relevant effect on Tesmec that excluding the IFRS 16 item, you will notice that the debt increased by some EUR 6.5 million. Out of those, the largest part was represented by a total increase in net working capital, mainly driven by accounts receivable.

Please consider again that accounts receivables variations should be read together with the variations of other short-term assets and liabilities. Considering those, I have to say the net number appears substantially in line with the net value that we experienced in the first quarter of last year provided that this year, we sold -- we presented higher volumes on a quarterly basis.

Clearly, the difference is represented by the EUR 4.5 million CapEx that we sustained this year, not fully covered by the quarter operating free cash flow. So the increase of what we call industrial debt was limited to EUR 1.5 million.

Now last comment on the debt composition. So this EUR 167 million, which is the last column. Again, at Page 23, again, let's keep -- let me share just a couple of comments. First of all, completion of the net financial position is very important as well as not less important, the duration of a net financial position and the [indiscernible], the high degree, the high level of [indiscernible] So duration of a net financial position against the net assets.

First point, composition out of EUR 167 million, EUR 92 million are back directly in net working capital. We know that the elective of Pemex throughout the year is to leverage on the extra stock that we accumulated throughout the last, I would say, 15 to 18 months in order to meet our backlog and short-term estimate in order to drive this value towards a much lower value by this year-end.

Second portion, EUR 46 million by, again, IFRS 16, we needed to accrue the net present value of the future outflows but especially for what concerns the machines, the Trencher that are subject to leading operations and that we have enter to triumph. We cannot accrue the relevance in terms of financial credits, the relevant expected margins. So balance is the real net industrial debt of the company was lower than EUR 30 million, EUR 29 million is the exact number.

Second point, duration. If you consider the overall level, the overall bulk of long-term liabilities, financial liabilities. So long-term debt, together with leasing operations that by nature, are bearing a mid-long-term duration, we'll raise the number of EUR 130 million against the portion of the long-term assets not directly covered by equity of EUR 75 million. So also in terms of duration, I think we are in a situation, let me say, phase -- the program of into development for which the whole management team is the very [indiscernible] greater the communication working throughout the year.

I will stop here before the Q&A, and then I'll leave the floor to our President for the closing comments.

[Ambrogio Dominioni, executive]

[indiscernible] that I don't know if we were very clear in our presentation. For any questions we are ready to replay. Just to give you an outlook for the full year, what we're expecting. We are expecting we give [indiscernible]. They were in line with our expectations that we are already present to you. We are expecting increasing variance in an environment that the inflation rate is what today is very low, near to 0 for our type of products.

We are expecting to have a certain stability in currency between especially -- we are making important part of our sales, especially in French division in dollar. And at the end, we are expecting to have in that situation amount of revenues that are more than 10% higher than the last year, which was the last year around [indiscernible] and we are expecting to have this growing factor. And this has to happen in a situation that our fully operation cost under control. We expected to have full cost in all the operation cost in line in absolute figures with the last year.

So we are making cost efficiency and we are trying to be worldwide in that philosophy to keep costs under control and to go in an environment that inflation is very low. As a result, we are expecting -- as a result, as I said, a good increase, both in absolute amounts and also in percentages of our EBITDA situation. At this point in that situation, we are expecting to cover all the depreciation and financial and interest rate to have a final line in net profit at the end of the year.

For the net financial position that as we told always, is our first priority, the increase in the first quarter was not due to increase in working capital basically [indiscernible] limited but working capital for is mainly [indiscernible] because in the first year, normally, the month of March is very high, generally, further lower. And this point, we have our [indiscernible] tradition at the beginning of the year is going to increase.

We expect it to normalization of working capital, our CapEx is under control. So at the end due to profitability in our net financial position has to improve. And normally, last year, we had a lot of several possible product [indiscernible] all our changes in the organization are giving us a positive feeling that we are not going to have an extraordinary item negative during the year.

So basically, our outlook in a way, generally speaking, is positive and is absolute line with our expectation. So we are expecting a second quarter better than the first but we are expecting that all the quarter are going to be with line with our expectation. I think that normally, this is a situation. This is in any way talking in a difficult degeneration environment because basically with the war of Ukraine and the war of Gaza still going on. But basically, as of today, the impact on the economic situation is not so important that somebody was thinking. Opposite, what can have an impact on the last quarter the new political changes that can happen in U.S. [indiscernible]. So we have to be really careful about the best part of year to be operating in a different country to cover this.

Thank you very much.

[Operator]

[Operator Instructions] The first question is from Emanuele Negri of Mediobanca.

[Emanuele Negri, analyst]

I have a couple. The first one is on the Railway, which somehow underperformed compared to the expectation in first quarter. Do you believe that recovery may appear in the second quarter or maybe in the second half of the year? And the second one is on Trencher, which observed a really high level of profitability. Do you believe this level to be somehow sustainable or to maybe normalize a bit in the coming quarter?

[Ambrogio Dominioni, executive]

[indiscernible] to Mosconi to give reply for this.

[Paolo Mosconi, executive]

Yes, we expect to recover part of the revenue in the second quarter. So to close the first half just in line with the budget, and we expect to have second quarter or second half of the year with important recovery. The reason why that we are supporting some delay in the starting of the new contracts and these new contracts will be fully -- in full operation starting from the month of May, June. So we expect to stay -- to have a second part of the year better but to recovery part also in the second quarter of this half.

For the Trencher?

[Ambrogio Dominioni, executive]

We are better than the year before, but we are not in line with what we are expecting because the Trencher machine anyway, a machine be able to sell but for machines that have a very high contribution if are well utilized. The reason why sometimes we are not an efficient situation because especially [indiscernible] U.S.A. and Australia last year, we're not performing for specific region. The reason why we took this big approach was not due to commercial situation but because we think that we have to be better organized.

We are fully involved about that and we confirm that if we have the right mix and if we are following in the correct way, the situation, the profitability can be -- can have a strong increase. And this is important because, first of all, the Trencher division is offer volume the biggest one; and second, also most important because we have an asset location Trencher is important, and we have to put this flexibility in the value position. What we are really thinking that also in the Trencher [indiscernible] we have to be more efficient in inventory management because no doubt that we have to decrease the asset allocation in this division.

[Operator]

The next question is from Enrico Coco of Intermonte.

[Enrico Coco, analyst]

I have two questions. First question is on the Rail business and then I have another question on the net debt position. So on the Rail business, basically, I would like to know why the contribution of this business to the group sales is so volatile? I saw in this quarter, minus 25% in revenues from the Rail business. These revenues will be covered by the backlog? So why we see this kind of volatile results?

The second question is on the net debt position. I would like to know if you expect to reduce net into your target to reduce the net debt position compared to last year. My question is if you expect to reduce the net debt in the last quarter of the year, or in general, what kind of progression in reducing the net debt do you expect on a quarterly basis this year? And also, if you could clarify what kind of debt repayment schedule you have for this year and for next year?

[Paolo Mosconi, executive]

Okay. I reply for the Rail. The actual backlog is very much connected with the Italian RFI. The RFI has some technicality to release the quantity for each year. And at the beginning of this year, they have a delay in defined the year plan. And so we are now in a recovery, the delay that we had last quarter of last year and the beginning of this year. The action that we are taking that we took starting from second half of last year is to have a better internationalization of the business. In fact, today, we are already present in 3 different countries besides Italy, and we are improving our marketing action to be more, let's say, international and not to be to face this up and down of the Italian Railway Authority.

[Ruggero Gambini, executive]

So the second answer -- as for the second question Enrico, yes, it is our corporate objective to start reducing the net financial position really starting from next quarter with a growing contribution throughout the second, the third and fourth driven by reduction of net working.

Do you have -- did I miss anything for your question, Enrico?

[Enrico Coco, analyst]

Yes. If you could provide the debt repayment do you expect for this year, next year compared to the liquidity position of the company. And if I have a follow-up on the net debt reduction, could you say if you expect to reduce also the leasing component of the net debt position, the one that this quarter increased by EUR 7 million. The question is if you expect this leasing debt to grow also in the coming quarters? Or will stop here?

[Ruggero Gambini, executive]

Okay. Fine. Very clear question. So point number one, if you look at the total debt towards the banking system at the end of March against the end of December, you will appreciate that it was decreased actually by EUR 10 million. These are details that you will find in the managerial note that were made available as well together with the presentation on the website.

The point number two, leasing. We think that this value could be lower throughout the year. And it will clearly depend on the mix of financing and number of machines that we are going to upload to our fleet in the next quarters. But I think debt the level at the end of March throughout the second year between add-on and depreciation, if in case of increase, it will increase by a maximum of a couple of million.

Point number three, reimbursement of senior debt, meaning EUR 82 million. We are reimbursing on an annual basis, around EUR 30 million -- EUR 30-plus million in 3 years. This is that means that the average remaining outstanding duration of this debt is around 3.5 years. And clearly, as you know, as for this mid long-term position, we -- a portion of this on -- not on incremental basis in terms of net financial position can be almost easily, quite easily substituted by me. But this is the annual level of repayments. So around EUR 7.5 million per quarter.

[Operator]

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

[Ambrogio Dominioni, executive]

Thank you very best, everybody. I hope that we will be in the next conference by confirming what we could do probably. We are fully committed to do better than what we told you. Thank you.

[Operator]

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