Tesmec SpA

MIL:TES

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Tesmec results as of the 30th of September 2024 conference call. [Operator Instructions]

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

[Ambrogio Dominioni, executive]

Hello. Good afternoon. I am Ambrogio Caccia Dominioni, President of the company. I have a pleasure to introduce to you the interim results consolidated figures as of September.

The year '24 was for our company a challenging year because we had a lot of changes in our organization. The prior organization, as we told already at the beginning, we changed the management in our company, especially in the area of our foreign companies. We have now new general managers in South Africa, U.S.A. and Australia. And that is a good point for us to go on in the year.

The year was not -- this year, the priority for our company was to keep control on the cost -- over the cost and the revenues. For that point, we have -- an important effort that had been performed to keep control on costs, and we have reduced our cost in a situation that is an inflation rate around from 5% to 10% depending on each single items.

The efficiency was -- has an impact on our profit and loss situation because due to this result, the volume are in line with the prior year, but we have a little bit better profitability. And basically, we had a chance to reorganize our foreign entities in U.S.A., Australia and France with no impact on the profit and loss situation.

We confirm that we are in process to -- with our research development teams to introduce new products in the market. We had a pleasure in the current year to have a result, especially in the area of hi-tech technology situation, automation and say, rail. There was a really important exhibition that we had a chance to check in this third quarter, one in Paris for automation and one in Berlin for railway. The situation for our product was positive, and we can confirm that these are things that are working.

What is important for us in the meantime, we started beginning of the year to reorganize our operation team, and we closed a factory in north of Italy. Now we are concentrated in the headquarter in Grassobbio for production of Trencher and Stringing equipment. This can have a huge impact on the future, and this is probably a good starting point for our future result.

What was not working, let say, we had still on a financial point of view, a net financial position that is down from what was the top in June, is supposed to become better year-end. But now this is a situation that for the future is to bear further improvement, and we have a plan to do that. But the impact on the current year is especially on the profit and loss situation due to high interest rate that worldwide has an impact. The currency situation is not positive, but rather let's say stabilized. And in a way, you know that we are long in dollars normally. And I think that in the current situation during the year due to the new situation in U.S.A., we think that this is not bad because we think that we are expecting year-end a better rate with the dollar.

After that, let's say, I will transfer to my good friend, CFO, Gambini, that can introduce to you all the figures of the year. And after that, we will review this on the business point of view, the key milestones of the current situation.

[Ruggero Gambini, executive]

Thank you, Mr. Caccia. Welcome, everyone. This is related, as usual, at the documentation, which is available for download on our website at Investor Relations section.

So I'm starting commenting the presentation from Page 11 of this document, a brief comment on the profit and loss, and then following some key notes on net financial position and financial structure. So from Page 11, profit and loss, as Mr. Caccia was saying, we achieved in the first 9 months of this year, revenues substantially in line with the level of the like period of 2023. Total sales revenues accounted for EUR 189 million against EUR 193 million of the 9 months of last year. This was marking a marginally negative 2% downturn. So again, volumes achieved substantially in line.

This was -- and this is very much remarkable under a managerial point of view in our view. This was accompanied by decisive determined managerial action aimed at reducing in a significant way our operating cost structure. And this managerial action achieved good results and was very important in order to increase our levels of efficiency and productivity on one side.

And on the other side, to counterbalance some of the effects of still unfavorable conditions in some key markets very important for us such as Australia, France and the United States, as it was mentioned, and also to offset a decreased contribution from our JV operating in the U.S. in the Stringing market as well as lower R&D contributions.

The combined effect of this was yet -- was still a slight increase in absolute terms in terms of EBITDA, but most notably, the confirmation of an increased profitability in terms of earnings before interest and depreciation. As a matter of fact, the EBITDA margin passed from 14.7% to 15.4%.

Now going down to the other lines of the P&L. EBIT, considering a very slight increase in depreciation by around 3%, closed with a marginal increase against last year, so increasing by around EUR 0.1 million and recording the value of EUR 11.4 million. But most notably, again, as Mr. Caccia remarked, and this is one of the key points of this P&L, I would say, in line with what was already highlighted during the last 2 earnings call.

We recorded in the first 9 months of this year an increase in our net financial charges, so interest, passive interest by around EUR 4.5 million, leading together with the minor negative contribution from ForEx to a negative result before taxes of a EUR 2 million, which combined with the different fiscal mix that was already commented during the last earnings call, and this was generated, as you might remember, during the first quarter of this year to an interim loss accrual of taxes, an interim loss of EUR 4 million.

A few comments on the P&L before going to the financial results. First of all, in terms of financial charges, let's keep in mind that 50% of the banking debt of Tesmec, so EUR 80 million out of total EUR 180 million, is represented by senior debt. Senior debt, the interest rate of which, as already communicated in the past, that is covered by means of interest rate swap, meaning all the old debt was fixed in terms of rate.

So by the time from quarter-to-quarter, we are reimbursing the existing debt and adding the substituting new debt, clearly, we arrived at the end of September to incorporate in our figures the full year effect with around 6 to 8 months of delay of the increase in interest rates accrued over the last couple of years. Clearly, the normalization is expected starting from the next quarter.

Another comment in terms of differences in exchange. As you might remember, we closed June with a profit unrealized like the one-off this year of EUR 1.1 million. That means that the decremental contribution to our 9 months P&L accounted for roughly EUR 1.5 million, EUR 1.4 million is the exact number.

Let's keep in mind, we are all aware that incidentally, exactly right at the end of the month of September, the dollar weakened in a significant way, jumping up to around EUR 1.12, then getting normalized in the 12 days following September 30. So going back to the same level of June 30, EUR 1.08, and now even below as of before the U.S. election. So clearly, this means that we are not worried of the value at the end -- at year-end. But for sure, this loss can be expected being normalized over by this year-end as parity of exchange rate.

In terms of P&L, I will stop here because the topic of the fiscal mix was already commented during the last earnings call. So I would drive you to Page 12. So some very brief and summary comments on the net financial position.

We closed with EUR 176 million of total net financial position. You can find the numbers, again, Page 12, summing the net financial indebtedness towards the banking system, EUR 127 million plus the lease liability. I already have the chance of commenting our position in terms of this IFRS 16.

In any case, the total number is EUR 176 million, still higher than the level of last year. But in any case, the margin confirmed the expectations that were shared during the August conference call about the reaching as at the end of June of our peak in net working capital.

Why am I mentioning net working capital? Because our debt increased in order to the adopt company with an adequate level, especially of inventory to cope with our very important backlog. I remind that our backlog over the last couple of years grew notably from around EUR 200 million to close to EUR 400 million, value to date is EUR 364 million.

This is very important because if we consider the level of inventory at the end of June, you will notice that the decrease in inventory actually accrued by the end of September. So the peak was -- is at our back. And now all our efforts are finally also with the support of the figures concentrated in reaching a target of important reduction of net financial position by reducing our net working capital by this year-end.

My last comment as usual, I would say, comment in terms of financial structure because that we personally consider very much important. Let's consider why we have this financial debt. Out of the total value of EUR 176 million, more than EUR 100 million is represented by working -- net working capital. Another roughly EUR 50 million, now EUR 48.3 million, which is represented by the IFRS 16.

Sorry to repeat myself every now and again, but let's keep in mind that this is the application of an accounting principle stating that the company has to incorporate in the net financial position the current capital value of all the future reimbursement of our -- in our case, leased machines and also as well also a small portion represented by the actual value of all the renting fees for our facilities for the portion of facilities not directly owned by Tesmec.

Clearly, [indiscernible] conversely, the same principle does not allow us to incorporate the value of the future margins generated by the machines that we keep in our fleet. And in any case, again, considering a total fleet of around 170 machines, let's remember that just 50% -- 57% of this fleet is subject to leasing. All of the balance is represented by fleet depreciated over 7 years the current book value of which is EUR 11 million.

Clearly, the balance is represented by around EUR 25 million that represents our real industrial debt, meaning the portion of financial debt not directly covered on top of our equity to cover a portion of our fixed assets. And this is very much important.

I would stop here in terms of commenting the results and leave the floor to my colleague, Carlo Caccia, Business Unit Director for the Stringing and the Automation business unit.

[Carlo Dominioni, executive]

Good morning, everybody. Let's go on to comment, say, the single business, each of the business units. We start from Trenchers that is in Chart 13, I guess, 13, yes. Let's start from Trenchers that is, as you know, the most significant in terms of volumes.

The first 9 months closed with, let's say, a bit of a slowdown in terms of volumes that is mainly caused by the slowdown of our French market and some delays in big projects, both for the U.S.A. and Australia. This situation brought us to a even stronger organization, as I said before, on 2 of our key areas that are France and Australia.

On the other side, the good part of the result is that there is an increase in EBITDA that is coming especially for a better mix in sales. And especially, we are looking at a significant increase of opportunities and a strong growth in some of the fast-growing areas of the world such as Africa and especially Middle East. We will see also later on during the outlook that this is going to be also a significant part of our strategy for the next future. So this is for Trenchers.

Going now to Railway business. Railway business, the first 9 months saw a decrease in terms of revenue and EBITDA, mainly due to some, let's say, renegotiation of some of our main contracts with the main Italian customer that was, let's say, very significant in terms of impact on sales of the Railway business. This is also the reason why there is a strong focus going on also with new tenders and new projects, both as a sales perspective, but also in R&D for new international markets, with significant opportunities on the diagnostics sector also both from the, let's say, heavy investment on safety that is one of the key topics of the railway authorities worldwide.

In terms of -- let's say, I would say, one additional point we saw in the first 9 months of this year on Rail was a significant focus on the rationalization of the cost to deal with some of these delays that we talked about.

Going to Chart 15, that is the one of energy. The first 9 months have been pretty positive, both in terms of revenue and EBITDA, even if there is some -- if we look into the details of the Q3, there is room of improvement in terms of profitability, especially on Stringing, also because of a couple of deals that were, let's say, not in line with the expectation, but let's say, on the other side, the volumes are growing and the opportunities are growing.

One significant topic also in terms of the outlook is that the first 9 months has been quite pretty tough on one of our main markets that is U.S.A., where both for Stringing and Trenchers we see strong, let's say, strong opportunities for the next future and a strong recovery of the local market.

In terms of Automation, there is, let's say, also in this case significant opportunities coming on new tenders, both in Italy and outside of Italy.

Looking at the outlook, so we switch to chart -- we switch to Chart 24 for the different business units, starting from Trencher. As said, there are, let's say, good -- let's say, there is, as said, a very good outlook on the U.S. market where there is also going on a strong reorganization of the sales network that will allow us to benefit from the boost of investments foreseen in this kind of business. And also relaunch on our French organization and French business, thanks to very interesting and significant projects in fiber optic and energy business in general.

Switching to Rail, as said, there is a strong reshape of the business in new growing markets and significant opportunities foreseen for both Western and Central Europe in general, say, with different tenders we are participating in. Also thanks to the strong impact and investments in both efficiency and safety.

Last but not least, Energy. The big boost coming from the impact of the renewable energies and the investments in the energy transition is bringing us a lot of confidence for the future, both in Stringing and automation. On the Stringing business, we are looking also in order to improve the profitability. We're looking especially with a strong focus in premium countries such as U.S.A., Australia and Western Europe with a lot of innovation in the, let's say, interconnection of the job sites.

While in the other side, on automation, the significant development is coming on especially in international markets with the focus and also challenge coming with some, let's say, new technological trends that will probably also change in the next future the business model of Tesmec business coming from the authorization of the applications.

So this is in a few words both the key facts and the outlook of each of the business units. And before concluding, I leave the floor to our CEO for the final comments on this document.

[Ambrogio Dominioni, executive]

Thank you, everybody. I don't know if our presentation was very clear. I have to summarize what is the current situation. The current situation is giving what is our outlook on the financial point of view. The reason why we are not giving specific figures now is because due to the external situation, not due to our backlog of our operational capability, we have a not easy situation on logistics.

We are shipping capital goods. And as of today, due to the not easy political situation in Middle East and due to the situation in Europe, we have a lot of problem now to guarantee specific shipping dates for our goods. For this point, we are totally optimistic for the current quarter and for next quarter for our business perspective due to the reason why in [indiscernible], we are expecting a strong market for our products, generally speaking, because we are really competitive.

And the second point, the scenario -- the growth scenario for this type of infrastructure products is really positive. But on the short term, we have to talk on what can happen year-end. We can confirm that our first line will be better than '23, but not exactly what was expected because as we told you, especially year-end, we have a lot of problem for logistics. Just certain product for us, for example, we have to -- the shipping ports are going to move from Italy to North Europe because there are no boats of certain type that are going to attack the Italian ports.

On profitability, as we told, we confirm that due to our cost cutting into the better mix, we are expecting to have an increase of profitability on a quarterly basis, but especially on a yearly basis. We are supposed to be much better than last year, especially on the 12-month figures, due to the fact that we have no strange figures coming on in the year. And we are already in the difficult area on the [indiscernible] already expensed all our reorganization activities.

Concerning our net financial position, that is the priority for our top managers, and we are looking to that and no doubt that we had an improvement compared to June. The delay was especially due to dates that to transfer that was not -- they were not done in the first quarter, but they were rather committed for the last quarter. And for this point, we are expecting a really good increase from September figures to year-end figures.

At the end of the year, we are going to be in line with the beginning of the year. That is not a fantastic result, but much better first what was to be. And the justification is that last year, we have not yet finalized new order with advanced payments that were supposed to be done this year, but they are going to come beginning of next year.

For this point, our end of the year is going to be -- our focus to improve our profitability, to have a better financial position and the volume have been better than last year. Hopefully, on next year, due to the quality of our backlog, due to the negotiation that we have in process and that was supposed to be closed in the next month, we are expecting a strong increase, especially in the strategic area of Railway application, digitalization and top machine for the business of oil and gas.

I think that if I understand correctly, we have -- we confirm that '24 was in line with our budget, but it is not satisfactory for us due to the level of interest rate and due to the last change, we are expecting due to the improvement of financial position, due to the fact that interest rates are on the way to decrease also in our figures because the market has already anticipated on the medium term and the decrease of cost of money of 200 basis points more than now.

That is basically where we are and where we expect it to go. Thank you, everybody.

[Operator]

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

[Emanuele Negri, analyst]

I have a couple of questions. The first one is on Switzerland. You announced an interesting tender award in the last few weeks. I was wondering which kind of opportunities do you see in this new market you entered? And the second one is on your guidance, which implies solid cash generation in the last quarter of the year. Where do you see room in terms of net working capital optimization to, let's say, generate this amount of cash you expect in your guidance?

[Ambrogio Dominioni, executive]

Excuse me, about this opportunity in Railway market, Mr. Mosconi that is our big boss in the area of rail can explain to you what was the result in our InnoTrans show and what are our expectations due to this big success in the technical market of SBB.

[Paolo Mosconi, executive]

Yes. Thank you, Mr. Caccia. We closed -- we awarded the first contract with the Swiss Railway Authority. The contract is important for the technology that we sold that is for the safety of the network of all the network in Swiss for the track geometry is a device very sophisticated. And the main result that we achieved is to start under the rules of the Swiss Railway long-term -- medium-term collaboration.

They show us their investment program for the next 15 years and they are -- they believe that we are -- we have the quality and technology to follow their investment in diagnostic services, but also in the renewable of the maintenance fleet for the energy network.

This was the result that we had in September. And at the end of September, we had this -- the participation to the most important railway show in the world in Berlin, that is InnoTrans. And we have the confirmation that we are part of the international award of the working car and diagnostic car, means that the main network owners in Europe and outside Europe came to us and share with us their future. And so we have now a huge opportunities, huge in numbers, in quantity, but also in value to numbers of tender on which we have to participate in the next 6, 9 months.

That is a confirmation that our investment in technology in railway is very close to the need of the European railway authorities.

[Ambrogio Dominioni, executive]

Excuse me, just to complete that, Negri. It is important to clarify that, first of all, the situation globally in Europe on the railway line is that maintenance is a huge problem coming out. You are seeing especially the big -- due to the overloading of these lines, there is a huge problem that -- and all the investment has to be anticipated. And if you take maintenance, the real driver connection to maintenance diagnostic that has the first objective to identify possible predictive faults on the line and to identify what has to be done.

This is our target. We have already as integration in the final test and is also on the press now, the best diagnostic vehicle that is supposed to become full operation end of this month with all the possible new technology that are going to be installed and that is going to be utilized by Italian RFI. This is an important success for us because it's a 5-year job. And finally, it's giving us a full audience in Europe about that.

The players in Europe are not as few. And basically, Italy is one of the first market for technology. This is important for the Italian network, but it's also important because the future is in the railway business worldwide is really important.

Second point about cash generation that we're expecting in the last quarter, I will transfer you to Mr. Gambini, that will explain why we are expecting such a better situation year-end.

[Ruggero Gambini, executive]

Thank you, Mr. Caccia. Emanuele, yes, this is a very important point and the driver to our managerial action. As you will have a chance to better notice in the numbers, the figures at the end of September, as I was mentioning before, already showed a first decrease in our inventory. When the inventory was created back in September -- between June and September '23 in order to accompany on one side, the strong increase in our backlog that we were experiencing at that point in time on one side. Coupled with on another side to the beginning of some logistic problematics at the global level that started appearing between '21 and '22 with a string attachment in '23 and following the post-pandemic recovery.

Now the good news is that starting from the peak of around EUR 150 million of total stocks, at the end of September '23, we lowered this value to -- at the end of December, there was a sort of follow-up in June. And against June, we achieved a decrease in total inventory by around EUR 11 million. This is already incorporated into the results at the end of September.

Now our action is to start strengthening this trend. By this year-end, we know that usually historically for Tesmec, the months of November and December are particularly important in terms of shipments and sales. Last year, we closed the year with around EUR 60 million of revenues that was below our expectations for all the reasons that we already commented at that point in time.

Now we are assuming a level of sales, as Mr. Caccia was anticipating commenting the outlook for energy a big difference between the total outlook and the actual set at the end of September higher than the level of last quarter of 2023. And clearly, this difference, coupled with a lower level of purchases accrued in between, will lead to a further strengthening of this trend of reduction of our inventory.

This coupled with the generation of the EBITDA that we are expecting and for which we are working in the last part of the year is supposed to lead to the outlook that reported at Page 23 of the presentation that our CEO already commented.

Let's keep in mind that as was reported in the notes -- the managerial notes, the results of last year, the last quarter of last year was influenced by a number of nonrecurring that are not supposed to concretize again this year. So clearly, the normalized starting point of our EBITDA is higher if we consider a starting point September 13, 2023. On top of this, we are adding the incremental margins and the related consumption of existing stocks.

[Operator]

The next question is from Enrico Coco of Intermonte.

[Enrico Coco, analyst]

I have 2 questions. One is on Rail and another one is on Trenchers. On Rail, I would like to know in Rail, you have a backlog, which is around EUR 200 million. So you have a significant backlog. My question is why I see revenues going down if I see the 9 months results? In other words, why you are not quickly converting this backlog? And if I may, I would like to know the implied profitability embedded in this Rail backlog.

The second question is on Trencher. Let me be straight on this. Do you sell Trenchers to your Saudi company, which has the business of -- based on the rental? So this company can buy the Trenchers in leasing and in accounting terms, you see revenues on one side, leasing that on the other side. Is this the case?

[Ambrogio Dominioni, executive]

Excuse me, after we transfer to Mr. Mosconi explain what is the situation. Remember that as of today, in our -- and we have anticipated in our backlog, we have big projects that basically are following the rules that are especially Italian. They are following the rules of certification. That means that every job has a first prototype, so-called test this area that has to be tested, accepted and certified. Basically due to the huge improvement in European rules, the big project that are currently managed by us are in the phase not like -- that we have to have accepted all our prototypes. We are completing the so-called certification procedures. And after that, we can start delivery.

From this point, not due to our point, just to give you an idea, there are vehicles that have been really completed over 0.5 year ago that are still completed in this week's -- or this testing phase, and we have already agreement. We have already received the final activation procedure to start delivery, let's say, as soon as possible. The fact that we are not able to -- in this period, not due to our reason, but due to the big effort for certification is basically the result of what was happening.

I will transfer to you now to explain what can be expected in our -- in the next future due to the fact that starting especially for diagnostics that we were telling before. Our approach now is to sell vehicle, but also to sell systems that have not the risk to be postponed by these procedures.

[Paolo Mosconi, executive]

Yes. Thank you, Mr. Caccia. We -- as said, the first 9 months of this year was impacted for a slowdown about the organization, the execution of the 2 main contracts that we signed 2 years ago with RFI because we are discussing how to improve the marginality and the RFI had changed a little bit the strategy for the future. This is just a fact, not recurrent factor, that impact on this first 9 months of this year.

For the future to avoid -- to have -- to stay under this long bureaucratic procedures of certification, we started to go on to the market with the diagnostic solution for vehicles of other manufacturer -- existing vehicles to install our technology on the existing fleet of vehicles all around Europe. This is the case of the Swiss contract. In fact, we propose to upgrade existing vehicle with digital technology for diagnostic. The volume are a little bit lower, but the time is much faster and the margin of contribution is absolutely important.

[Ambrogio Dominioni, executive]

One good point that is another value for us that is giving for us future profitability is that starting -- when we are going to complete this certification phase that is for high-speed vehicles with boogies that is basically completed in this week and the final papers are going to be produced in the next 3, 4 months. But we have an agreement with our client that this procedure can be considered closed.

We are going to have a full range of maintenance machine already certified from the small machine with access to the heavy machine for maintenance for the [indiscernible] speed. That is really important for future because we think that we are in a strong competitive position. Just to give you an idea, in the next 4 years in that range of products in Italy with the Italian grid, we are probably 80% of the market share.

As a second point for Trencher, remember that basically we talk about what is our -- we are talking specifically about Saudi. We have our Business Director, Marco Paredi, who can give you reply what is the policy, how the company is done, what are our priorities.

[Marco Paredi, executive]

In terms of Trencher, at the end of September, we recorded a better mix in terms of sales. And for sure, Saudi was one of the point that generate more revenues and more margin and contribution in this period. And the second part, also the result is coming from some cost activity -- cost reduction activity in some elements and some specific due to the drop of revenues, Australia, U.S. and France. And that allow us to counterbalance the drop of sales comparing our forecast.

But what we see in the next future looking at the opportunity in the pipeline business, so I mean water and also gas. And in mining business, we see that in the next months, for sure, thanks also the current situation in some areas like U.S., probably we inbound also for the rental and project activities. Our expectation is a better mix. We work for better projects in some particular area.

In Australia, we -- Mr. Caccia already explained that we organized our structure and our expectation for 2025, something better in terms of energy cable installation in renewable projects better than the past. We organized better. And the U.S., we have an important trend in pipeline and FTTH. We are awaiting the release of funds for the FTTH project. In Europe and France, we back -- we suppose that we estimate that in 2025, we're back in better shape due to energy cable installation too.

So to summarize, better mix in end of June -- end of September with a counterbalance of the drop of the revenues, thanks to some cost reduction in specific area and focus in a better mix in rental and sales for the next quarters.

[Enrico Coco, analyst]

My question was also if you sell trenchers to the Saudi company and see revenues on one side and leasing debt on the other side.

[Marco Paredi, executive]

In Saudi, our expectation is to have a mix between sales and rental, but the majority…

[Ambrogio Dominioni, executive]

Yes. But excuse me, when we sell to them is in our to the figure, we don't make any accounting because we are making as revenue only when we sell to third parties. So when we sell to our external company, we freeze -- we fully freeze all the profit and we transferred all the machine on cost basis. Basically, we have an accrual made in our accounting for machines that are on the board with 0 profitability due to this reason. It's a huge amount of money that we are obliged to postpone because for all the machines that are in our external branches and all the machines that are on the boards, we have 0 profit.

[Enrico Coco, analyst]

But still, I see these are revenues.

[Marco Paredi, executive]

Saudi is fully…

[Ambrogio Dominioni, executive]

And lot of revenues, yes.

[Enrico Coco, analyst]

And can I ask how much revenues refer to this sort of intercompany sales? Even if I understand, you do not account the profit, your margin.

[Ambrogio Dominioni, executive]

I can't -- I have a figure, but I don't know if I am able to, because there's a figure that are not public, basically. But as I told you, our transfer policy due to fiscal reason, we create a transfer pricing policy with IFRS that's basically 15% of gross profit. But for our financial figures, all this 15% are frozen.

We have, as of today, just to have an idea -- for idea between machines that are on the boards and machines that are in stock, in our foreign entities around [indiscernible], which we don't account anymore.

[Enrico Coco, analyst]

But why don't you account this as capitalized works and you declare to account this as sales?

[Ruggero Gambini, executive]

Enrico, this is Ruggero speaking. Hello to you. Let me be clear under an accounting point of view. All the intercompany sales to the extent until the moment they are not resold from the subsidiaries to any third-party clients are not accounted for in the consolidated figures. That means that they are present in the civilistic accounts of each company. They are neutralized in terms, as Mr. Caccia very clearly explained, both in terms of revenues and in terms of profit.

The profit is then accrued to our inventory within the so-called profit to inventory accounting principles. What Marco and Mr. Caccia were mentioning is that based on the stock that for commercial and strategic reason, we must keep with our subsidiaries in order to let them provide in real-time machines to follow up the demand. In the meanwhile, in the meantime, the total bulk of intercompany profit suspended in this reserve called profit to inventory are not released to the P&L till the moment the machines are eventually sold to the client. Is this a reserve? Yes, it is a reserve.

[Ambrogio Dominioni, executive]

Excuse me, it's clear?

[Enrico Coco, analyst]

Yes.

[Ambrogio Dominioni, executive]

Basically, it's to avoid any, let's say, cosmetic profit because in a way, it was too easy.

[Enrico Coco, analyst]

Not profit. My question was just about the sales part, even if it's at cost base. I didn't -- I wanted to be sure that you don't account revenues when the private client is just renting the machine.

[Ambrogio Dominioni, executive]

No, no, excuse me, very correct because we have in the consolidated figure sales and the acquisitions. So basically, we compensate, we have 0 impact on the balance sheet.

[Operator]

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

[Ambrogio Dominioni, executive]

Thank you. Thank you, everybody. Just to conclude, we want to take 20 seconds. We are here. We are on the way to prepare our next year figures and to close the year. I think that we are available for everybody for any clarification.

In a way, looking to the last changes in the global scenario, we are expecting to have -- as a company that has a location in Europe, location in U.S.A., location in Saudi, location everywhere that we can have a good success. One general point that is coming out, especially from the question of press information, a general trend worldwide coming out from U.S.A., France, Saudi, the local content of all the sales in this type of country are going to be pushed by the fact that we have a local entity.

And this is strategically a fact that we confirm is an added value because as of today, what is going on with the news in [indiscernible] U.S.A., America First is finding us ready to be competitors in that market because we are expecting, especially on all the market, a big change in the commercial policies, and we are basically in the key country already organized. We are in India, we are in China, we are in Middle East, we are in Africa and the local content is a must now for all the big projects. Thank you very much.

[Operator]

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