Avio S.p.A. (AVIO) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Avio First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Giulio Ranzo, CEO of Avio. Please go ahead, sir.

Good afternoon to you all, and thank you for joining Avio's Financial reporting for the first half of 2020. The presentation on the first half results is available online, I hope you all had the occasion to have a look at it. Unfortunately, we apologize, we uploaded just on a last-minute basis this time. Anyway, just as an introduction on the agenda, I will be going over the highlights and some of the key facts of the first half 2020, then Alessandro Agosti, our CFO, will take you through the details of the first half results. And then I will take it back to talk about the outlook and some additional considerations. And then we'll open up to questions, as always. So moving directly to Page 4 in the presentation. Here is a summary of the key highlights for the first half of this year, but in general, for 2020. So in a nutshell, I would say that 2020 is confirming our business's resilience while we prepare for the future. The business has been definitely resilient across the first half. We have put a lot of effort to maintain continuity of industrial operators, and we have focused primarily on our own internal activities, partially offsetting some operational slowdown with the industrial chain of our subcontractors as a result of the COVID-19 outbreak. During this period, we achieved revenues of EUR 168 million, which is down 5% with respect to the first half of last year, reaching EBITDA reported of EUR 17 million, which is 5% higher than to 2019. And an EBITDA adjusted of EUR 20 million, which represents an 18% growth with respect to last year. So in terms of profitability, I would say that the first half of the year went pretty well. It had still somewhat limited impact from COVID, which we were able to offset to our advantage. Then if we look at the year 2020 outlook in terms of our guidance, we continue to see elements of resiliency of the business model to mitigate inevitable negative impact of the COVID-19 pandemic. In terms of revenues, we see this year, landing on value anywhere between EUR 325 million and EUR 345 million, which will be some 9% less than fiscal year 2019. And EBITDA reported anywhere between EUR 34 million and EUR 36 million, down 18% with respect to last year, largely due to one-off nonrecurring expenses linked to the effect of COVID-19. And the factored EBITDA adjusted anywhere from EUR 41 million to EUR 43 million, which is only 5% less than last year. So as you can see, what we see for the end of the year is a moderate impact on EBITDA adjusted, of course, due to nonrecurring costs, 85% of which are related to COVID expenses, EBITDA reported will suffer, still we think the numbers will be in an order of magnitude that keeps us confident on managing the future. In 2019 -- 2019 dividends, as you know, have been retained, but we have continued the share buyback program, which is now nearing completion as the demand was received by a shareholder meeting. So what's the way forward? Why we navigate across the storm of COVID-19? We are now catching up with the launches of Vega and Ariane and preparing for Vega C maiden flight in mid-2021. Also, P120 production, the first stage model for both Vega C and Ariane 6 is ramping up its production, and we expect to conduct the last flying test very soon. We are also in the process of turning into contracts the results of the European Space Agency Ministerial Conference of December '19. Also, this process has had some kind of delay in the course of the summer due to COVID, but we are making good progress also from this point of view. And in parallel, some potential M&A opportunities have emerged. And so therefore, we are scouting also for these opportunities to see if we can take advantage of this time to look at interesting businesses, which we will combine with other. I would like now to move to the focus of the first half and what we did in the business. So I would switch to Page 6 for a summary of the key results of the first half and what were the key achievements of this semester. First and foremost, we ensured continuity of operations, while preparing for the future. So we successfully returned Vega to flight with SSMS in September, which we view as a major achievement because not only did we come back to launch after a failure, as you know, but we did come back with a very sophisticated mission, definitely a first time in Europe, a ride shared with 53 different satellites launched over France. By the way, in 2 different orbital planes, demonstrating, therefore, that we really have a unique technology to do that. We've also completed 3 Ariane flights successfully, the last one in August, another one coming up soon. We have signed a new contract for production of tactical missiles propulsion systems for ESSM missile. This is traditionally a smaller business line for us, but it comes timely at this point and combines well with the rest of the business lines. We have prepared for the last P120 flying test, which we expect to conduct in October. We have set up new office space to secure social distancing and allow for work on-site in a safe manner. We've also leveraged remote working to the extent possible through an improved level of connectivity and implemented all safety procedures to also conduct launch campaigns -- launch campaign operations safely. We are executing on our CapEx projects as planned. You will see that we are intending to trim those a little bit towards the end of the year, but we are essentially on track with the plan. And we also are on track to complete the share buyback program. So in the future, you'll see a little bit of what I described. It's a year like no other, we are definitely adjusting to a new normal, but I would say, in a very robust fashion. Moving to Page 7. As I said just a minute ago, Vega's last flight was a very successful one, the first time Europe ever conducted a multi-satellite launch with 53 different space crafts. And setting, therefore, a new standard for European capabilities. Satellites were very heterogeneous from 1 kilogram in size to 150. They were released on 2 different orbital planes with very sophisticated orbital maneuvers that no one has ever performed in the world. So I think this was a big showcase that it also helped to push commercial activities again for the future. In fact, when you look at the right side of this Page 7, you'd see that the number of satellites to be launched to space in the next decade is set to double for the satellites larger than 50 kilograms in mass, but is about to triple for those that are below the 50 kilograms in mass. So this means that with this technology, we now have an additional opportunity to capture business in the fastest-growing market segment. And now this is a demonstration and qualified capability that the whole world has been able to see in practice. So it's no longer a project, it's a reality. And it's very important at this point in time, I really like to emphasize. Then moving to Page 8. I think in addition to the successful mission of Vega, we have 2 more scheduled one after the other. The next Vega flight schedule will be November and the following one in early in January. So between now and year-end, we'll be working hard to catch up with the delay in the volume we accumulated over the last few months. And in terms of development and complementary activities, we will perform the P120 test, which will be the last step for the development of our own model and continue on the research and development activities and speeding up after the return to flight. So towards the end of the year, we will prepare for the maiden flight of Vega C, which we plan to conduct by mid-2021. Also, on Vega C -- vega E, we have now successfully performed the first flying test. So now we are well on track to speed up on the development program with the new funding, which we will receive from EU. On Page 9, we have a summary of the 3 Ariane 5 missions successfully performed in 2020. One more is to come between now and year-end. I think this also has been extremely important. Ariane 3 has demonstrated to be present on the market with the most important customers, such as Intelsat, JSAT, KARI and Maxar. So the business continues to run smoothly, although, as you know, Ariane 5 is now towards the end of its life, and will soon be replaced by Ariane 6. So when we complete the P120 third engine set and prepare them for the maiden flight of Vega C, this third test of P120 will specifically be the Vega to test in the [indiscernible] configuration of P120 for Ariane 6. And Ariane 6 maiden flight is scheduled to take place before the end of 2021. So that's, in a nutshell, what we have done in the first semester of the year. I will now would pass the word to Alessandro Agosti, who will take us through the financial results.

Yes. Thank you, Giulio. Good evening to everybody. So we move to Page 11, we have reported the main economics of half year 2020 compared to the corresponding period of last year. Backlog is substantially stable. More backlog intake is expected by year-end after the ongoing contractualization of the amount allocated by the Ministerial Conference of last November '19. In terms of revenues, we closed the semester with EUR 170 million revenue, lower about 11% compared to previous half year. Basically for Ariane 5 ramp down only part compensated by Ariane 6 ramp up and some delays in certain development contracts. In terms of EBITDA reported, despite the COVID-19, we closed the half year 2020 with EUR 16.9 million with -- plus 5% compared to the corresponding period of the last year. It is substantially for Ariane and Vega contribution to profit comparable to the corresponding period of 2019 in aggregate. We added COVID-19 a recurring cost of about EUR 2.3 million. That has been offset by savings in fixed industrial cost, for instance, utilities and G&A expenses or travel, support staff expenses and so on. Taking out nonrecurring costs, EBITDA adjusted, as you can see, was close to EUR 20 million, plus 18% compared to previous half year. EBITDA reported -- adjusted showed the same trend as EBITDA, and the net income for the half year 2020 was close to EUR 8.5 million, plus 18% compared to previous half year, benefiting also from income tax from -- of EUR 0.5 million from COVID-19 measures. On Chart 12, we show the net order backlog evolution over this semester. As you can see in the total, backlog substantially stabled, we had about EUR 130 million order intake basically for Vega and Vega C, industrial activity and maintenance. And for ASTER, we ceased a contract for the production of booster for the defense system ASTER-30, which cover production period of about 3 years with deliveries starting from 2022. So we move to Page 13. We have reported a trend of our revenues over the semester. As you can see, in the left side, we have reported revenue by line of business Vega, Ariane, Tactical and other business. As you can see, we experienced a reduction in Ariane 5 production and delay in transition to Ariane 6. On the right side, we have reported same revenue by activity. Production is substantially stable. We experienced a slowdown in Ariane 6 and Vega C development due to the COVID-19 and postponement of the Vega return to fly, as Giulio commented before. On Chart 14, we have summarized our source and uses. As you can see, we are pretty much in line with end of December, except for working capital for the typical seasonality of the net working -- of the work in progress for activity vs advances already collected last year. Fixed assets show an increase due to CapEx, including P120, Vega cadence improvement and Vega redevelopment, net of depreciation of the period. This working capital -- this movement in working capital is reflected pretty much in the net financial position, we've moved from about EUR 57 million end of September to EUR 30 million end of June. Finally, on Page 15, we have some -- we reported the bridge between the net cash at the end of December '19 compared to end of June 2020. As you can see, in addition to the positive contribution of EBITDA reported, we had the effect of the seasonality of the working capital, it is minus EUR 30 million in, line substantially with the effect of previous half year 2019, that was EUR 27 million. And the effect of the CapEx that we sustained in the 6 businesses that -- for nonoperating cash flow, we have the investment in the share buyback of about EUR 1.4 million. I give back the floor to Giulio for the outlook of our presentation.

Thank you, Alessandro. So we are now taking some time to try and guide you towards the future. So on Page 17, we have summarized our view on the guidance for 2020. Let me say, first of all, a preliminary remark. As you know, the business seasonality of Avio is such that most of the yearly profit is generated in the third and fourth quarter. If you look at the evolution across quarters of the profit, this is the case, and this has been the case for the last 3 or 4 years. So at this point in time, we still have 2 quarters to be the next year. And so there's quite a lot of work that still needs to be done to make the numbers. So it's a good time still to set the guidance. We think we can reach our net order backlog anywhere between EUR 650 million and EUR 680 million, which means essentially keeping, if not improving, the net order backlog what we had at the beginning of the year, so maintaining visibility for the future. And I think this will be attached largely to the completion of the development contracts whose finalization is currently pending with European Safety Agency just as a matter of a natural delay in the contractualization process that has occurred over the last few months due to the COVID emergency. With the net revenues, we plan to land anywhere between EUR 325 million and EUR 345 million, so this will be soft, and it is largely linked to the fact that industrial chain of our sub-contractors has been, at the beginning, somewhat slow to respond to -- after the COVID lockdowns, certain subcontractors in Europe have had more discontinuity of operations than we have had. And therefore, we do not manage to incorporate yet their sales into our figures. But as you know, this doesn't impact much profits because the consolidation of their revenue in our accounts, it brings revenues, it doesn't brings much of a profit. And therefore, the softness in revenue does not necessarily impact the profit. In terms of EBITDA reported, we plan to be anywhere between EUR 34 million and EUR 36 million. Now I'd like to mention that this number is impacted by as much as EUR 7 million worth in nonrecurring expenses, very largely attached to COVID-19, which, by the way, we've been able to partly offset by a very significant reduction in industrial fixed costs and G&A costs. So in other words, what we have done is we have had an impact on profit for sure because all of the delay in certain programs in the industrial chain plus additional expenses and slow down the progress of the profit. But at the same time, we've been able to limit the exposure to fixed costs and G&A costs, such that we have partly limited debt. And as a matter of fact, you will see the EBITDA adjusted is not that lower than the one we had last year. We'll probably be anywhere between EUR 41 million and EUR 43 million compared to probably EUR 44 million last year. Net income will be equally impacted, of course, there's nothing else changing between the EBITDA reported line and net income other than some slight reduction in the recurring financial expenses as a result of the gross debt reduction we did this year from EUR 50 million to EUR 42 million. But as you know, because this debt is between expense, it doesn't generate much of a difference. So we think these numbers are still challenging to achieve a lot of work to do. But we think given the extraordinary character of the emergency we have lived in 2020, this is not a bad scoreboard. Because it means in practical terms, especially when you look at adjusted figures that we're not very far from what we had last year, while we are preparing for an attractive future in '21, '22 and '23. And as a matter of fact, on Page 18, to just conclude, what we have spent time on this year was also ensuring we maintain a robust balance sheet to allow maintaining our strength and potentially capture any opportunity. So what we have done is on cash generation, we've been challenged by the presence of nonrecurring costs, most of which were COVID-related. And we have also partly offset that via some fixed cost savings. So on cash generation, we did what we could to maximize it. On the cash absorption, in fact, we were expecting cash absorption via working capital. It is normal for the business cycle. And we also had planned this year to reach a significant level of CapEx to complete the CapEx cycle to prepare the factories for the next-generation product. So what we've done is we have limited, of course, the exposure to working capital. We have gained just a little bit the CapEx as a way to protect cash absorption to maintain a certain cash position. As you know, we have decided to retain dividends and have provided at the shareholders' meeting the recommendation to retain dividends. But we have invested money in the completion of the share buyback program. Why that? Because should we come across an attractive M&A opportunity, which we are seeing possible at the moment, we may partly use some of these own shares in the context of such potential transactions. So in a nutshell, to conclude, we have acted this year to protect the company from an economic point of view with as good a result as we possibly could achieve amid many difficulties, as you can imagine, but with success demonstrating also that our capabilities are strong especially after the return to flight of Vega. And on the other side, we have worked hard to maintain the strength of our balance sheet to make sure that if an attractive opportunity arises, we will be able to capture that even in such a challenging time. With this, I think our presentation is completed and we'll give the word back to the operator for any questions.

[Operator Instructions] The first question is from Martino De Ambroggi with Equita.

The first question is on the guidance. If you could very roughly define the order of magnitude concerning the impact on sales coming from the delay in Vega C and Ariane 6 development and the delay in the return to launch Vega, just very roughly in order to understand how much is coming from R&D, how much comes from the launch activity. Still on the guidance, the EBITDA at the end of the year is expected to be similar to last year, just very slightly lower. But you have a much lower sales. So maybe if you could elaborate on the nonrecurring items -- the EUR 7 million, it's clear. But maybe there is already something on the positive side, R&D incentives or I don't know what else. And if you can provide a very rough range for the net cash position as a guidance.

Okay. So starting from the revenues, I think the major shortfall in revenues between, let's say, the consensus expectation and what we see as a guidance comes from both Vega production and Vega development. Now I think these 2 items account probably for 80% of the overall revenue shortfall. And I would say they would be divided half and half between development and production because the stop of the European space [ tour ] has been such that we've been unable to fly. And therefore, also the production chain has had to slow down because flights were not pulling new items to go to flight. But also development has to be pushed back in terms of timing because we have to put in priority the -- to let the customers fly before coming with the maiden flight of Vega C. And therefore, we had to suspend part of the legacy development activities, which we will resume maybe at the beginning of the year for a flight in mid-2021. So in other words, last in, first out or actually first in, first out. So we had a slowdown, which has moved the remaining on the right. And so we had an ongoing impact on Vega production and Vega development. In terms of R&D incentives and so on, nothing different from what we expected. I think as always, we will see at the end of the year this order of magnitude of about EUR 6 million worth in R&D incentives. Now it's not something I'm willing to bet on again. The regulatory framework may again evolve by year, but that's the [ main thing ] we expect. Then in terms of EBITDA, yes, you're right. We've been able to offset that to a good extent because yes, we've had quite an impact on the total cost. When you think about what was the cost of Vega 16 flights, we have performed the launch campaign 3 times. So moving the team back and forth using special practices, dedicated flights and so on, it has been quite expensive. We have invested something in excess of -- probably on the year round of EUR 1.1 million on protection devices, sanitizers and tools and things to lead with COVID-19. We have made donations for EUR 0.5 million. We have invested money in HR and IT, most importantly, to speed up the connectivity. We have rented additional office space. You've seen the photo. So all of this has been something more than EUR 6 million for sure. So at the end of the day, this has impacted EBITDA reported negatively. But for example, on the industrial fixed costs, we've been able to limit the cost of energy in terms of electricity and the use of steam for heating and so on. And we have been significantly active on G&A expenses. I mean there has been obviously less problem of the personnel, less expenses, no trade shows or communication activities. So we've been brutally cutting G&A costs to protect the profit at the end of the day. And so that's where we got to the figures we currently have, which are yet to be done because as you know, EBITDA reported today in first half is only EUR 16.9 million, and we need to go all the way to EUR 34 million to EUR 36 million. So it's a long way to go, so still quite challenging. We hope we don't have any other surprises in between. Then speaking about cash, perhaps cash is a bit less predictable than economic figures. But we think we should be between the net cash position end of last year and the net cash position at the end of the first semester, somewhere in between.

Okay. If I may, 2 questions on the strategy. First of all, you mentioned twice in your speech, and it is reported twice also in your slides, you are actively scouting M&A. Is it -- is there anything which is accelerating? Or is it just business as usual? And -- yes.

Well, so this is difficult to predict. But there are opportunities available, and probably the effect of COVID is accelerating in certain parties the idea of effective sale. At the same time, this makes more challenging buying a business in the middle of all these extraordinary impacts. So we are reviewing certain opportunities. We will see where we get to. What we wanted to see now is that we are open to that, and we are financially equipped to potentially conduct M&A activities in spite of the COVID impact.

Okay. And very last on the Vega launch with multiple launches. Am I wrong in stating they could be more profitable than the single- or double-satellite launch?

Sorry, I didn't quite get the question.

If the multiple launches that you did with the last Vega launch, in the future, maybe the first one was not the case, but maybe in the future, the multiple launches with the same Vega can be more profitable than what you used to do in the past with just 1 or 2 satellites placed in orbit for one launch.

Well, we will see whether we will be more profitable. For sure, we will have more ability to access market opportunity because the market growth in more satellites is lower. So today, we really have one more opportunity to access such market. In the past, it was a prospect. [Technical Difficulty] So I was saying, it's difficult to say whether it's a profit improvement. What I can certainly say, it's a much bigger opportunity to capture new business because the market growth is all in these small satellites. Now we have a qualified technology to take this satellite successfully to space. [Technical Difficulty] Can you hear me?

Yes. I got most of the answer, I suppose.

Your next question is from Andrea Bonfa with Banca Akros.

My first question is related to the prospective backlog for next year. I mean the indication that you provide us for this year, backlog, of course, includes the first effect of the inter-minister conference -- European conference of this year. But there is this -- let me allow this question more meat to eat. So if you can just, I mean, give us a flavor if -- I mean, with the visibility you've got today, if you expect that the backlog will improve before next year as well. And if you can, the second question is a brief indication on how many launches you are expecting for the Vega next year for the area and also for next year.

Well, first of all, next year, what type of backlog or order intake should we make progress on next year. Can you hear me?

Yes, yes.

So what we should achieve is progress on the future backlog for Vega. We are now nearly completing what we [ need for batch 3 ]. If you notice, we have published [indiscernible]. Now most of these are sold. So now we need to be delivering those. We shall now be able to start commercial sales in the following launch. And this is already in good progress. Of course, the commercial activity has softened in the period after the failure. So we didn't achieve much commercial result after -- before we actually return to flight. So now we'll be active on that in the core. We think we hope we can be, in the course of next year, able to make progress with Arianespace eventually on the following batch of Vega. There will be also a new chunk of order for production of P120 for Ariane 6. There will be more production of tactical missiles. So next year, it would be interesting in terms of acquiring buying new orders. All -- remains to be seen at what field we can make this progress considering the effects of COVID on the slowdown in business in general after a lead of time from [indiscernible]. But if everything works, [indiscernible] supply, and this is what we can do for the future. In terms of flight for next year, now we really need to catch up with the schedule of flights that were supposed to be done earlier. So next year, we should aim to be 4 flights of Vega. But one of them will be, I guess, the maiden flight. So it will be a busy year, challenging. One of the flights will be an entirely new rocket. So I think it would be a busy year. [Technical Difficulty] Can you hear me?

I got you only until the 4 launches for the Vega, which one was Vega C.

Yes. But that's it essentially. So we have to perform 4 Vega flights, one of which will be Vega C. So for me, this will be a very, very challenging schedule for 2021.

And these 4 launches do include one of the 3 expected launches for the Vega this year or are just in addition to it? Because I mean Arianespace mentioned 3 flights for Vega this year. One might be between the 2 years.

Probably the third one would lead to the beginning of January because we will do one after the other, but probably we should be able to do it by beginning of January.