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 9 Months 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabrizio Spaziani, Investor Relations Manager of Avio. Please go ahead, sir.

Thank you very much, and good evening, and thank you for joining our call on the 9 months results. With me, Giulio Ranzo, CEO of Avio; Alessandro Agosti, CFO of Avio; and Matteo Picconeri, Investor Relations Specialist. We prepared a short presentation summarizing the key results for the period in terms of the main economic and financial indicators as well as the main developments from a business point of view. So let me turn it over to Giulio Ranzo, CEO of Avio.

Thank you very much, Fabrizio, and thank you all for joining the call. So let me start directly from Page 3 with a summary of the 9 months results. 9 months results were broadly in line with our expectations. And as such, they were affected largely by the impact of COVID-19 in terms of a general business slowdown and of the occurrence of nonrecurring costs across the 9-month period. However, we do believe to be in the right trajectory. And as such, we do confirm the 2020 guidance we have anticipated to the market at the occasion of the 6 months results reporting. Net revenues in the 9 months reached EUR 216 million, which is down 20% with respect to 2019. This is a result of a slowdown in production and development activities that we have experienced in the course of this year, largely due to COVID-19. You may recall that at the beginning of the year, we had a complete shutdown of launch operations for 3 months. And then later, we had further slowdown due to a peak in the COVID pandemic, especially at the launch site, and all this obviously provides a slowdown across all the different programs. As a result, adjusted EBITDA reached EUR 23.1 million, which is down only 9% with respect to 2019. Why is this better than the revenue slowdown? Well, because the negative impact of the COVID and the slowdown in the business was partly mitigated by a significant reduction in fixed industrial costs and G&A costs. Then, of course, when we go down to reported EBITDA, we do record EUR 17.5 million, which is down 26% compared to previous year, largely due to COVID nonrecurring costs of about EUR 5 million. We will show you a little bit of a detail of that so you will grasp where this money was spent and why and the one-off nature of such costs that we hope will not come back next year. In terms of net cash position, we stayed pretty flat with respect to where we were in June, so stable cash versus the 6 months result. We reached EUR 26.3 million, which is slightly above what we expected to reach. It's actually down about EUR 32 million with respect to the end of the year. But we knew from the beginning, this would have been a cash absorption year after all due to the intense activity with capital expenditure and due to the business cycle related to the different programs. So not bad. We're quite satisfied with the current net cash position. And for all these reasons and other methods that I will come soon prescribing, we do confirm the guidance we had communicated for 2020. If I summarize the most relevant business facts of this first 9 months, we achieved 3 successful out of 5 launches in spite of the many difficulties, I have to say. You may recall that we executed a launch in August, in the middle of a real, real peak of the pandemic in French Guiana. So it was tough but we made it happen. Also, and for us, most importantly, we came back successfully the flight with Vega the beginning of September. And this was a great, great success, and we're coming up next in just a few days from now, showing that we're now back on track with a very frequent series of Vega flight as planned to make sure we catch up with some of the delay that unfortunately this pandemic has made us accumulate. Then the European Space Agency a few days ago confirmed Vega's maiden flight will occur in June 2021. We're working heavily on that. And so far, it looks good. We should be on the launch pad by June 2021 with this new fantastic launcher. New flight contracts was signed by Arianespace for both Vega and Ariane. One remarkable piece of information is that we signed through SSMS hexagonal module additional passengers even for VV18 for the flight that we will have occurring in February. Why that? Because immediately following the September flight, the market regained trust in us and in the Vega launcher and they love this possibility to launch small satellites in a modular fashion through SSMS. So we managed to accommodate a small hexagonal module atop the current main payload. And this will be very important because, of course, it improves the field factor of the launcher and, therefore, the profitability and so on. Arianespace also managed to sign more contracts, 1 for Ariane 5; and 1 for Ariane 6. So I think the ball is rolling, always moving again in spite of the many difficulties that we are always facing. But I think the situation looks much brighter now. Moving to Page 4. This is a bit of snapshot about the first 9 months when at the beginning of the year, you remember, we did execute 2 Ariane 5 flights. And in parallel, unfortunately, with Vega, we were at the time, stuck preparing the return to flight for Vega. And as a matter of fact, at the beginning of March, we were ready to come back to flight. But unfortunately, we were hit by what I just said before, a complete shutdown of the space center for about 3 months. So we then managed, after the summer, to recover. Now we are accelerating on the launch schedule. And this is what the current schedule looks like. So with Vega, we luckily have another launch in November. And the other one, we're likely looking to 2021, probably in the very first few days of February. And similarly, we have a flight in August with Ariane 5. The next one coming, will probably be the beginning of next year. But all in all, I would say, considering the very significant challenges we've had, I'm quite glad we ended up with this result, and I'm looking forward to the flight in a few days to really see Vega launching again. Now going to Page 5. I wanted to dig a little bit deeper with you on a very first complete and tangible result of the SSMS technology success. The very same night we flew, some of the customers that flew on VV17 -- on VV16, sorry, asked to be on board VV18, the very same night. So that's amazing. For example, from Spire, they were so excited about what we did. They signed up the launch again. And this is a great vote of trust that we value very much. You can see from this picture -- a picture taken from space, onboard Vega, you can see 3 of the satellites being released by that client. And so this really gave confidence to the market, not only to Spire, but also to NanoAvionics, Eutelsat, Myriota and Tyvak to trust us. And we do seem to be for them a trustable solution for most of the light loads. So this will greatly help because it will enable us to really fuel any launch we have with full flexibility to do it in a modular fashion. So we look forward even for some segment flight to carry on board some additional small craft even on somewhat last minute basis. Turn to Page 6. This is Vega 17 flight, almost ready to launch with SEOSAT-Ingenio and Taranis, respectively, Spanish and French government satellite. Very interesting flight, dual payload again. So you see that Vega continues to work in this complex business of launching more than 1 satellite a time. And this is very important because it further demonstrates, on one side, the ability of Arianespace to capture these customers and pair them in a single flight and having quite some success on this point of view. And on the other side, our ability to technically meet the expectation of these customers in performing this type of missions. On Page 7, we reported some other successes of period, the firing test of P120 and that of Zefiro 9. Now why are these static firing tests relevant to you? We have talked about firing test before, both for P120 and other motor. But most importantly, the P120 test we conducted on the 8th of October is the third and last firing test we do prior to launch. So through this firing test, we successfully completed the development of P120. I remember that meaning the common main stage of Ariane 6 and Vega C and this means essentially that the P120C development program is successfully completed. Now it's not trivial to mention that the program was completed on time, on performance, and with the allotted budget. So it's an extraordinary result. This is a very nice piece of technology we have, and it's the core of our competitive advantage. So we will continue to leverage this for the future with further improvements possibly to really expand our competitiveness. On the bottom, you see a test for the Zefiro 9 motor, which, of course, we had already tested on ground and which flies regularly on Vega. But this is slightly different than modified version that we fly in Vega C. So by which of this test, we have now finished to test any possible items for Vega C prior to main flight. The test went extremely well. In fact, it was also an upgraded and improved version of the motor. So also in this case is another important check mark to say we're ready to fly. And this is, I can tell you, very reassuring for us as we go towards the challenge of a maiden flight, knowing that all of the equipment we have developed works as we expected. On Page 8, we summarize a little bit what is currently in the backlog of Arianespace for future flights. This is taken officially from their press releases, so there's no news or speculation on what is in backlog and whatnot. And you can see, the book is filled. There's 8 more flights to go with Ariane 5, all of which has customers and will be slated across 2021 and 2022. Then we'll see how it goes with customers if that could match the relevant time frame. And then there's 5 Ariane 6.2 flights with 4 more in option for the European Union. And there's 5 Ariane 6.4 flights scheduled for the few years -- next few years to come. The European Space Agency has announced that Ariane 6 will have its maiden flight in mid-2022. So these flights will occur from 2022 onwards, mainly in a time frame between 2022 and 2025. And then we have Vega and Vega C. Vega and Vega C currently have 9 booked flights. More flights are currently in pipeline. Arianespace is having several discussions with very many relevant customers. And you'll see some examples of satisfied customers coming back to us. We look forward to conclude any new launch service agreement soon and to be able to report that to you. But so far, this means that we have plenty of work to do for the next few years. We really have the challenge to execute on time and at the right level of cost. One more comment on Page 9 is about tactical propulsion. We do not talk often about tactical propulsion because tactical propulsion only accounts for 3% to 4% of our revenues. However, it is worth noting at this point in time that we are gaining that momentum on this business line and long-term visibility thanks to the hard work that has been done over the years. First and foremost, we have achieved an interesting milestone in developing an innovative electromechanical thrust vector control system, so an actuator that moves the nozzle of the missile, that may represent a breakthrough innovation in the domain of tactical missiles. So we have developed this internally together with some of our suppliers and main partners and we think this would be a great improvement for our military customers. So we think this may lead to further business in the future. But most importantly, we have received from our main customer, and we already -- I think we have already mentioned this to you earlier in the year, an increase in the production rate for the ASTER-30 boosters in the period 2022 to 2023. In fact, the volumes of production went a little bit above our expectations, and we will more than double the current level of delivering in this period of time with an option to continue at this level up to 2027. So that comes at a very good moment because in the general slowdown of the rocket business due to the COVID pandemic, this somewhat unexpected positive news comes really at a right time. So I would now invite Alessandro to maybe walk you through the main financials.

Yes. Thank you, Giulio. Good evening, everybody. Moving to Page 10, we have summarized the main financials and economic results of the 9 months 2020 actual compared to the 9 months 2019. As Giulio commented before, these figures have been affected basically by COVID pandemic. As you can see, net revenue -- slowdown in net revenue was essentially due to COVID in -- because of flight. As you can remember, we are ready to fly in March, then the Guiana Space Center has been shut down for a couple of months. We were ready to move it to 25th in June, then we postponed finally to September. Most of revenue were -- have been impacted by Ariane 5 ramp down, as that's been only part compensated by the ramp up of Ariane 6, and some delays in developments contact have been recently postponed beyond the end of September. In terms of the results, EBITDA and EBIT has been impacted by nonrecurring costs related to COVID for about EUR 5 million. That has been offsetted by savings and fixed industrial cost mainly by a -- represented by savings in utilities and the G&A expenses for travel, support expenses due to a control procedure that we implemented by us since the pandemic happened in the first quarter. By taking out the nonrecurring costs, the adjusted figure show lower contribution, basically coming from the profit of Ariane and Vega compared to the 9 months 2019. In terms of cash, we have this difficult seasonality trend. We closed at the end of December, we compared the end of the year. December, EUR 58 million. We ended EUR 26 million, end of September. But this is in line with typical seasonality trend. Actually, the cash was in line -- is in line with end of June that was EUR 26 million. So we move to Page 11, where we reported the quarterly pattern of adjusted EBITDA and net cash position. As you can see here, we have a typical quarter-to-quarter pattern to show an increase towards the end of the year, particularly Q4, represents half of the results of the year, fixed -- adjusted. And we are on the similar trend as in the last 2 years, as you can see in the graph. On the bottom part of the page, we have reported the net cash position, the quarter evolution. Here, again, we had typically a higher level of cash towards the end of the year and the level -- low level in June half year and September, except from the [ 29 and 8 -- 28 ] results of the net cash that was combined nonrecurring tax event related to [ DC ] and R&D tax credits. On Page 12, we have reported the breakdown of nonrecurring costs, as anticipated by Giulio before, to let you understand this year was -- has been -- impacted our results. Out of EUR 5.60 million of nonrecurring costs, EUR 5 million were represented by the COVID-related costs. In particular, 60% were related to Vega 16 extra costs, related to the pre-launch campaign that we had to perform in March, June and beginning in September. We had -- 13% has been the amount of nonrecurring cost related to protection devices related to COVID-19. Then we have the donation and other related cost donation that we made in March to the crew hospital in French Guiana and the city protection department of Colleferro where our headquarters are located. And then we had current HR and IT upgrade. HR to keep the distance between our colleagues working because, as you know, we kept working during the shutdown period. And IT has created tool to have connection between Italy, French Guiana and those colleagues that's working in -- not working on the [ office location ]. This is the summary to explain to give you a picture of the significant and nonrecurrent cost that we incurred in the 9 months. I would close to Fabrizio Spaziani, Investor Relations Manager, to comment the buyback program that we completed right now in October.

Yes. Thank you, Alessandro. Just a few words. If you go to Page 13, we summarized the share buyback program that we just completed. It was a program of EUR 9 million. It was launched in August 2019. And among the reasons and the objectives of the program, I would like also to underline that we started the program in order to provide a means for an additional return to shareholders. And actually, this turned out to be a very precious lever as it was decided this year not to distribute dividend. So I think this was also a good way to provide return to shareholders in a period in which it was conservative, we decided not to distribute the dividend. And also to create, of course, a precious asset, valuable asset of treasury shares. And we have now almost 700,000 shares that can be very useful in possible M&A transaction. So I -- at this stage, I would open up the Q&A session. And I would leave for the operator to manage the questions.

[Operator Instructions] The first question is from Matteo Bonizzoni of Kepler.

Yes. I have just two questions. The first one is as regard to the short-term outlook for the 2020 guidance. What is your feeling as regards the range, which you provided, which you have confirmed so on the P&L? It seems that maybe you can reach the low part of the guidance range, but profitability looks well protected. So if you can a little bit comment on this, let's say, sensitivity? And also on the recovery of your net cash position in the fourth quarter, you have also confirmed this, if you can elaborate a little bit more as regards to the full year CapEx level and the working capital evolution? And the second and last question is, looking at 2021, what could be the impact on your activity, P&L and cash generation of the delay by 6 months of the launch of the maiden flight for the Ariane 6 from the second half of 2021 to the first half of 2022? So what is the impact on the production schedule for the P120 and both on the impact on P&L and potentially cash flow?

Okay. I shall start and try to answer additional questions. As we speak, I'm trying to get back to how we communicated guidance. Now one preliminary remark, Matteo, as you follow us since a few months. Keep in mind that incredibly enough, in the first 9 months of the year, traditionally, when you look back at the last few years, we achieved not even 50% of the total EBITDA of the year. So the fourth quarter, as far as EBITDA generation and cash is of fundamental importance. And therefore, even in extremely intense quarter of the year where there are a lot of transactions, lots of margins to be met and so on. Now for us, it's a bit difficult to tell you where exactly we intend to stay within the communicated guidance. We're already happy enough to say we believe we can be within the guidance. Now where in the guidance is a bit difficult to say. By the way, we did provide a fairly tight guidance, revenues in the range of EUR 325 million to EUR 345 million, EBITDA between EUR 34 million and EUR 36 million and so on and so. At the end of the day, this year, to be honest with you, is so strange and so unpredictable in terms of what happens that it's risky business to say whether we'll be on the lower end or on the upper end. What I can tell you is that there are, to date, a number of risks and challenges to meet the guidance. But there equally are some unexpected opportunity. So we now need to stay focused to balance things out. I hope we can pull within this range. In terms of the recovery of the net cash position, I think we knew from the beginning that 2020 would have been a cash absorption year. And that's a good part of the cash inflow would have come from advances from the new European Space Agency contracts, which are resulting from the past ESA accounts. As we speak, we are one by one signing all the different contracts. So it is -- don't go wrong between now and year-end, that portion of the cash inflow, meaning the advances from new initial contracts, should be the primary source of rebuilding the net cash position positively. So making it grow basically between now and year-end. Now regarding 2021 impact of Ariane 6 delay. There is no doubt that a shift in the maiden flight of Ariane 6 may cause some production delay, but at the same time, do not forget that we do not manufacture on a just-in-time basis. We basically follow additionally a make-to-stock type of business. So it will be something to be negotiated with the customer. Because at the end of the day, the customer -- as per customer orders itself. And so they need these items to be manufactured. We just need to see how much we can afford to keep on storage how much cash is available in the system to secure that we manufacture acceptable levels across next year to prepare for the maiden flight, and by the way, for the second flights that follow. Because the maiden flight is one event, but that shall very shortly be followed by launches of those customers we already signed. So we will be debating this between now and year-end with the customers. And at the same time, we also seek from the European Space Agency some support to possibly offset at least partly any possible negative inconvenience. All of you who are familiar with our business have now realized that when there are strong unexpected events, such as, for example, the Vega failure we suffered last year, the European Space Agency has always been extremely attentive at providing industry with as much support as possible to overcome significantly unexpected issues with potential negative impact on the accounts. So it's difficult now to guarantee how much the business decision can help on this front, how well we can negotiate with the customers. But I am quite confident we can build a stable production flow for the next few years. We will get to know in the next few months as soon as we actually make the production plan for next year turn.

The next question is from Martino De Ambroggi of Equita.

Yes. The first is a follow-up on the last issue you mentioned. I don't know if it is something you can share with us, but how many engines are you able to store today? And have you any flexibility to increase your ability to store more engines in case of delay as it seems to be in the case? The second is just a confirmation. So I understand you need to negotiate with our clients in order to have the possibility, even if you are able to store more engines to have the cash as soon as you produce the engines. And the third issue and fourth question on this issue, when you talk about you suffer from the European Space Agency, is this something already contractualized in some way or has to be renegotiated from scratch?

So I will start from the last question. You remember last year when we had a failure of Vega, and we didn't have a contract that said this is the cure for the failure. However, in just a few months, as you may recall, we have managed to create the right conditions to receive an extra budget from ESA to support the return to flight activities. Now last year, we had also the location of the Ministerial Conference which helped from this point of view. But I have to say the pandemic is such a relevant event that I cannot see a possibility that you cannot possibly put in place any effort to find even temporary ways to provide some budgets to cover any shortfalls we may suffer. It will never be a full recovery and support, but I think you're going to be see we work on the subjects and we may -- are not sure to have receive at least a partial support on this front. Now how many engines can restore? Now this is a bit of a complex question to respond. I will try to do it in a simple way. So first of all, in Colleferro, as you know, for P120, and you have seen yourself, we manufacture the insulated model case. So we do not cast the propellant. So it's related motor cases, to be honest with you, we can stock as many as we want. We have plenty of space. There are no limitations or risks in stalling the engine material, so that's not an issue at all. In Guiana, storing engines that have already been cast with propellant is a bit trickier. But we also have significant storage capability within our joint ventures in particular, [indiscernible] and [indiscernible]. So we shall be able to accommodate storage for 2021 should this be -- I mean therefore, I think we just need to find out how much, because as you pointed out, this is a question not only of available storage and feasible space. This is also a question of cash and availability of financial coverage because nobody wants to pay to support its own production, right? So we want to make sure we have a sufficient slowdown from end customers' contracts to the whole industrial chain that covers production activity on a net to stock basis. This does not affect us only. It affects the whole industrial chain. Nobody in Europe will be interested to slow down operations and then having to stop. We all want to keep, to the extent possible, operations stable. We just don't want to have the [ peaks and crops ]. So this is the type of negotiation we need to have to smoothen the plan as much as we can.

Okay. Okay. And the second question is more general. If I look at Q3 stand-alone, I see a significant decline in sales. I love it, it's very clear that your business must be seen in the long term. But what happened exactly in the fourth quarter? Didn't -- the launch that didn't happen in the first half? So just [indiscernible] also because maybe I'm missing something, but I didn't understand what the impact on production and the impact on R&D in Q3 standalone.

So it's very simple. First of all, let me just correct the use of a word. It is not exactly sales represent value of production in a way, in our system. So why did we slow down with that? First of all, let's have a look at what happened in Vega. Unfortunately, in Vega, we suffered an incredible sequence of negative events. So from March, the return to flight will slip to May. From May, maybe to July, then July it was again windy, we couldn't fly. Then there was another peak of the pandemic with mid to August. And mid-August, we also had to do Ariane 5, and we ended up in September. All these slippage of Vega 16 flight made things such that we had somehow also a slowdown in the rest of the production chain. We could not keep too high a production rate if the flight activity buildup continued to delay from March to September, okay? So we had a partial delay also on the production chain. Then put on top of this the fact that, yes, we worked relentlessly in the course of the last few months. We never stopped operations even during the lockdown and so on. But the rest of the world did. In many countries, suppliers and partners did have a complete shutdown. So not everywhere was it possible to continue running operations smoothly. So we did have a slowdown also on that front. And the delay of the return to flight of Vega, unfortunately, caused the delay also in the Vega C development program. Because some of the decisions to be made on Vega C were also pending confirmation of results coming from the return to flight of Vega, which eventually came. But meanwhile, we had to stay somewhat idle with the development of Vega C because some of the changes implemented on VV16 also has to be implemented on Vega 6. So it was a very negative chain of events, which affected this. Put on top the fact that on the development of P120, we had the last important milestone to be carried out in mid-July this year. The static firing test of the last P120, P13. But unfortunately, mid-July was when the peak of the pandemic in Guiana was highest. So again, for that, we had the motor on the test then, but we could not test it to COVID. Then we made to the first days of August. And in August, we had the flight of Ariane 5. Then for another reason, we've leaped again to the beginning of September, and we had to work on Vega instead, and we ended up doing the first 2 days of October. So also on this program, we have the milestone. This milestone was associated with revenues and cash as well. And unfortunately, rather than reaching that milestone in mid-July, we did reach it on October 8. So it went out of the quarter. So what I can say is that, today, I'm pretty assured and confident because I finally saw some of these milestones achieved and behind us, okay? And all of them were achieved successfully. The return to flight, the P120 test, the -- obviously, the restart of Vega 6 preparation. Now we are finishing up preparing the Vega 6 flight items which we've traveled to Guiana in just a few days. So I mean the whole chain now is running. I mean the train has departed in a way. So I do see now the system getting back on track. But we went through at least 6 months of general slowdown and sequence of negative events.

The next question is from Andrea Bonfa of Banca Akros.