FNM S.p.A. (FNM) Earnings Call Transcript & Summary

[Interpreted] Ladies and gentlemen, good afternoon. Welcome to the presentation of the consolidated results of the FNM Group as at the 30th September 2022. [Operator Instructions]. At this point, the Chorus Call conference operator will hand you over to Ms. Minazzi, Investor Relations Head of the FNM Group. You have the floor Ms. Minazzi. Thank you.

Thank you very much, and good afternoon. Welcome, and thank you for joining our conference call on the results of Group as at the 30th September 2022. We have here with us Mr. Piuri, the General Manager; and Mr. [ Mattia ], who is CFO of the group as at the 1st of November 2022. And therefore, I'm very pleased to introduce Mr. [indiscernible]. Mr. Piuri will start the presentation. He will do the introduction, and then I will personally come back and illustrate the results of the group. At the end of the presentation, we will take your questions. At this point I hand you over to Mr. Piuri. Thank you.

[Interpreted] Thank you. Thank you very much. Good afternoon on my behalf as well. Thank you very much for joining this conference call and also thank you for showing your interest in this. Now the picture at the end of Q3 confirms what we have so far have been saying and therefore, a positive trend overall. Now considering the pro forma results from the beginning of the period to September and compared to 2021. All our indicators are positive. The same is true for revenues and EBITDA. EBIT is also positive 17% and 35% represented the adjusted net result. And you can see from the slide that the net result is around EUR 38 million. So this is the overall overview of our performance, and this confirms what we have been doing. Now considering also the context and the number of variable factors, which we are witnessing. But despite this, the group is confirming its soundness and the soundness of the different businesses, which comes out from the results. Page 5 of the presentation. What is perhaps most interesting is the demand of mobility. All of the industries or all the sectors are positive, and this is proven by the fact that we are recovering the number of passengers is something we started off after the pandemic in 2021. As bus transportation, which is, as you can see, growing 23%. Then we have the motorways, Milano Serravalle which is growing around 16%. And this applies to heavy vehicles and light vehicles. Now the segment, which is showing a very positive trend is represented also by light vehicles, not heavy vehicles. We do apologize on my behalf as well, this is the CEO, Mr. Piuri. I was describing the trend of demand. In all segments, demand is growing. So the positive trend is continuing with different numbers. In road transportation, both as far as trains and the bus are concerned, we have an increase in demand between 20% and 30%. And the number of passengers are, however, below the corresponding period of 2029, we are around 30% of the number of passengers. What we are witnessing in this case is that revenues and revenue trend, it didn't go back to what it was in 2019. But the bank is shrinking and it's certainly smaller than the gap that we have with a number of passengers. This was due to the fact that we've had an increase of revenue per passenger, which is why the curve we have removed faster, and is this steeper in terms of a recovery versus the curve of the number of passengers. Now this contains what we said in other occasions, especially for trains. Now passengers that are still missing so to speak. Other passengers of the metropolitan area of Milano. If we break down the number of passengers between regional services and suburban passengers or suburban services that the gap will find it in the suburban services, which means that in the suburban areas, we haven't recovered fully both Milano and Verona, which means there are behaviors which are related to organizational solutions to the company, smart work, new remote working, both on the part of companies and universities. And we can see on the contrary that the curve of APL and MISE, the curve have almost reached to the levels in 2019. Actually, APL has gone beyond and above the levels of 2019. MISE is almost there. And here, you can see that light vehicles has recovered a lot heavy duty vehicles or heavy duty traffic had lost very little during the lockdown and during the pandemic. So all of these considering demand that leads to revenues being all positive. Whereas it comes to margins and EBITDA, there are situations or cases to a different segment and segment.

At Page 6, and this is Piuri speaking, you see the EBITDA per segment revenues and EBITDA revenues are growing versus the same period of the previous year. The situation is different for different segments. EBITDA of railway and road passengers is -- and motorways are growing. Whereas you can see that the RoSCo & Services is -- of a negative sign. The difference here is due to the recovery of demand despite the high cost of energy and higher inflation. Let's move on to the details. And let's see the trend in the sector. Let me now move on to Page 7, and let's see the RoSCo & Services. Here in this segment, revenues have grown up 58.5%, EUR 1.1 million. And basically, this is ready to increase revenues of corporate services. In particular, revenues of IT services, rents from commercial buildings and commercial costs related to the TILO project. Now when it comes to the big chunk of revenues, basically related to rolling stock, this a flat year . Well, the reason here is that greater revenues from leasing on contracts for new trains TILO for instance, and 520 trains. Well, this made up for the lower revenues related to the negotiation of leasing the contract for TAF and CSA trains. The EBITDA in this segment goes down by EUR 3.5 million year-on-year. This is due to increase of personnel costs, high number of headcounts, but also increase of operating costs, service costs, IT costs, insurance costs and also -- these for associations. Please remember that here, you have the startup of FNM Pay and also you have the development costs of H2IseO project and Fili. Let's move on to the railway infrastructure. Data are positive, EUR 11.7 million more, and such increase is related to grown revenues from -- because of contracts of public services. Here, we have taken the current however, costs related to the railway network, especially Milano Malpensa and also costs for the funded or nonfunded of rolling stock, which is managed by Ferrovienord as in line with the program or framework contract. This is made up by efficiency mechanisms, which are related to the service contract and the remodulation of the overall railway offering. Revenues are also growing for rolling stock lease. These are related to management and the maintenance of rolling stock of Regione Lombardia but managed by Ferrovienord. These revenues have increased because of the growth of the rolling stock fleet of Regione Lombardia. And here, revenues are growing, but also costs are growing because of provisions for the usual and regular maintenance of the fleet. And therefore, this part sees EBITDA flat. Moreover, we have a reduction of leases -- sorry, revenues are growing after contracts -- lease contracts were suspended because of COVID and then also revenues related to drivers compensations are concerned. Our revenues are growing by -- from EUR 95.8 million to EUR 107.7 million. What is interesting is the planning revenues or engineering revenues, which will not be repeated in Q4. [indiscernible] has a positive effect on EBITDA, which will continue up until the end of the year. As to the EBITDA of this sector, it goes up by EUR 7.7 million, less than proportionate increase in costs for infrastructure and maintenance design activities, higher provisions for rolling stock fleet maintenance in line with revenues. And increasing in utilities, insurance, IT system expenses, lower personnel expenses due to the recovery of statutory sick pay costs, and one-offs for EUR 1 million of nine, of the first nine months of the year. Now as I said, this is a one-off, which is basically related to provisions to the receivables impairments which we had in 2021, and we did not have in 2022. Page 8, we'll move on to Road passenger and mobility. We see higher revenues by 10.9%, which is related to an increase of passengers year-on-year. The number of passengers has grown by 23%. And then we have had outsourced additional transport and car sharing services. Revenues from public contracts are going down, mainly due to lower government compensation only partially compensated. In the first nine months, this amounted to EUR 9.2 million in first nine months of 2022. This went down to EUR 7.2 million. Of this item, revenues related to compensations given by the government, amounted to EUR 2.7 million in the first months of 2022 versus EUR 5.5 million in 2021. So a strong reduction here. Now the reduction of government compensation is partly offset by the contribution of per kilometer by the Veneto region. Other revenues are also growing because of an increased recovery of taxes on diesel fuel and also because the compensation for energy costs. EBITDA in the period goes down by EUR 2.9 million due to higher costs of personnel because of the increase in demand of public transportation. We had to increase the number of headcount. The headcount is also affected positively by the car sharing activity, which is recording very good and growing results in the period under review. In the first nine months of the personnel costs in 2021 included a release of the risk fund due to the renewal of the contract for a railway personnel. Moreover, we had greater costs related to energy prices is also because of the increase of the headcount also of a greater number of kilometers have made. Now versus 2021, the number of kilometers made increased by 10%. So an increase, therefore, of energy consumption costs but also an increase additional services so as to be able to meet the needs related to such growth as to motorways in the period under review. Revenues are growing by 16.9%. Such growth is related to higher tolling revenues due to a greater recovery 15% year-on-year. And the increase in tariffs that was applied ever since the beginning of the year, 2.62%. Also, other revenues are growing. And this is due to higher revenues from service areas, concessions, which recovered because of the recovery of mobility and also a number of more benefit contracts in the case of MISE. Now the EBITDA is growing EUR 18.5 million. This is because the higher average revenues. However, we have to take into account higher maintenance costs related to maintenance and repairs of the motorway infrastructure, but also higher net provisions to the maintenance fund also to take care of greater maintenance work and also considering the need to align it to energy prices. Traffic is recovering. We witnessed an increase in the cost of labor because of incentives given personnel for early retirement, an agreement that we signed with trade unions in August last. Page 9 of the presentation, you can see performance of Trenord. In the period that Trenord benefited from the recovery of traffic that improved by 34% as we said before. This had a positive effect, both on revenues. Revenues, as you can see, are also growing because of the service agreement, especially because of the costs reduction that we had in the period. You can see other revenues are going down by 69.1%. This is basically due to the lack of government grants. In 2021 first nine months, we had EUR 73 million, which were not there in 2022. Now this, of course, has an effect on EBITDA, which goes down from EUR 77.1 million to EUR 70.8 million in 2022. And of course, then you have an effect on EBIT going down from negative EUR 57.5 million versus EUR 49 million negative of the previous year. Of course, since we did not have the benefits of the government grants and compensations, the results are certainly effected. But like-for-like, without government compensations, where we can see that the growth of traffic and the less than proportional growth of costs, of course, it shows a positive performance and net of government grants. The net result shows a loss of EUR 51 million versus EUR 24.8 million of the previous year because of the operating performance and because of advanced taxes that we paid in the period versus the previous year. Now APL. Now, Page 10. Here, we have simply the benefit of the growth of traffic, plus 27%. No tariff increase. And therefore, revenues are growing by almost 27%, and this is mainly due to the growth of revenues coming from motorways tolling services. Now EBITDA is moving from EUR 11.2 million to EUR 16.9 million. Well, this is similarly affected by positive by lower growth of operating costs. EBIT is growing from EUR 7.8 million to EUR 12.4 million. And this is also because of a high financial depreciation charges closely linked to the increase in EBITDA. Net result is growing negatively to minus EUR 3.2 million. And this is related to accessory fees, which are related to the Senior Loan 1, which was taken out so as to support the C2 portion of the Pedemontana motorways. At this point, let us move on to Slide 11. This is the usual walk through the EBITDA -- from EBITDA to net results. Now from EUR 155.7 million. We go down to an EBIT of EUR 13.4 million this is because of greater D&As, which date into account the investments made in the past in motorway infrastructures and also the write-down on ATV for EUR 6.6 million made in the first quarter. Lower financial charges down to EUR 4.3 million. We closed the bond last October with a positive impact on lower financial charges, taxes are going down because of the reduction of the taxable income. And the adjusted net result is growing EUR 58.3 million versus EUR 43 million for the same period. As to the nine months bottom line, this is impacted by the performance of our companies consolidated at equity, which are certainly affected by the performance of Trenord with a result which is certainly worse than the same period of last year. Other companies, other country showing a positive performance year-on-year. Let us now move on to Slide number 12, where you can see the CapEx analysis. Now you can see here the CapEx cash flow of EUR 84.7 million. This is related to CapEx in motorways infrastructures funded by Regione Lombardia. And then EUR 59 million are represented by -- EUR 13.3 million is CapEx related to road transportation mobility, especially the purchase of 66 new buses, 20 of which are electric. And then we have a CapEx for motorway companies of the group, EUR 11 million of RoSCo. And this you can see also in the CapEx accrued, and they are related to services and also revamping of TAF. And then we have the remaining CapEx for motorways. And then we have investments for the acquisition or the purchase of rolling stock on the part of Regione Lombardia amounted to EUR 249 million, and this mainly related to the purchase of new rolling stock material and also the extension of a number of lines on the infrastructure. Page 13, the cash flow EUR 108 million is the cash flow from operations, so positive. The EBITDA is positive for this reason the cash flow from operations is positive. Here, you can see net working capital negative related to higher receivables of deferred payments from interconnected motorway companies. And then it is also -- there's also an impact about credits or receivables from public bodies. Another item which is meaningful and which has an impact on the cash flow and which de facto offsets the operating cash flow is represented by investments, EUR 84.7 which we outlined before. The cash flow of the period is impacted also by M&A activities. Now, we had during the first part of the year, we had the increase of the stake within TEM from 18.8% to 22.55%, EUR 8.4 million. And then the disposal of shareholding held in Autostrade Lombarde/BreBeMi, EUR 6.3 million. And then the liquidated minority shareholders of MISE, which leads the stake of FNM within MISE at 100%. The value of the stake that was liquidated amounted to EUR 29.9 million. The period closes with an absorption of cash flow which is EUR 5.2 million. Page 14, we have the net financial position waterfall. And here, you see the net financial position as at the end of September, you see IFRIC 12 effect on financed rolling stock, EUR [ 45.9 ] million, and then we have lower payables versus noncontrolling shareholders for the liquidation of MISE EUR 24.6 million, which I mentioned before, and which have been reclassified that were present in our accounts as financial debt. The period closes with a net financial position of EUR 693.5 million adjusted and a nonadjusted net financial position. As I said EUR 693.5 million, adjusted EUR 755.6 million. Now Page 15, the gross debt composition. Please remember the investments in MISE EUR 80 million in the quarter, a reduction versus the first six months of the year, EUR 141 million are the uncommitted credit lines. And then what we confirm versus the previous period, is the composition of the debt bond 68%bond, 20% MISE funding and then the remaining funding from EIB leasing and other. The debt is basically current debt 84% and basically fixed rate, 80% of the debt is fixed rate. The average rate is 1.57 -- 1.37% is the average cost of debt. The rating on the a part of S&P and Moody's and Fitch ratings are stable or stabilized before. Now Page 16, you have the structure of our debt, not much to add. It is in line with what we assumed and what we had before. The debt average life is 3.8 years, in line with the total asset structure. At this point, I'll leave the floor to Mr. Piuri to conclude the presentation and to give you the guidance outlook for 2022.

[Interpreted] Now as to the guidance, we confirm what we presented before, meaning that we see positive signs for all the variables of revenue and adjusted EBITDA and also EBITDA -- adjusted EBITDA margin as to the EBITDA between 10% and 15%. Certainly, we confirm a net financial position, which is in line and consistent with the requirements discussed with the rating agencies. And the NFP EBITDA ratio is in line with the plan and with the development. So we confirm by the end of the year, the trend of stability and basically, the trending results that we've seen so far. At this point, we have concluded our presentation, and we can start the Q&A session.

[Interpreted] [Operator Instructions] Now the first question is by Dario Michi, BNP Paribas Exane.

Now the first question I'd like to ask is -- has to do with the increase in costs on Pedemontana for the B2 lot. I read in the press that also going to grow quite markedly. Can you confirm the regulatory structure covers these costs increase? And can you confirm that these costs will not impact on the traffic volumes? Second question about the dynamics that you are witnessing in this quarter. Now can you tell me something about the dynamics of the energy costs, traffic and so on, that can give us some confidence about your ability to reach the guidance targets? And then you've mentioned your guidance. What are the main drivers that we can expect for 2023. MISE, for instance, an increase in tariffs by 1.5%? What are the variables that are driving the results in 2023 from a qualitative point of view?

[Interpreted] Now as to the first question about the APL, Pedemontana. Now we are very close to the signature of the contract with the general contractor. The resort and the appeal to the target, administrative courts was rejected. And therefore, we are very close to signing a mechanism that envisages an increase in costs that was reference. Now in this case, we are going to reference the executive project there. We will have to consider the cost increase versus what was expected. And the concessor and based on the regulation, there will be the possibility for an adjustment helping covering the increase in costs. And so we are quite confident that with the signature of the contract and considering the executive project there. And with this prospect, we may be able to cover the cost. So price increases of commodities and energy. Now it's sure that prices have increased. We are -- however, trying to think about the mid- to long-term year of 2023 and 2024, it's certain will be years with the costs that are going to be higher versus historical costs. We have to understand what kind of speed or with what can speed prices will adjust down and when they will stabilize. Well, the -- perhaps the references the cost per megawatt hour of [indiscernible], which went back to the fourth quarter of 2021, EUR 218 per kilo per megawatt hour. In November, it went up to EUR 220. So costs can be alarming volatility in prices are there. And in January, in general, gas fuels and energy costs are some volatile and source of tension everywhere. Let me add that the updated forecasts to the nine months which inspired our guidance review. Take into account, as usual, all of the potential considerations, which are related to the costs of fuels. As to the guidance of 2022, we are somewhat confident of -- about the resilience of our guidance. As to 2023 and the forecasts thereof, is a bit premature to give you indications about the possible trends. We are at moment in the year when we are thinking about the budget for [ '19 ] for [ EUR 293 ]. And so we are forecasting the traffic, the mix of traffic. We're witnessing a recovery of passengers going back to using mobility services, things are kind of adjusting, but it is still premature to give you a guidance for 2023. What we can say is that now considering the trend in demand, well, we are somewhat confident in terms of demand recovering and growing. This is what we can say at the moment.

[Interpreted] Now the next question by Luca Bacoccoli, Intesa Sanpaolo.

There's three questions on my part. First of all, CapEx for the first nine months of the year. we've witnessed a widening of the cash flow of user CapEx and CapEx from cash flow. So what can we expect as far as CapEx funded with the cash flow? Another question about the debt mix. The part of your debt at variable rate is not very high, around 20%. But rates have rapidly gone up. And I'd like to know whether you are considering taking out some hedgings to take care of this or whether you want to shift this portion of variable debt to fix debt. And then Trenord, do you have any update about the government compensations and grants.

Look, Luca, as to CapEx, there has been a widening in the -- and the gap which certainly is affected by a timing effect. From here to the end of the year, we expect this gap to recover. This is also related to the current conditions, which are certainly related to the difficulties of certain bus producers or companies that do revamping operations of train, but this is only a timing shift. And we expect that there is going to be a recovery overall here. As to the variable tax floating rate debt, now as you can see, I'll give to [indiscernible], as you can say, we have an overall interest rate or cost of debt of 1.36%. Now fixed rate that is below 1% that was contracted well before rates that thought to go up. As to a floating rate, there is a certain 1% of hedging. But here, we have to try and see how things are going to move going forward. But the floating rate debt is a residual portion of that something that was born so to speak within MISE and we still have. Now government compensations. Now as we said, we find ourselves in a context where the industry has quantified the needs and requirements for the overall transportation companies have submitted such a calculation set the government. Now, please remember that we're speaking about the compensations for 2021 because we are always lagging a year behind of the overall business. Now you can see that the choice that we have taken, we have decided not to take into account compensations that we are going to be paid. But despite this Trenord revenues have improved. At the moment, the government is not allowing us to have a good visibility on timing. These are resources that are due to the companies is based on European and national legislation. We need to take into account the new government just came recently and we'll have to wait some time. And we hope that in a few weeks, we'll have the decision. But as of today, there is no measure taken by the government that can help us understand when these measures are going to be implemented. This compensation is going to be paid basically.

[Interpreted] Now the next question by Stefano Gamberini with Equita.

[Interpreted] This is not Stefano. Stefano, had to go to another call. We have three questions about your results. Now are you going to see improvement in results also by the end of 2022. And then why have virtual costs going up by EUR 50 million in the first nine months? And why are you including most of the CapEx, which are made by Regione Lombardia. We didn't understand this.

We do apologize [indiscernible], we could not hear well your questions. Now the first, why haven't you improve the guidance given the performance of the first nine months? That was the first question. We couldn't hear well. Could you please repeat your questions and more clearly, please?

And then why have [indiscernible] costs increased by EUR 50 million in nine months. And the third, the calculation of cash flow, why are you absorbing also the CapEx of Regione Lombardia, the Lombardia region in the calculation.

Okay. Now as to the question on your guidance. Now the new forecast of the full year result was still inside of the -- all the guidance, which takes into account greater costs for energy, greater costs for maintenance which has an impact, in particular, on railways and motorways infrastructure. Now the motorways business, has had limited maintenance works in the first nine months. Well, this is because of the great maintenance done in the summer in the summer months. So what was not done in Q3 has to be done in Q4. And therefore, we will have a moderate increase of margins in the motorways sector. Though, we are still forecasting an increase in demand. As to railways, as we said, we have a positive performance that we had in the first 9 months such performance was partly reabsorbed because of increasing cost of maintenance in and cost of energy. And then please remember that we have item costs within RoSCo for the development of new projects, costs which are to be taken into account. And traffic are on roads. Our traffic is growing certainly, but this is a segment which is affected by the higher cost of fuels. And as I said before in our forecast, we have integrated an update of the costs of fuels, which leads are not improve the guidance versus the previous one. Now internally, we have two items leading to the increase of costs. First of all, in our labor costs. So we had to hire people because of services going up in volume. The service plan started to be operated at full scale. So we had to hire new people and then the cost of energy, which went up. These two items account for 90% of the costs for the cost increase, which is visible for Trenord. Now in 2022, however, you have EUR 70 million of contributions from the government, which now there. And therefore, the results are different. From EUR 49 million of the previous year -- sorry, minus EUR 49 million last year, considering EUR 72 million, which are not there of government compensation. We landed at EUR 59 million. So this is the correct reading that to be able to compare apples-and-apples in Trenord. As to the cash flow, if I correctly understood your question and why we are including within our cash flow, the investments on railway structures financed or funded by the Lombardia region, well, this is because this is our core business. We know very well that these are investments. This is CapEx funded by Regione Lombardia. So these are not FNM funds, which have no effect on our position, but they are included in our own cash flow because they refer the related to the core is or better they refer to a business which is managed by Ferrovienord, and which then has a reflex or an impact on the revenues of this segment on this business.

[Operator Instructions] Ms. Minazzi, Mr. Piuri, we no longer have questions from conference call. Thank you.

Thank you very much for joining us. The presentation is now over. Of course, we are available have any other questions or requests for clarification. Now we'll have the next call for -- when we shall present the presentation for the full year. Thank you very much, and have a nice evening.