Fincantieri S.p.A. (FCT) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining Fincantieri First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Bono, Chief Executive Officer. Please go ahead, sir.

Ladies and gentlemen, good morning, and welcome to this conference call where we explain the results of our first half year. Let me start by expressing my relief the situation has changed for the better since our last call. The ultimate, the change in the future, we faced the emergency with determination so that we could emerge stronger than ever. As such, there's success in the past. And also, we worked hard, and our backlog is still intact. In fact, thanks to our strong relationship with our clients, we can confirm we have the [ normal ] condition so far. We reassessed the delivery date for some ships, and consequently, we postponed part of the sector -- segment. Just to give you an idea, our postponement of delivery was about -- will be about over 4 or 5 months. Our competitor have delayed to 12 months. We can proudly claim the leadership, all told, into the cruise business but also in the naval surface ships. In fact, we distinguished our service into the defense sector, becoming for the first time prime contractor for the U.S. Navy. I would like to remind that the cruise ship industry has always been resilient in the face of the worst market conditions. As well, it signals -- it is signaling to be the same also this time around. Some shipowners have, in fact, already resumed their operations and/or are in the process of resuming [ their operations ]. We are proceeding in our diversification strategy, but our good business is the construction of ship -- naval and cruise ship sector. I want to underline that the cruise ship sector is not affected. In the next future, the sector will have the growth [ of the pack ] in our view and in the view of our clients. We are proceeding in our diversification strategy through our divisions and subsidiaries, developing businesses in the infrastructure [indiscernible] visibility in all the world; in the electronics and the cybersecurity sector; into the cruise ship, complete accommodation in the equipment and system and services area. In services, we have the strategy to grow because the client in the cruise consider the structure of the maintenance inside. I would like to remind that we continue to have as our priority the safety of our people over the one -- and the one of our subcontractors as they represent an important asset for us and for our country. Our people and our suppliers respected all the safety measures that we put in place. We were able to restart [ sales ] up, overall strength. And this time, I'm pleased to say that 91% of our people declared their appreciation to the -- for the safety measures that we implemented in most of -- in every task considering that in our Italian site, we record almost 30,000 people every day. We have a recognized service by the -- in America, our -- in the yard in Wisconsin that was recognized that our measure are the best in the American yards. Focused concerns, our economic and financial result, they were influenced by the production downtime. However, our current backlog allows us to be confident for our future as we'll have a workload for the next 6, 7 years, thanks to that our performance is probably in line with the targets of the provision (sic) [ previous ] business plan. I want to underline that our balance sheet is clean. We reported the results until the last euro because we don't want to postpone in the future this -- the result of this -- the negative result of this period. I want to take a moment to thank Mr. Maestrini for the integrity and effectiveness he exercised during the tenure as General Manager of Fincantieri. Best of luck to him for the new challenges he will take within our group. We want to -- in the business unit to put in place the best manager for the future. At the same time, I want to welcome Mr. Fabio Gallia, appointed yesterday by our Board of Directors as the new General Manager. His past experiences in important Italian companies speak for themselves. We are sure that the expertise will enrich our group in the years to come. I think that he also is one of the best manager with a long experience obviously in important Italian companies. And now allow me to give the floor to Mr. Maestrini. Thank you.

Thank you. Good morning. Let me start by providing some highlights on events over the 6 months of 2020. As you all know, the first part of the year was deeply affected by the COVID-19 outbreak. I want to stress once again that despite the dramatic impact of the virus on the global economy, our backlog and -- as Dr. Bono said, remains intact. This is a very strong signal because it will make us much stronger when the crisis is over, and we will be -- even increase our leadership in the market. As we mentioned in the first quarter result conference call, our production activities have been resumed gradually as of April 20 to ensure the safety of all workers. By the end of June, up to 90% of our production staff was safely back to work. Production downtime and the preparative restart of the activities led inevitably to a slowdown of our production schedule and to the postponement of our deliveries, causing a decrease of about 16% in revenues year-over-year. Even though production suffered a slowdown, we can confirm that in next 5 months, we will deliver the 3 cruise ships scheduled for 2020. Let me now give you an update on our business strategy and other key events. First of all, as has already been said, our Americas subsidiary, Fincantieri Marinette Marine, was chosen by the U.S. Navy among the most challenging worldwide competitors as the prime contractor for the FFG(X) standard, winning a nearly $800 million contract for the design and construction of the first-in-class guided missile frigate. The contract also includes the option for further 9 units, bringing the cumulative value up to almost $6 billion. This is a clear signal that our leadership in design and manufacturing of sound and balanced combatant ships is even stronger, and we have design which are suitable for a large variety of applications. And this leads me to a second important topic, that we are -- we can achieve this result, also thank you to the strong investment we made in key technology in systems and components. As we always said, we want to control all the technologies that are vital for the performance and the competitiveness of our ships and our design. We are -- we have several initiatives that are ongoing in this -- in the various sector where -- spanning from surface and underwater electronics system and managed technology, innovative smart storage systems and everything that goes on board our ships to make them better and more performing. It's worthwhile mentioning the success of our subsidiary, Fincantieri Infrastructure. Clearly, the Genoa bridge is the star in the sky, but this is an investment that is proving more and more successful. The construction of the new bridge on the Polcevera River was completed just 1 year from the steel-cutting ceremony held in March 2019. And it is with pride that I remind you that the opening ceremony will be taking place as soon as next Monday. This is -- we want to continue our focus in infrastructure because we want to bring to this market Fincantieri culture of delivering on time on budget as we do in all markets where we operate. And even here, we will select the proper niches where we will be the leading company. Then it's worthwhile remembering our joint operation with Naval Group joint venture, NAVIRIS, which is equally owned by the 2 companies. They signed recently 2 contracts with OCCAR, the Organisation for Joint Armament Co-operation. The first is for a research and technology program, including 5 different projects aiming to enhance performances of our vessels. The second one relates to a feasibility study on the midlife upgrade of the 4 Horizon frigates owned by the French and Italian Navy. The joint venture will be the prime contractor and will own the intellectual property emerging from the feasibility study. A word about the offshore market. After we have stabilized the production performances, we are now focusing on market opportunities for special vessels. The recent example of the wind farm support vessel is a good example. At the same time, we want to safeguard the rich know-how in this engineering sector in VARD to be ready to emerge as leader once the market picks up again. The -- as an example of our diversification, we are working in -- for example, in the aquaculture market. And we are delivering new innovative products, for example, for fish farming for a very large application, for example, in the farming of salmons. We're talking, about hundreds of thousands of fishes that can be grown in our -- with our equipment and solutions. Again, reminds me that Fincantieri is focused in increasing and making more sustainable business. First of all, of course, in terms of economic sustainability but also in terms of environment. And that is even more relevant now with the -- all the problems, climate problems that we are facing. Not later than yesterday, our Board of Directors approved the update of our sustainability plan targets, raising the bar in view of sustainability challenges. We are taking this commitment very seriously. And our obligation towards the environment, notwithstanding the slowdown of the COVID -- due to the COVID outbreak, kept on going ahead, and we are increasing the number of challenges and targets that we are putting in front of us. Our focus on environment, human rights and community is always continuing. Our efforts to fight the climate change were rewarded by the Carbon Disclosure Project with a rating B and as well as by Vigeo Eiris, evaluated our sustainability targets integration with our business strategy. For that, we gained the highest placement in the category of mechanical components and equipment. Just a quick comment, finally, on the first half 2020 results. Our revenues were impacted by the shutdown of our production activities and with total revenues for EUR 2.369 billion for the first half with a revenue shortage of approximately EUR 790 million. And in consequence, our EBITDA at EUR 119 and our EBITDA margin at 5% suffered from a shortfall in contribution of approximately EUR 65 million. Net debt is at EUR 980 million from EUR 736 million at December 2019. That is mainly influenced by the postponed delivery of one cruise vessel in the second half of this year instead of the first half as originally stated. Our total backlog stands at 117 units, EUR 37.8 billion, covering roughly 6.5x our revenues, with a backlog of EUR 28 billion and a record highs of backlog of almost EUR 10 billion, almost -- increased by, of course, the new contract with U.S. Navy. I wish to remind that during the first 6 months, we are still able to successfully deliver 10 vessels from 7 different shipyards, among which 3 cruise ships, 1 fishery and 1 naval unit. We -- as already said, we are keeping on working our diversification through our division and subsidiary, infrastructure, electronics, cybersecurity and all the rest. This sector recorded a significant increase in revenues of approximately 6%. I'd like to mention also the results starting with the order of one service operation vessel, which I mentioned before, of -- in offshore wind farms. And then we collect also 2 different orders for 2 fishery units equipped with the latest cutting-edge green technologies. And then last but not least, let me remember the award of the contract for reconstruction of the Italian Port of Rapallo and for the stadium -- the Bologna stadium, Renato Dall'Ara. I will now leave the floor to our CFO, Giuseppe Dado, that will guide you through the details of the group 2020 first half results.

Good morning, ladies and gentlemen. We can certainly move to Page 8 of the presentation, go through the order intake and backlog. Order intake for the first half of 2020 was at EUR 1.7 billion. And of course, comparison with last year's order intake is -- which was EUR 6.6 billion, is meaningless, let me say, because last year, we had a record first quarter. We had an order -- total orders for 11 ships last year. We had EUR 1.4 billion in shipbuilding coming from -- mainly from the naval business. And as Mr. Maestrini mentioned before and Mr. Bono, the order from the U.S. Navy, which was literally a quantum leap in our strategy as far as our capacity to become a strategic partner and the main contractor to the U.S. Navy. We had EUR 164 million in the offshore and support vessels and EUR 322 million in equipment, systems and services. The total backlog, we said it before, amounted roughly EUR 38 billion, with a soft backlog of EUR 9.9 billion, which increased with respect to the year-end 2019, thanks mainly to the inclusion in the soft backlog of the full value of the options for the U.S. Navy frigates. On Page 9, we can see the breakdown by segment of the deployment of the backlog. And here, as it stands today, the core message that we want to give is that so far, we have succeeded in avoiding cancellations, notably in the cruise segment and that all in -- overall, from 2020 to 2024, the number of cruise ships to be delivered in this period is unchanged with respect to the situation before the outburst of the pandemic. And this is so far a very, very good achievement, although as Mr. Bono mentioned before, we then shifted deliveries by an average between 3 and 4 months in the overall production schedule and mostly as the years 2022 and 2023 are concerned. In the naval segment and in the offshore segment, the situation is broadly unchanged. On the revenues, Page 10. The production downtime that we mentioned before that was, I remind you, was from March 16 until April 20, we closed the yards in Italy. And after April 20, we started resuming operations gradually. We can say that as of today, as of the end of June, of course, we are right now working at normal, let me say, pace, but needless to say that we lost roughly 2.7 billion hours in production. And that translates in loss in revenues of roughly EUR 800 million, with a shortfall in contribution in EBITDA that we calculated in EUR 65 million. Shipbuilding revenues were mostly affected by the shutdown as we closed all the Italian yards operations. As a matter of fact, cruise revenues are down 13%. In the equipment, systems and services, mainly thanks to the diversification strategy that we've implemented in the past years, revenues -- notwithstanding the shutdown, revenues are up almost 6% with respect to last year. And this is also thanks to the contribution of the construction activity for the bridge in Genova and the activity and the consolidation also of the INSIS, the company that handles the electronics and software business. EBITDA, on Page 11. EUR 65 million in loss of contribution, I mentioned it before. We closed with EBITDA margin -- EBITDA of EUR 119 million with a margin of roughly 5%, with a margin of 5.7% in the shipbuilding. We reiterate the message in the offshore support vessels business that closed at breakeven also for the first half of the year. And we can say that we are reaping the benefits of the activity -- of the restructuring activity and of the review of the project budgets that we performed last year. And this is the result that we expected that we wanted to achieve. And so far, we are in line with our expectations. The EBITDA for the equipment, systems and services stands at EUR 39 million. And this is the result of the production downtime and to the -- coming from the contribution of low profitability but strategically relevant projects like the one we mentioned before, [ the whole chart of it ]. Net income -- net loss actually amounts at minus EUR 137 million. And of course, we had -- we are accounting for EUR 114 million of COVID-19-related costs. Roughly EUR 65 million of this EUR 114 million are related to less operating leverage that we achieved in the past -- in the first 6 months. The fact that we performed less hours and we have less revenues did not allow us to cover some fixed costs. And the rest is attributable to extra costs that we have incurred to face the emergency, to implement safety and health measures on -- in our operations. As we said before, we have on average 30,000 people in our yards every day in Italy. And believe me, we have reached very high safety and health standards. And managing all these people in this basis is quite a challenge, but I think we have reached very good results in this. On the CapEx, Page 13, we had EUR 122 million, of which EUR 97 million tangible assets mainly dedicated to the improvement of efficiency in Italian yards; the -- also the further improvement of the production capacity of our Romanian yards; and of course, the enhancement of the safety and environmental conditions, notably in the Italian yards. The pace of capital expenditures, of course, in the year 2020, we have carefully reviewed our CapEx plan. And considering the situation, we are reassessing our CapEx plan and postponing some investments for 2021, waiting for the emergency to pass. Net working capital, Page 14, roughly unchanged, although the components within the net working capital had, let's say, a change because receivables increased. But this is mainly to the fact that -- and work-in-progress, of course, decreased mainly to the fact that we expected to deliver some ships, of course. And when you expect delivery, you should invoice deliveries that did not occur. But we stated before and I confirm that we expect to deliver all the ships that we expected before this year. So we have 3 deliveries out of the Italian yards in the next 5 months. And of course, the lack of cash inflows has had an impact on net financial position, which closed at EUR 980 million with respect to EUR 736 million as of last year. And again, I don't like to repeat myself, but postponement of deliveries and postponement of cash inflows related to the cruise business is having an impact on debt levels. Let's move on to Pages 16 and 17, cruise and company outlook. We -- as Mr. Bono mentioned before, the cruise business has proven very resilient in the past in rolling over sudden shocks in the industry and going -- quickly turning to -- going back to the growth path that we have seen in the past years. Literally, we went through a secular growth in this business. And albeit the situation is critical right now with basically no operations at this point of time, we are seeing some operators starting to resume activity in niche markets like Ponant, a French owner that has resumed operations in Polynesia. Soon, we hope cruises will start back in Europe. And of course, expectations for the year to come for 2021, and this comes -- these expectations, of course, are linked to statistics and facts, like the number of reservations that our clients are seeing. RCCL recently declared that reservations for 2021 are in line with historical trends, which is good considering that historically the market has grown. And of course, also according to a survey from the travel site, Cruise Critic, on cruise traveler sentiment, 32 of the respondents are already looking to book their next cruise, and 37 said that they are likely to book a future cruise once restrictions ease. So this is to say that we strongly believe, and we're not the only one, that the cruise business sooner or later will resume operations and will go back to its growth path that we have seen in the past. And on the order side, what we are seeing is a gradual process of fleet renewal, with the tendency of the owners to dispose of older ships, older and less efficient, and with the owners publicly and clearly saying in words and facts that they do not intend to cancel orders. And I mention the CEO of Carnival and the CEO of NCL who both explicitly declared that they have no interest in canceling orders. As when the industry will recover, of course, it's better and more suitable, more efficient to have the youngest fleet possible to be more competitive. A younger fleet means a novelty effect on the consumer, on the passengers; means, of course, a more efficient ship; means a ship that can be more compliant with environmental and safety rules. So the newer the ship, the better it is. And therefore, we strongly believe that we will not face cancellations. And as we stated and repeated several times today, so far, our backlog is intact, okay? Let's go to Page 17 then, on the company outlook. So for the second part of the year, although the impact of the COVID crisis will still be heavy on the accounts, the production volumes are expected to come back to pre-COVID levels in the second half. And we are going to have second half 2020 revenues are expected to be broadly in line with the second half of 2019, okay? We expect to deliver 3 cruise units from the Italian shipyards. And of course, we are keeping progress ongoing on the 2 main programs that we have in Italy for the Qatari Ministry of Defense and for the renewal of the Italian Navy. Now on the outlook beyond 2020. For this, the outlook is easy and straightforward. Provided that the company's backlog is successfully preserved, the embedded profitability in this backlog will trigger a robust rebound of the group's results in the medium to long term, and we strongly believe that. And of course, we will soon present the business plan 2020, 2021, 2024 as soon as we have a more, let me say, frozen situation on the -- and clear expectations on the cruise market and on the macroeconomic environment. This is it. Now we are happy to take questions.

[Operator Instructions] The first question is from Monica Bosio of Intesa Sanpaolo.

Thanks for taking my questions. Thanks also for the outlook on the revenues. I was wondering if you can give us an indication of the weight of the naval segment for the full year because in the first part, it was a little bit down year-on-year. And what could be the weight of the naval segment in the medium term on the back of the U.S.A. Navy award? The second question is on the savings side. Can you please quantify the savings from Cassa Integrazione or temporary layoffs in the second quarter of the year and in the first half? And very last, do you expect further extraordinary costs below the EBIT line due to COVID? Because it has -- they have been EUR 114 million in the first half. What is your expectation for the full year?

So on the first question, on revenues from -- on the split between cruise and naval revenues in the second half of the year. On the overall amount, we clearly stated that revenues on the second half will be broadly in line with the second half revenues of last year, with maybe a few percentage points above that. And the -- as far as the split between naval and cruise, we had a 75%-25% split in the first half. I believe that we can maintain this split as the second half is concerned, okay?

Okay.

On question #2, which I believe was the extra COVID -- no, the -- can you repeat question #2, please?

No. Before the #2, I was wondering if you expect a change in the weight of the naval business in the medium term on the back of the U.S.A. Navy award.

On this, the U.S. Navy award, I mean, the first -- delivery of the first vessel is 2026. So you can see an impact on the revenues starting from the back end of the 2020-2024.

Monica, in this moment, our yards in U.S.A. are complete because we are [ well figured ], yes, producing last LCS for the America -- in the U.S. Navy. And we start to produce the LCS for Saudi Arabia.

Okay. And on the COVID savings and costs, on the savings side, please note that we have used the Cassa Integrazione up until May 29. So that saving, of course, it is -- it's -- you won't see that in the second half of the year because as we said, we are going to work, and we are working almost at full speed. So we don't rely on that support. On the second half of the year, you're going to see extraordinary costs COVID-related to a lower extent with respect of the first half because we will not have the lack of operating leverage, let me say. We closed at EUR 114 million of COVID-related extraordinary costs. And I said it before, it was -- roughly EUR 65 million of them is related to the lack of operating leverage to the loss of -- related to the loss of 2.7 million hours that we had in the first half. So that share of the costs will not occur in the second half. But we still are going to incur into extra costs for health and safety, okay?

Okay.

So you do the math.