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

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Fincantieri 9 Months 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Gallia, General Manager. Please go ahead, sir.

Good morning to everybody, and welcome to the third quarter conference. I'm here with Giuseppe Dado, our CFO. In a year characterized by unprecedented challenges for businesses [indiscernible], Fincantieri demonstrated its ability to react, its responsiveness, its resilient and encouraged to invest for the future. People and clients first as far as our effort for safety, health of the workforce and all the suppliers we have to say that we're being able to protect production in our sites. As a matter of fact, the number of infections has been contained to below 3%. And actually, the number regarding our direct employees, colleagues is well below that number. And we also proved to be a very cohesive experience for all of us as demonstrated by the internal survey, which demonstrated that more than 90% of the colleagues appreciate the effort for perfecting the workplace and their health. Just for your background, roughly every day, we have 40,000 people working in our shipyards for containers. Regarding our support for clients, we're being basically protecting all of our orders. No one has been canceled. We've been delivering 3 ships during this pandemic period, 14 so far. And we also managed to gather 4 new orders and also providing financial flexibility to our clients, therefore, strengthening further the relation with them. Also been managing to invest for growth as demonstrated by our diversification program, which is clearly having some sensible and hard results. Just looking in more details on the numbers and at Page 5, as we were saying, it's also important to look at new orders that we've been taking. One is on -- for U.S. marine and 3 have been in the new fields of our activity, particularly by Vard. As I already said, the measure for prevention a litigation of the potential risk has proven effective. Vard maintained its breakeven and it's very encouraging order intake so far. We continue to post sound funding capacity or liquidity and credit lines or medium-term development. Also thanks to a loan in excess of EUR 1.1 billion, granted by a pool of banks and guaranteed by SACE. Regarding third quarter results, you can see that is in excess of EUR 1.165 billion with EBITDA of $81 million with a margin of 7%, which is better than previous quarters. We now also say that the third quarter's production utility is basically in line with pre-COVID performance. You can see the numbers in this chart, and you can have a comparison. I would highlight that net debt has been moving north as we has touched above [ EUR 1,400 billion ] -- [ EUR 1.425 million ], sorry. And this is also the result of what has been going on in terms of providing financial flexibility to shareholders in the COVID impact. As a matter of a fact, the number, which we calculated of this COVID impact for net financial debt is roughly EUR 600 million. EBITDA has been impacted by $17 million and more details will be provided in the following pages. So it's important to say that all in all, COVID-related extraordinary costs are roughly EUR 150 million. We're seen before that investment for the future. We can also see that our backlog is roughly EUR 37 billion, used to be $32 billion a year ago. We had record high top backlog, also thanks to great performance by the naval business. We plan to deliver Costa Firenze on scheduled fourth quarter according to the new delivery schedule. And fourth quarter, we are expecting that production will be in line with pre-COVID levels. In terms of diversification, we would like to highlight performance in the Naval business, and there will be more to say in the coming pages, electronics, systems and infrastructures. Also we invest in innovation and in sustainability. And as a matter of fact, there new orders regarding new fishery units. And another support operation vehicles for Vard, plus and experimental fuel cell-powered vessel, Zeus. And it's also important to mention that our joint venture with the Chinese CSSC is proven successful also for our accommodation business. As a matter of a fact, Marine Interiors, just announced it will be providing 2,800 cabins for the first Chinese cruise -- cruise ships built by SWS. And we also announced yesterday that Fincantieri NexTech, which is the former INSIS Company we bought a year ago with IBM and Autostrade has been setting up the agreement for innovative systems to monitor the highway network. If we flip page and we go to Page 6, we had some update regarding our focus on strategic developments. I believe it's hard to underestimate the impact on our U.S. operations for the future of our company. FFM is -- as you know it is, Fincantieri Marine Marinette is a prime contractor for the first-in-class guided missile, frigate with 9 additional options for the U.S. Navy. U.S. Navy is the most important clients and the work. Also being awarded a contract for design engineering of large unmanned surface vessels, which represent a growing and innovative field in which effort is being concentrated. We've also been investing for air sanitation systems. And all in all, we can say that innovation will continue to be a key feature of our effort of our investments in people and resources. We already mentioned about Vard breaking even, and we also built a cutting-edge stern trawler Luntos to be delivered in '22. We want to continue our diversification away from oil and gas, trying also to follow the path for growth represented by wind farms, fishing farms and trawlers. These are areas of growth, which we believe will characterize Vard strategy for the years to come. In infrastructure, there has been the opening ceremony of Genoa bridge held on August 3, and we also reached an agreement with Bologna in order for investment for styling of their stadium, which have been declared as a matter of public interest by the municipality. In defense, we signed a second contract with OCCAR and -- which is Organisation d'ARmement Cooperation for feasibility of the mid-life upgrade of the 4 Horizon Frigates. And regarding NexTech, which is again the new name for INSIS the company we bought a few quarters ago. We've been awarded European tender for electronics infrared seeker emulator to be supplied to the Italian Ministry of Defence. Sustainability, here Zeus is an experimental fuel cell-powered marine vessel, which is of paramount importance for an effort for environmental sustainability, and we will continue to invest and keep you speed with future developments regard that. And in terms of innovation, we received the MIKE Award in the global company category. Going to Page 7. I would say that the messages here are about growth, significant growth and opportunities in the naval business. This is what has been achieved. And you can also see the expected delivery. It's also about diversification. We have a very diversified pipeline, which is very important for our future. And in terms of deliveries, I would really underline as the extraordinary effort by the whole organization and all the workers and suppliers by sticking to our production goals and delivering 14 ships from 9 different shipyards. Page 8, you can see backlog deployment. You can see that the visibility, which is a strong one in both cruise and naval. With the delivery tracing up to 2027 in the years in which the cruise really going down in terms of new orders, you can see the extraordinary work done in previous years. As you can see, the level of visibility we can provide to our clients and our shareholders. That is even true in naval, naval is our -- not just U.S., but also opportunities, which will be captured in international markets. And this segment, we believe that will continue to present growth vector for Fincantieri. I really commented about off-shore and specialized vessels. But again, it's important to say there're -- this is testify the effectiveness of the restructuring environment, where there's still some work to be done, but also the fact that we're also diversifying away from the original oil and gas and trying to position ourselves in a competitive way in the new area of growth. Before, when we sum it up, 14 units delivered 4 new orders and 88 ships in backlog. We've got strong visibility and probably diversification never achieved before, and with good positioning in new trends of growth for our shipyards. I will hand over to Giuseppe to comment on the financial results.

Thank you, Fabio. Good morning, ladies and gentlemen. We now move to Page 10, and we'll start going through some financial data, and we start with the order intake and backlog on Page 10 again. Well, the key message here is that, as Fabio said before, we managed to preserve our backlog whilst at the same time, increasing the soft backlog through especially opportunity. And the win we got in the United States with the program of the U.S. Navy frigates. Of course, if we look at the right -- on the left side of the page, the order intake for the year, the comparison with last year is absolutely meaningless. As last year, we had a record levels of orders. This year, we are roughly at EUR 1.9 million of order intake. We expect to further order intake in the next Q1 coming from the naval business. The total backlog as of the end of September is almost EUR 36 billion, including [soft], that gives us a lot of visibility for the next year at 6.3x revenues of 2019. Again, the preservation of the backlog at this point in time is key in our strategy. Revenues, Page 11. Production volumes due to COVID-19 were down almost 20% compared with the pre-COVID estimates. And that led us to a loss of revenues of EUR 945 million. Again, here, comparison with last year, has no meaning. The main message is the loss of revenues due to the production shutdown and the rescheduling of the production plant. The total number is EUR 945 million, mainly related to Shipbuilding and systems and components, although in shift in the equipment, system and services, the revenues were up 1.6% year-over-year, and this is thanks to our diversification strategy and the growth we are seeing in the infrastructure business and in the electronic business. Also in the Offshore and Specialized Vessels segment, revenues were down only 1.1%, but this is mainly due to exchange rate effects. As a matter of fact, if we like or we do the comparison in a like-for-like exchange rate, revenues were up 5.8%. And Fabio mentioned before, the relevant order acquisition that we have in the last 9 months. Moving on to EBITDA. Please note that there is a substantial improvement in results between first half of 2020 and third quarter of 2020. In June, we close at 5% figure EUR 119 million. Right now, we are at 5.7% with a loss due to the reshaping of the production of EUR 71 million. For those who would like to compare with these results with the last year results, EBITDA levels in the third quarter of this year were even better of the EBITDA levels of the third same quarter of last year. The EUR 71 million, only EUR 6 million relates to last quarter, and this shows, again, the fact that we were able to resume production even in this difficult environment. For the fourth quarter, we expect production to go at full speed. Capital expenditures. Page 13. Well, broadly in line with last year. But here, the point I want to stress is that now withstanding is a difficult situation in the yard and the shutdown of the yards for month in March and April, we were able to keep the pace of our investment plan, and this falls within the strategy of improving production, improving efficiency and preparing the group to resume the growth that we started the COVID-19 outbreak. On networking capital and financial position. Of course, the impact of the slowdown in production is evident in the networking capital level. Of course, cash-ins are skewed towards the fourth quarter. During the fourth quarter, we already delivered 1 vessel, the Silver Moon, 2 weeks ago, and we expect to deliver the Costa Venezia by the end of the year. So cash-ins are postponed in the final part of this year. As Mr. Gallia said before, the effect on net debt levels due to the pandemic is estimated in last EUR 600 million, and this is both due the rescheduling of the production plan, the rescheduling of the deliveries and in and, and the slowdown in the production. I'll leave the word to Mr. Gallia for the outlook.

Thank you, Giuseppe. If you go to Page 16, you can see a focus on cruise. It still represents a -- more than 50% of our business, we are heading towards a gradual path to recovery, expecting 2021 as a kind of a transition year and going back some kind of normal or new normal in '22. You can see that there has been temporary suspension in Europe. CDC lifted the no-sail order in U.S. and all the operators are taking decisive actions to abide with the sail guidelines, which have been set up. While the association an announced voluntary suspension through December 31, which means, year-end to meet the health and safety requirements, which has been decided. It's also fair to say that all major operators have been investing to implement rigorous safety protocols. And clearly, when expecting the next few months. So we can probably envision gradual resumption with reduced occupancy rates, clearly, protocols, very strict, which should provide clients with effective safety because we've been investing a lot of a time for implications in the location -- procedures and also increase onboard testing in order to create a very safe environment. Clearly, there will be new standards. And all in all, clearly, we're waiting like the whole world to see the effectiveness of the vaccines and policies will take time. That's the reason why we're expecting that 2022 will be a return to a new normal. We're talking about the company outlook. As we already said before, we have very solid visibility regarding our backlog. It's a very diversified one in a very difficult period of -- for the work. It's important again to highlight that the production workers have been safely going back to the shipyards. And there will be an impact. It has been, but it's important to highlight that fourth quarter production should be in line with pre-COVID levels. Regarding cruise Enchanted Princess and Silver Moon had already been delivered, will be new one before the year-end, Costa Firenze. Naval business, it's about U.S., which is an important transforming project for us because it's going to be prime contractor for U.S. Navy and U.S. Coast Guard. There are opportunities in the navel business at international level. And as a matter of fact, we're also expecting to progress with orders for the Qatari Ministry of Defence and for fleet renewal of the Italian Navy. As Giuseppe said before, financially robust and adequate liquidity credit lines in order to tackle this crisis. And as we said before, with the lines, which has been provided, with a guarantee by SACE, we're expecting we can challenge -- we can walk through this challenging period. And diversification projects are starting to pay off, and we continue to look for our execution on the plans we have for the next few years in a strong competitive position. I will stop here, and we're happy to take your questions.

[Operator Instructions] The first question is from Alessandro Pozzi of Mediobanca.

I have 2, and the first one is on revenues, I'd say, the strong improvement sequentially going from the first half into the 9 months at the top line. But if I look at Q3, I think in shipbuilding, we are still a little bit below what the company delivered in last year. And I was wondering that what is still missing to go back to a level of revenues that is more in line with what we've seen at pre-pandemic. Also -- and the second one is on net debt evolution, I appreciate we haven't -- you haven't released the new business plan yet, but I was wondering what sort of net debt we should see into year-end? And how you -- maybe if you can give us an update on net debt evolution for next year?

Okay. Alessandro, on your -- it's Giuseppe Dado speaking here. On your first question, let's look at the past first. If you, of course, consider that we closed at EUR 3.5 billion in revenues this year, with EUR 945 million of lost revenues. And you add those numbers. You easily find out that without the COVID-19 pandemic, we would have been way above last year. Third quarter shows a recovery of the production phase -- of the production rate. First half of this year, we lost 3.7 million hours in production. In the third quarter only 400,000 compared to the original production plan, not compared to last year. Comparisons with last year really are not meaningful as also as the company was really in a growth path in terms of hours and therefore, revenues. What we expect, for the end of the year, we expect to pick up production even further. Of course, we didn't -- we're not giving a guidance on the end results, but it should be broadly in line with last year, okay? As with when the situation will go back to normal -- for normal situation, I would say that at this moment, with the information that we have at this moment, we foresee a recovery starting from next year. And we already stated that during the presentation on the first half results. On net debt, first message important message is, as Mr. Gallia said, the group and the resources in terms of credit lines, in terms of cash to face the current situation and what we foresee in the future. We have worked very well. We increased further our capacity. So at this point in time, we do not need any other increases in this capacity. We consider the debt level that we have reached in the third quarter and what we are going to see towards the end of the year, as, let me say, the peak, of course, this is what we see under the current assumptions in terms of deliveries and in terms of the production schedule. For the end of the year -- from now until the end of the year, we expect net debt to stabilize, both even if we deliver 2 vessels in the fourth quarter, so why is it so? Because at the same time, the inflows will resume, but at the same time, outflows will resume back to normal. And of course, this will occur first, okay? That is why we expect net debt to stabilize from third quarter to fourth quarter. And we can fairly say that these -- we are reaching -- we have reached the peak levels, okay?

Okay. And just going back to the revenues. Is it fair to say that the -- also the increase in profitability was driven by a higher share of the revenues from naval and do you expect that to be the case in the coming quarters, more revenues from naval?

No. No. Because again, if I take out COVID, the cruise business was in a very important growth path. We are -- also due to the record levels that we reached last year in terms of order intake. We do expect the share of revenues in cruise to increase, we expected it to increase, of course. Now we do not take into account in this expectation, the contribution coming from the U.S. Navy program, which will start more likely starting from 2023. To contribute to revenues in a substantial manner. Okay?

Perfect. And in the business plan, do you expect to release it with the full year results plans?

Sorry, say that again.

I was wondering the new business plan, whether we're going to have an update for the full year results?

We obviously we communicated when we will have, say a more stable scenario on the end market, notably in the cruise business. It could be possible that we have communicate new targets on the occasion of the presentation of fiscal year 2020 results. Look at the cover page of the Economist of this [month]. A little light at the end of the tunnel.

The next question is from Monica Bosio with Intesa Sanpaolo.

My first question is on the profitability on the fourth quarter. Given that the production volumes will be back at the pre-COVID level and considered that Vard offshore is at a breakeven. Vard cruise has improved. Can we expect for the fourth quarter a further improvement in EBITDA margin versus the third quarter? Or is it too aggressive assuming this? And the second question is on the COVID cost, EUR 149 million in -- over the 9 months. Can we expect that it's over or should we expect some further cost in the fourth quarter? And the very last is on marine interior contracts on the 2,500 cabins. Can you give us some rough indication of the value of the contract.

Sorry, I was on mute. On your first question, profitability, let me be cautious here. The third quarter was a very good quarter. It shows a trend of improvement. Let me say that we do not expect this trend to continue substantially, although, as we said in June, once the situation, the end market stabilizes, cruises will start lowering again. The fact that we are able to preserve all our backlog is the key point in our strategy, in our core market and the necessary premise to resume the growth that under which we started, let me say, to work 3 years ago, okay? We will see improvements, most likely in 2021, 2022, okay? 2020 still is a difficult year, although we can say that we are thinking clearly, and of course, the world will be starting to some light at the end of the tunnel, okay? On -- can you repeat your second question?

COVID costs.

COVID costs, EUR 149 million as of the end of September. As we said, there are 2 components in this COVID costs. The loss in operating leverage, which did not increase in the third quarter. So it has stabilized. Well, we have seen is an increase in the cash costs for all the BPI and the safety amount and safety measures or so across the yards and all across our offices and departments. If you want to know the impact, of course, we expect still to incur these costs in the third quarter, and we all read the news in the newspapers about the levels on the start of [indiscernible]. What I can say is that we do not expect further losses coming from the loss of production of hours.

In the operating line, okay, so something more but just related to cash cost only. Okay.

On the value of the contract for the cabins, we do not disclose the number. But usually, the value of the supply of cabins is roughly 10% of the total value of a vessel.

[indiscernible]

We're a little bit above EUR 50 million.