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 2021 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.

Good morning, dear all. Welcome to our conference call. Mr. Gallia and Mr. Dado will show you that our first half 2021 results display a true positive turnaround of the group performance. But before that, I will just underline a few aspect that in my opinion stand out. During this time, deeply influenced by the pandemic and the other difficulties, we proved beyond any doubt our skills in adapting our operations, even in adverse condition with scarcity of qualified workforce as well as of components and the raw materials. We can claim our business is robust and sustainable to elements that are essential to be competitive in the current global economic scenario. As you saw, we can say that we have already laid the foundation for what Fincantieri will become 10 years from now. But thanks to this order acquired in the defense business in which we established our leadership, we are positive and will achieve higher marginality and strong cash generation, while keeping the highest production standards on the market. I want also to underline that those orders are just an example of what we can achieve, thanks to our competencies and capabilities. As well, we stood by our long-term vision, expanding our competencies in non-maritime sector. And with satisfaction, we are starting to see very good results. The commitment and the determination of our people and of those of our suppliers have never been so high, even during the darkest hours of the last 18 months. And for that, I want to thank each and every single one for the dedication. This is also why I feel we can reach outstanding economic and the financial performances in the next future. I am personally proud to see that our efforts allow the Fincantieri to grow and become such a strong global group. I wish this gloomy period will soon come to an end, letting us come back to a normal life. And now I'll leave the floor to Mr. Gallia, please.

Thank you, and good morning to everybody. We're here to present what we consider a very healthy set of results. Key messages are we're back to profitability. Revenue is up 28% excluding pass-through activities. EBITDA is in excess -- is roughly EUR 220 million, with the margin which is in excess of 7% compared to the 5% recorded in the first half of last year. Adjusted net income is around EUR 50 million, with EUR 42 million extraordinary costs. And net debt is in line with the first quarter results. It reached EUR 1.6 billion. But as you may know, we had 3 ships delivered in July. So that net debt and construction loans are now back to a very low level. We can confirm our guidance for 2021. Revenue expected to grow by more than 25% and with EBITDA margin around 7%, notwithstanding increasing commodity prices. Total backlog is very solid with a number of EUR 37 billion, which is about 7x 2020 revenues, 111 units; backlog with 93 units; and soft backlog with EUR 9.4 billion. Production volumes are historic high. We've been working 8.4 million production hours at Italian sites with a growth of 50%. That is -- that was instrumental to deliver on the backlog we have been building over the years. And we can say that we are in line with the delivery schedule. Corporate vaccination program has been successfully launched and has been very well received by both our colleagues and all the subcontractors. In terms of delivery, 7 ships has been delivered from 6 different shipyards and 6 cruise ships to be handed over in the second half. Actually, 3 have already been delivered in the month of July. In terms of new orders, as you may know that U.S. Navy exercised the second option for the future frigate, that is a very important part of the progress we are building in U.S. with the role of prime contractor for the 6 frigates in the Indonesian Navy. We also reached an agreement with MSC to build the new cruise terminal in Miami. 85% of our revenue base in this first half of 2021 has been represented by international clients and 80% of the production has been carried out here in Italy. If we go to Page 6, we have a brief business update. 5 cruise have been delivered in this period, which 3 in July. What is important to note is that we have a very broad diversified client base, which is certified also in this first months of 2021. You can see we've been delivering both for Viking, Hapag-Lloyd, Virgin, MSC, Holland America In terms of defense, we already mentioned the Indonesian contract and the second Constellation-class frigate for U.S. Navy. It's really important to see how the success in U.S. last year allowed us to go with this very prestigious, very important reference every time we have to deal with new clients. In terms of offshore and specialized vessels, Vard, our Norway -- Norwegian subsidiaries have been providing North Star Renewables with 3 operating vessels to be deployed in one of the largest European wind farms, which is Dogger Bank, East of England. Vard also is about to supply cable repair vessels to Orange Marine. In terms of Equipment, Systems and Services, we partnered with MSC for the construction of the PortMiami, a very important project, which is about to be delivered in the next 2.5 years, while Fincantieri NexTech has been finally launching the operational execution of the agreement reached with Autostrade and IBM. If we turn page and look at the strategic initiatives, we continue to be totally committed on environmental transition. We are collaborating with Enel, Enel X, particularly, to build the next-generation port infrastructure which is key for a new way of cruising. We've been partnering with a company, Faist Electronics to build lithium-ion batteries. That is about -- the production is expected to be launched early next year. And in terms of building hydrogen propelled vessels, we partnered with both MSC, one of our most important clients, and SNAM for a feasibility study to design and build the first hydrogen-powered cruise ship. In terms of sustainable mobility with our subsidiary, Fincantieri NexTech, we partnered with Almaviva to deliver program to support digitalization process in transportation and logistics. And last, but not least, we partnered with Comau from the [indiscernible] group to develop prototypes, robotized steel welding solutions in our yards. We've been investing a lot to provide our shipyards with the state-of-the-art technology, taking also the opportunity to be in a position to invest for that technology. More competitiveness in our yards also in light of our competitive position versus other players. A brief update on ESG activity. In terms of environment, clearly, tackling climate change is one of our key priorities. 100% of electricity needed in Italian and Romanian yards has been purchased from renewable sources. It's also important to highlight how 2/3 of our R&D budget is devoted to clean tech. In terms of social clearly protecting the safety of our people, of our suppliers, of our communities has been a paramount importance. We also implemented 5 shifts in order to ensure productive -- production activity in [indiscernible] but also enabling safety and social distancing. We already mentioned the corporate vaccination program in our yards. In terms of governance, we approved the group tax strategy, which is fully in compliance with the GRI standards. And rating agencies have been appreciating our progresses. Gaia Rating, which is a French rating agency, awarded us a very high score, 85 out of 100. And in this ranking, we are the second one in a sample of 500-plus industrial companies worldwide. Green Star 2021 seal from the German Institute of Quality, and Excellence in Safety and Improvement in Safety awarded by the FMM. That testifies our commitment. And clearly, our commitment is about to stay for the years to come. Next page, we can have a look at new orders. Shipbuilding. We had, as we said, the frigates for U.S. Navy. And then these Somnio Superyachts project, maybe some of them you already read about it. It's an innovative project, and we're really happy to collaborate with this entrepreneur to launch this innovative solution. In terms of offshore and specialized vessels, 3 Service Operation Vessels for North Star. And deliveries, we already elaborated about that. Again, I would like to highlight diversification of our client base, but also diversification of our industrial footprint. You can see that not just Italian yachts, but also Romania, Vietnamese are working and allowed us to have a unique industrial footprint. Next page, about backlog. You see all the numbers. Again, it's important to highlight the visibility that is provided by this backlog. Indonesian projects included in the soft ones. And you can see that both in cruise enables the visibility is guaranteed '25, '26 and beyond, while on the offshore specialty vessels, we have ships and vessels of totally different dimensions, but we are pretty much encouraged by what we see in the market. I will hand it over to Giuseppe for the analysis of the financial results. Thank you.

Thank you, Fabio. [indiscernible] Good morning to everybody. Now to Page 12 on our order intake and backlog. The order intake for the first half of the year came in at roughly EUR 1.8 billion and despite the whole stance that the cruise sector has taken in signing new contracts. During the period, we had approximately EUR 1 billion in orders in the Shipbuilding segment, out of which we can pinpoint the award of the second constellation-class frigate, as we said before. And as Mr. Gallia mentioned, the first residential yacht for Somnio. This is an important order that might signal the opening of a new market for us. In the Equipment, Systems and Services segment, the order intake more than doubled compared to last year. And this is thanks to a new order for -- in the infrastructure business for the -- to build the new cruise terminal for MSC in Miami. And we had an order intake related to the construction of complete accommodation and cabins in the captive business. The backlog, it's, as we mentioned before, EUR 37 billion, including half the soft backlog, EUR 9.4 billion, that includes as well the Indonesian contract that was recently announced. Regarding revenues, we had in the first half of this year, a record high production volumes and this -- let me underline it is a true rebound compared to last year, and we have proven in the first 6 months of the year that the intention and the strategy that we envisaged last year to fight the pandemic was right. And here we are. Revenues grew almost 28%, and I have to pinpoint the growth in Shipbuilding at -- in the naval business, revenues grew almost 50%. And in Cruise, we had a growth of roughly 26%. And we basically recovered all the hours and the revenues that we lost last year during the first 6 months of the year. Also, in the offshore specialized vessels, revenues were broadly in line with 2020 levels. And we partially recovered the volumes lost in the first quarter of this year. Revenues increased as well in the Equipment, Systems and Services 23%, almost mainly thanks to the recovery in the complete accommodation business to supply our Cruise business for cabins and public areas. 88% of the total revenues were generated from international clients. This gives you the true global footprint of the company. On Page 14, EBITDA. And of course, the recovery in production volumes and revenues has had a very positive effect on our profitability levels. We reached 220 -- almost EUR 220 million, and this comes with a margin of 7.2%, excluding pass-through activities. This is slightly higher than the guidance that we gave for the year 2021. This is mainly driven by the Shipbuilding segment, up EUR 91 million year-over-year with an EBITDA margin of 7.7%. And also in Vard offshore, we have a positive EBITDA of EUR 5 million for a total growth of plus 84% compared to the EBITDA levels of last year. If we move to Page 15, we have tried to explain where the growth comes from. And basically, out of the EUR 100 million in growth, almost half came from -- more than half actually came from the growth in production volumes, the recovery in production volumes. And the other half came from the improved operating margin, thanks also to a mix in revenues that's more balanced. The growth has been higher in the naval business than in the cruise business. And you see the benefits also in the EBITDA margin. And of course, this boils down to a positive net result before extraordinary items, EUR 49 million of adjusted profit, against a loss of EUR 29 million last year and of course to EUR 7 million profit after almost EUR 50 million of extraordinary items, EUR 29 million of which related to asbestos claims. On Page 17, the CapEx program still continues and the investments for the first 6 months of the year are mostly related to the completion of the upgrade program of the Marghera shipyard where we are today. Yesterday, we -- today, we delivered also a ship out of Marghera. And the revamping of the American shipyards before the start of the construction phase of the first-in-class frigate for the U.S. Navy, which is envisaged to start end of this year, end of 2021. Net working capital and net financial position. Net working capital increased in the first 6 months of the year of almost EUR 470 million net. And of course, this is related to the production plan. And the increase of net working capital was mirrored also by the increase in the net financial position. You see it's almost symmetrical if you look at the numbers and include, of course, the CapEx. Of course, as we said, we had a quite intense delivery schedule, mostly concentrated in the month of July. And today, we complete -- we can say that we completed the delivery program for the month of July, we delivered 4 cruise ships in total, 3 out of Italy and 1 out of Norway. And as you very well know, with the completion and delivery of the cruise vessels, we cash in the delivery payment that's roughly 80% of the contract value. So we can say and state that the figures that you see for the end of June are stale, in a way, because as of today, net financial position and net working capital, net financial position and construction loans improved a lot. As of today, net financial position went down from EUR 1.6 billion to EUR 1.2 billion and the construction loans went down as well from roughly EUR 1.3 billion to EUR 300 million. So this is the real -- this is -- this more reflects the real situation of the company as of today -- of the group as of today. I'll leave the word to Mr. Gallia for the outlook for the remaining part of the year now.

Thank you. So we're about to close. We would like to give you a brief update regarding cruise markets. All the major operators are listed for we know you're familiar with what's going on. We can say that the worse is over. That is true also when reading their statements. They are, in the end, positive about the prospects for second part of the year in which cruising will resume everywhere around the world, clearly with different intensities. But what is very important is to read what have been stating about 2022 prospects. They are solid ones, both in terms of booking and in terms of prices. Some of the owners are saying that prices in 2022 are expected to be higher than '19, which bodes well also for what is the resilience of this industry. We recently met -- physically met again with our clients and what has been a really positive surprise is the fact that we've been talking about future, we've been talking about a new project, we've been talking about new clean technology get to be put on board and it's about the future, which is very encouraging. And when we have to talk about the last page about the business outlook, we can confirm our guidance, notwithstanding prices in commodities, which are been moving up. If we just compare where we stand today in the summer of 2021 to where we used to stand 1 year ago, the world was paralyzed at the time. Yards have been facing hard difficulties. We have a safety issue, safety priority for everybody, and the businesses was really with a huge question marks. One year after, we can say that our positioning is very solid, it's very healthy, both when looking at Fincantieri per se, but particularly when we look and compare to our other players. We can say that this competitive position is strong because of the diversification of its client base. It is unparalleled. The diversification of the industrial footprint. We can tap skilled labor forces in other countries where other players cannot, and that allows us also to have industrial flexibility. We have a diversified business portfolio. We have defense, which is clearly benefiting from the work done and the extraordinary success in U.S. last year. We've been investing. We've been investing a lot, as you've been seeing before. Investing is about having more efficient yards, it's about instilling, inserting in yards, state-of-the-art technology sooner than others. It's about technology for healthier shipping or more respectful shipping in the future. It is about also clean tech. And that will be clearly looked through different areas of applications and that allows us to be very committed on sustainability. Therefore, we look at the future with trust, confidence and ready to take the opportunities we have ahead of us. Thank you, and we are ready for questions.

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

I have 3 questions. The first is on net debt evolution. Can you give us a rough indication of the expected CapEx by year-end? And if I'm not wrong, your net debt guidance is not including the finalization of the Indonesian contract yet. Do you expect the finalization might occur by the end of the year? And if can we expect a positive impact on the net debt compared to your guidance? The second question is on the future business opportunities in the Naval segment. When it is expected an outcome for the Greek tender? And very last is our raw materials. I understand that cost inflation is not impacting your margins and not very much so far. But what about 2022 and beyond, do you expect that this could be an issue for the future?

Monica, Dado speaking. On your first question, net debt evolution. First of all, Indonesia, well, we are guiding -- we keep the guidance for year-end for net debt levels in -- broadly in line with last year's. Indonesia, of course, is not included any effect coming from Indonesia. We do expect the contract to become effective by year-end. Of course, they have to complete some steps, including the finalization of the financing. What we have to say, and this month of July is -- offers a crystal clear evidence of this. We have very intense delivery schedule also next year. First, cruise vessel will be delivered end of January of next year. And it is a sizable cruise vessel with a sizable cash inflow. Therefore, I mean, all in, we see the net debt situation is healthy and very, very, very positive. The numbers you're looking at -- again, the numbers you're looking at as of the end of June are stale. Situation is completely different. On the raw materials. And of course, there is volatility and there are price increases going on. But we have proven also with the results of the end of June that we have the opportunities and the scope to offset and recover the potential price increases. So for 2022, as we look at it right now, we are pretty confident.

Just a follow-up...

Yes. On Greece, on the Greek project, I mean it's still -- we're still in the context -- or in the contest, of course, it's -- there are many, many competitors. We are very well positioned because we have proven to gain leadership in the surface vessels, notably in the FREMM frigate product. But we'd rather not comment, and we wait cautiously, okay?

But let me elaborate a little bit more regarding this. We -- clearly, the company is concentrating in having the naval business grow, and we can definitely leverage the success of our FREMM, our multi-mission frigate. And we know that the market is a growth one. That is expected to grow for the world. It will be growing more in Asia, less so in Europe and in U.S. But frigate is expected to grow in multiple of the growth rate represented by defense expenses and expenditures. And we're a leader in this field. And normally, when we have a dialogue with our clients, which is the [indiscernible] Ministry of Defense in other countries, this is a very respected product. And clearly, we know that all these negotiations are not easy ones, but we're well positioned, and it's important for you to know that the market for frigate is expected to grow in excess of 6% compound annual rate for the next 10 -- at least 10 years. That is according to studies and researches of anybody. So we're clearly keen to exploit the competencies we've been building over the years and clearly capture part of this growth. As far as the defense business grows, we know that these businesses are not equal. Profitability is different. And interestingly, the working capital cycle is different. So the more we grow on the defense, the less will be indebted. And by the way, also on the cruise business, profitability today stands at different level versus where it used to be. Also because of investments, our yards are more efficient than before. Our production methods, processes has been improved by our own people. Just compare Fincantieri positioning versus the ones of our competitors. And that tells you we are probably the only one who can continue to invest for the future. To exploit this opportunity in a clearly complicated uncertain environment to improve even further our ability to perform. And you can see also how that will be reflected in the composition of our both P&L and balance sheet with respect to the question you pose regarding nonperforming loans. Our raw materials, Giuseppe has already elaborated. We don't control them. We cannot hedge steel. We can do something on copper. But clearly, we have a duty, which has continued to be committed, focused and being more efficient and being ready to improve our profitability, which allows us also to compensate for some unexpected hurdles, which can materialize down the road, like the ones which just materialized on raw materials, but we're there.

Okay. Can I just a short follow-up? Do you have a rough indication of the total CapEx spending for this year?

Well, the investment plan is an important one because in the last few years, we've been invested to in our Monfalcone yard in our Marghera, but that is true, I would say almost everywhere else. But very importantly, this year, next year, we will be ramping up investments in U.S. for the production of our U.S. frigates. In last year, we invested more than EUR 300 million. This year, it's going to be around EUR 400 million. Next year, it's going to be probably lower. But it's important to expect that this is the curve, and we're expecting to reach [ zenith ] the hopefully this year. And then it should go down, go down to definitely lower levels even because these investment cycles takes a year, but also luckily, last years when we invest for equipments when we make some marine works in our yards that used to last for many, many, many years. Therefore, when you look out the plan and also the target that Mr. Bono has been providing you a few months ago, you can count on [indiscernible] variables that investment curve will definitely move south.

The next question is from Emanuele Gallazzi with Equita.

Three questions from my side. The first 1 is on the Cruise business. Can you comment more on the dialogue and negotiation that you have with cruise operator? Just to understand the general mood now and if you still expect orders to resume beyond 2023? The second one is [ ESS ] on the division. It ended with a margin of [ 7.7% ] in the first semester. Can you comment on it, what do you expect for the full year? And what could be a reasonable profitability in the medium term for division? And my last 1 is a very quick 1 on the business plan. If you can just give us an update on when you expect to disclose the new business plan?

Okay. Let's start with the first one. Thank you for the questions. Cruising, you mentioned the name mood. The mood is a positive ones. All our clients, the 3 major, Americans and the Swiss ones, are thinking about future projects because this industry is considered to be in a secular growth phase penetration of cruising holidays is still low, and it's considered to be growing in the years to come. You have different penetration rates from U.S., which is around 4%. You have 6% in Australia. Europe is lower, it's more between 2%, 3%, 4%. Then we have a big question mark on China, which is less than 0.5%. These holidays are now considered to be among the safest way to spend time with your families and friends because the protocols which have been inaugurated by MSCs, particularly the strictest one a few months ago are basically allowing tourists to live in a kind of a bubble. And the fact that bookings are resuming to a very sustained rate is very encouraging. Tourists today are spending much more than they used to spend 2 years ago. And this is a pattern which happens -- if you talk to hotel operators, if you talk entertainment operators, they would tell you the same thing. Clients who want to enjoy after a very dark period. And so what's about the future? We are not expecting any new orders this year on cruising even though we captured some new projects. We are not expecting new orders next year. But who knows? If things resume, we know that new ships are more efficient in commercial terms, and therefore, in terms of profitability for owners. But above all, everybody is talking about how can we build ships, how can we operate ships, which impact to a lesser degree on the environment. And this is about technology and this is about how you project, how you team up with your clients in order to provide incredible products, like the ones we've been delivering in the last few days. The last 1 was last night, is amazing product. Our owner -- our clients was really enthused by the product. And we have to say that we've been delivering that through the pandemic. And it also tells you how the Fincantieri is strongly motivated. I was cohesive in order to capture this moment will be improved through hell, but we think that with all the uncertainties we have and we know the delta variant, and we know this uncertain world, we're definitely well position. Therefore, this is a secular growth sector. We have roughly 40%-plus market share. We are the technology leader. We are the environmental technology leader. And so we think we can continue to work well and partner with our clients to build beautiful vessels, capitalizing on improved processes -- industrial processes, new technology and progressively totally revamped shipyards. In terms of the other segments, you know that they are made up by a number of other different activities. Some of them are basically working for captive clients for profitability is less meaningful. But clearly, everything has been regulated at market standard prices. And I would like to mention that the technology division, NexTech, is still a small one. But to me -- to us, is very meaningful because it boasts great technologies in certain fields. We're small, roughly EUR 200 million revenues, but growing nicely with a lot of respect being conquered on the market. Margins here are clearly higher. So if we managed to grow as we are expecting to, that will give a boost to overall profitability. In terms of infrastructure, we continue to stick to a very selective approach. So we're going to stick to what you already know, make it better. We've been putting on board new competencies, new skills, which allowed us to struck good deals as the ones for the terminal or the work we've been doing, and there are other projects we're about to participate, but it will be a very selective approach. Then we have all the design of furniture, which is basically a captive business. We have good opportunities also outside of captive business, but that has to be developed. Therefore, we'll be talking about it maybe 1 year out or a couple of years out. But therefore, it's important to note these divisions are smaller, but it will contribute to the growth of the company. And regarding business plan, so far, we're working with the guidance we gave you, and we'll keep you up to speed.

[Operator Instructions] The next question is from Gabriele Gambarova with Banca Akros.

The first one regards again, Indonesia. I was wondering if you could share with us a few more details about the value of the contract or the delivery cadence of the ships of the vessels? The second one was on CapEx. I understand that there is this peak of investments this year and next year, especially in the U.S., and I was wondering what could be, let's say, in the medium term a normalized level of investments for you? And the third one was about the cruise market. Your clients scraped the 10s and 10s of ships even 20 years old. I was wondering if you have an idea of how many -- how much capacity in terms of [ berths ] was lifted from the market through this scrappage campaign? Because if the market -- assuming that the market comes back to a normal level, there might be -- I'm wondering if there may be somehow a capacity constraint at this point?

Thank you for the question. In Indonesia, we cannot disclose, but I think you can gauge the order of magnitude when comparing to other public information. But I believe, and we all believe that this is a very important project that we're going pursue and deliver in the next few years. Regarding investments, so already being elaborated about investment curve, investment cycle, the purpose of these investments. Let me be very clear, cash flow will more than compensate for the investment plan that we are about to put in place. We said very clear that 2021-'22 will be very intense and very cumbersome in terms of investment plan and curve, but we are expecting that this will go down. And by the way, even in these intense period, our cash flow will cover it, and that is very important. I will not go back to what I said before, but having more efficient yards allows us to have higher EBITDA, I put it very bluntly, okay, and allows you to be more competitive, more flexible when we have to cope with a very distinguished competitors. So that is really important. And cash flows will cover investments. Regarding scrap, there are some public figure, I will go by heart because I don't know all the exact statistics, but the largest operator, which is Carnival, has been scrapping roughly 19 -- pardon, have been reducing the fleet by roughly 19% more or less 10 have been sold, 9 have been scrapped. And that means reduce -- overall reduced capacity. There are some minor operators which have been buying the ships. Actually, also hope to refurbish 1 of them with our services division. But you know that the last year, they had to survive. And capital market provided the cash in terms of both equity and loans and bonds to go through hell. Today, they are refinancing themselves. You can see that almost every month, you have the Carnival, the Caribbean, the Norwegian and the other ones who are announcing new terms and conditions for their loans. And every time they save from EUR 90 million to EUR 120 million, EUR 130 million in terms of the cost of this debt. Therefore, if next year, situation stabilizes in terms of pandemic and the scenario becomes clear, we cannot exclude that this positive thinking, we have been recording, we've been physically recording when having discussions with them in the last few weeks, can bring to new projects and our scenario that orders will resume in '23. So we see if things will be faster and better, maybe there can be some positive surprises. Otherwise, we stick to our scenario, which is a very conservative one of new orders in '23, no sooner.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

So if there are no other questions, we thank you. And on behalf of Mr. Bono and Mr. Dado, we thank you for the attention, and we look forward for the next set of results. Thank you. Bye-bye.

Bye.

Ladies and gentleman, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.