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 9 Months 2021 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.

Thank you, and good morning to everybody. I'm here with Giuseppe Dado, our CFO, and team to present to you our third quarter results. We can start on Page 5 of the presentation deck with the executive summary. Let me say that these are -- represent a very solid set of results. Revenues are up by 28% or about EUR 4.5 billion better than -- and was in line with expectations, with EBITDA going up by 65% with a margin of 7.3%. Net debt, as indicated in previous presentation, is in line again with our forecast, which is slightly north of EUR 1 billion. Backlog and therefore, visibility, long-term visibility is EUR 36 billion, represented by 110 units. And we can confirm our 2021 guidance. I would also like to take the opportunity to say that the company has been managing, I would say, effectively this pandemic. And even in current circumstances, behavior in our yards has been very conscious. Therefore, I would like also to say that this set of results highlight what is the resilience of our business being able to do in the face of the pandemic. We can move to the next chart regarding business update. It is -- as the chart somehow highlights, our performance has been resilient and positive across all of our segments. We've been delivering 4 units in the third quarter in the cruise sector. As we speak, there is a delivery of Silver Dawn in our shipyard in Angola. But you can also see from this page how diversified has been our delivery platform. In Defense, we are being running up to speed with all our major commitments. Qatari Minister of Defense has been in the launch of the third corvette. And the delivery a few weeks ago of the first corvette, of the Al Zubarah class. Program for Italian Navy is progressing according to plan, while also in U.S. Navy, we already commented about the second half [indiscernible] awarded -- with the same awarded as few months ago and has been MoU in Europe with Navantia. In Offshore and Specialized Vessels, again, as somehow was evident in the last few months, the offshore wind sector is going in the right direction with 8 SOVs in our portfolio according to official statistics. So we've been becoming a market leader in this specific area, while on Equipment, Systems and Services, we already commented about initiative in Miami for MSC Cruise terminal and the progress by our tech subsidiary, Fincantieri NexTech, with the acquisition of IDS Group. We've been also continuing our investment plan in our Italian yards and in our American U.S.-based yards and investing in technology. The group evolution recorded in the past years has been quite significant. We diversified both in terms of products, in terms of clients, creating synergies across different geographies and business units. Investment plans allowed us to be more competitive, and the increase in technology investment is becoming more and more a feature of our group. We try to extend our skills, our competencies and try always to get synergies for what we do, trying to serve our clients better and focusing more and more in higher-margin solutions while keeping a strong focus in best-in-class execution, operations, integration capabilities, and adding to this, technology in order to become what our field calls a tech platform. Page 7, we have a sustainable strategy page. It is important to highlight that there is a tireless effort to become a model in our industrial work. We've been believing in this responsibility for many years. We can say that sustainability is somehow embedded in our culture. Somehow, this is also certified by the ratings we have been given. For example, by V.E., we are in an Advanced range, and we ranked first among our peers this year. You can also read the other ratings we received by CDP and from others. We want to extend the number of key rating firms in order to be able to communicate in a more effective way with investors and all stakeholders. Clearly, sustainability is about culture, behavior. It's also about actions and investments. For -- we'll continue to invest because part of this -- for our companies, I would say, for the whole economy and the society, it's about also investing in technology and innovation. This is really a key part of our DNA, and we continue to do that directly and also through different partnerships. You can see that we have agreement with the major players for hydrogen, for green hydrogen, decarbonization. And it's also important to highlight that we have a day-to-day dialogue with our key suppliers, particularly with regard to -- particularly with reference to propulsion. And you know that this is a key part of our business. We have a number of initiatives, we have the opportunity to comment in the months to come, but it's important to highlight how deeply committed the company is. We can flip to Page 8 and see new orders and deliveries. I would just highlight the fact that new orders reached EUR 2.3 billion. You can see what is displayed between Shipbuilding and Offshore and Specialized Vessels. And we've been delivering 13 ships this year. These are coming from 10 different yards and 3 different continents. And it's important -- again, I'd like to highlight diversification and the fact that all our -- components of our industrial footprint are efficient and delivering according to schedule. At Page 9, we have the backlog development. Again, we can confirm the long-term visibility, the diversification of both client and product base, which is really essential for a lower and safer risk profile of the company. We recorded no cancellations. And you know how important that is also for our financial profile. And it's also, in closing my initial remarks, important to highlight that after the pandemic, our clients, particularly in the Cruise segment, are in much better shape, and the conversation regarding new projects resumed, not for new orders but conversation regarding new projects, which amounted to -- a different environment. I will hand over to Giuseppe for financial results.

Okay. Thank you, Fabio. Good morning, everybody. If you go to Page 11, we start commenting on the order intake and backlog. In general, the numbers really signify the full recovery of the business of the whole group. We had no order cancellation, which is a significant achievement. And on the back of the COVID-19 pandemic, we were able to preserve -- fully preserve the backlog despite the challenges of the pandemic. In the first 9 months of 2021, the order intake came at EUR 2.3 billion, up 25% year-over-year with a very positive impact, as we mentioned before, from the Offshore and Specialized Vessels, the Equipment, Systems and Services and also the Shipbuilding as well. In this segment, whilst we did not have any new orders for cruise ships, we keep maintaining a good order intake coming from the Defense business. Our U.S. operations were awarded the second FFG-62 class frigate, and we had further orders. Total backlog is approximately EUR 36 billion, including EUR 9.4 billion in soft backlog. This is thanks to the recent achievements in Defense, as we said before. Long-term visibility. Again, we got the opportunity to shape a medium-term investment plan to create production efficiencies, whose results are starting to materialize, and you see this in the following numbers. If we go to revenues, first 9 months of 2021 has seen now a strong revenue performance driven by exceptionally high production volumes. We had roughly 12 million -- in excess of 12 million production hours in the shipyards. This is despite safety protocols in place. And this comes on the back of the 3 million hours that we lost, as you remember, in 2020 due to the pandemic. Given these production volumes, revenues closed at EUR 4.5 billion, excluding pass-through activities, which were EUR 235 million. Revenues excluding pass-through activities grew in excess of 28%, which Shipbuilding is contributing to most of the growth. And within Shipbuilding, we have the Cruise business growing almost 26% and Defense 36%. Cruise still accounts for more than 50% of the total revenues, whilst the -- in the Defense business, we moved from 21% to 23%, and this also has a good, although slight, impact on margins. The reduction in Offshore and Specialized Vessels compared to, say, the end of 2020, we grew 15.3%. We are recovering the volumes lost in the first part of the year. Also, in the Equipment, Systems and Services, we grew almost 30% for all the operations, and it's supporting the OEM business in Shipbuilding. Going to EBITDA. EUR 330 million, that's an exceptional growth with respect to last year, 65%, EUR 330 million at 7.3%. We improved from 5.7% to 7.3%. And this is higher than the guidance of around 7% EBITDA margin that provided -- we provided for year-end. In this respect, the Q4 marginality is expected to be in line with the previous 2 quarters. Therefore, we are confident that we can reach over 7% of EBITDA margin in the year-end. This very positive operating result is mainly driven by the Shipbuilding segment with an EBITDA margin of 7.6%, especially thanks to the very positive performance in cruise deliveries. I remind you that we delivered the 3 vessels in the month -- in July. Also, we had a positive contribution from Offshore and ESS. In Offshore, in particular, EUR 6 million of positive EBITDA, we are reaping the benefits of the turnaround strategy that we have implemented in the last -- starting from 2019, and it sees [ Vard ] repositioning in more promising markets, on which we have already a leadership position. Well, Slide 14 shows you better than my words where the recovery came from. And the EUR 130 million more that we did comes -- we can split it exactly in 2, a part for -- roughly 50% of it, EUR 67 million, comes from the recovery -- the full recovery in production volumes, with most of the contribution coming from Shipbuilding. And for the other half, in improvement in operating margins, and this comes from the fact that -- as we already said in our business plan back in our '18, '22 business plan, right now, we are working on ships that were acquired at very good prices, first. And thanks also to all the technological developments and the investments that we did in the past years, we were able to perform better than expected in the construction activity. This is notwithstanding the pandemic. And this clearly, clearly shows in our growth in EBITDA. Let's move on to Page 15 on the CapEx. EUR 258 million, up 50% year-over-year. And this comes mainly from the scaling up of the United States and the detail of the scaling up of our European shipyards, notably the 2 main cruise shipyards, Marghera and Monfalcone, in order to compress lead times and improve efficiency. And this first 9 months of 2021 show that the investments from this perspective are paid off. Net working capital and net financial position. Net working capital is negative at EUR 398 million, going down with respect to the beginning of the year. And this is mainly driven by the deliveries that we did in the third quarter. Net debt is stable with respect to the end of last year and improving with respect to the levels we had in June. Remember that for first quarter and June of this year, we said that net debt levels would have reached a peak. And from there on, we're going to see an improvement. And the improvement is already ongoing. Net debt is roughly at the levels we see for year-end. We also had an improvement in construction loans, which were EUR 976 million was -- we reimbursed roughly EUR 350 million of construction loans. We see these debt levels going to year-end with a growth in construction loans. So -- because we need to finance the very, very -- the numerous delivery plan that we have for the first 6 months of 2022. Notably, we have the first delivery at the end of January of 2022. As with the outlook, I give the floor to Fabio for final words on how we see the end of 2021.

All right. Thank you. Page 18, we have the usual update on Cruise being a large contribution to our business. More than 200 ocean ships are back into operations as of the end of October. This represents roughly 60% of the global fleet. Pent-up demand is reflected in very solid bookings for 2022, and occupancy level, even this month, is constantly improving. Some numbers can be captured also by the results of our clients, for example, at Carnival, Norwegian, Royal Caribbean. And interestingly, they all point to increasing activity for the Christmas season and particularly positive outlook for 2022 in terms of booking, in terms of price. One of this company publicly stated that 2022 pricing is going to be better than '19. And this somehow is reflected also in the capital markets valuation, both for equity, for the cost of financing and their CDS. So we're still probably not really out of the wood with this pandemic. But clearly, the outlook is totally different. And therefore, we have a positive attitude towards activity. Page 19, our final page. As we already said, we confirm our 2021 guidance. That is due to the stronger effort and commitment done by the whole company, which allowed us to gauge -- to capture efficiency improvements. And this is also due to the investments we've been putting in place. We're expecting revenues for 2021 with a growth in the range of 25% to 30% with an EBITDA margin north of 7%, and with the debt in line with 2020 levels. We believe that the backlog preservation is a strong feature of our company, I would say, quite unique. And we can also say that commodity pricing is going to be mitigated by the positive effect of planning and designing processes, purchase activities and strategy and by important CapEx plan we've been putting in place with the addition of an increased focus on technology. Regarding ESG, we'll be more detailed in the year-end presentation in a few months. But we strongly believe that technology will be an enabler of both less impactful ships and differentiating factors when having a dialogue with our clients, keeping a focus on reducing emission while raising energy efficiencies. We're working on specific initiatives. We will continue to promote growth, enhancement and training for our people with particularly focus on inclusion and diversity. And clearly, our tireless effort to reduce CO2 and other polluted emissions will continue to characterize our actions. I will stop here, and we are happy to take your questions. Thank you.

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

I have a few, but I'll try to limit to maybe 2 or 3. First of all, goodwill set of results, you maintained the guidance for 2021. As we look at the 2022, I think the main uncertainty, I guess, is raw material cost inflation. Can you give us a sense of whether there could be any impact on margins in 2022? Or maybe can you give us a little more color on the timing of steel purchases and whether you have already started purchases, raw materials, whether you're going to do it in one batch or is going to be deferred throughout the year? So any color around procurement, that would be great. Also, on net debt. I believe you mentioned deferrals will likely to be repaid in Q4 and also throughout 2022. Maybe can you give us a bit more color on the timing of those and potentially how the net debt could evolve?

Sorry. Can you repeat that? We didn't get you, sorry.

Okay. From the beginning?

No, no, no. Just the last part regarding deferrals.

Yes, about deferrals and the evolution of net debt in the next few quarters into 2022, we know it's going to be a step in 2021. It's going to be in line with 2020. But I was wondering, in 2022, if you can give us a bit more color on how net debt is likely to evolve throughout the year.

Okay. Regarding the first question, the comment we have to make about that is that as of today, with the information that we have, we're confident that we can offset decrease in raw materials, so let's call it this kind of inflation, with the actions we already put in place. And we can confirm that this is according to what are the estimates we have on -- regarding pricing evolution. Steel for us is an important copper, while we are less impacted by energy pricing. And by the way, we have purchasing policies which allowed us to absorb a part of the increase in raw materials. And as I said before, the number of other actions we've put in place and regularly put in place, and clearly we increased the intensity of these programs in order to be more and more competitive, working on processes, organizations and technology. And clearly, we are also reimproved by what has been done in previous years. I will stop here, and Giuseppe, you can take the second one.

Yes. Net debt, I gave you some hints before during the presentation. But we confirm that -- well, the levels we saw end of the year and the first 6 months of the year are peak levels. We are directionally pointing towards deleveraging. This is a tale of the recovery of the deferrals we gave to our clients in order to support them during the pandemic. We have roughly -- we had -- we put on the table an effort of EUR 900 million, as you remember. But the residual part is roughly EUR 300 million right now. So on that matter, we are, again, directionally going towards the full recovery of these values. You can see already what we mean when we say deleveraging. Deleveraging is already ongoing right now because peak levels were reached first half of the year. We're going to close the year with roughly the same debt levels we had as of the end of 2020 but with a much higher EBITDA, and as I said, with a very intense delivery program ongoing next year, in particular, in the first 6 months of 2022 with the first ship in January. And also the average size of the ships we are going to deliver next year is much -- we are going to deliver one more -- one ship more than this year. But also the average size is higher in terms of gross tonnage. Therefore, in terms of price, therefore, in terms of delivery installments, therefore, in terms of the effort that we have to put right now to finance them, okay?

Okay. So should we expect the working capital to improve further next year?

Well, with the improvement of net debt with deleveraging, yes, net working capital should improve. And of course, the things I'm saying do not factor in the advanced payment come -- that will come when the contract with Indonesia will become effective. Okay?

Okay. And just one point on the previous question on steel purchases. Have you already started making those purchases for next year? And are they going to be staggered throughout the year?

Are they going to -- yes, we are already looking at the market. We need to buy steel. Point is that, as Mr. Gallia said very clearly before, we don't see the cost inflation bending our trajectory for the next years. We are very confident that we can offset these cost increases first. We also do not see any major disruption in the supply chain when it comes to timing of the supplies and so on and so forth. But on this matter, we are protected from a contractual standpoint. So of course, we monitor very carefully the situation, but there are no major concerns at this point in time. That really -- let me stress this once again. Operationally, we are working full steam very well, very efficiently with good results.

If I have time, just last one. There was no order from Cruise in this quarter, I guess, was well expected. As we look at next year, you have conversation with cruise operators. Is there any chance we could see orders in Cruise in 2022?

I don't know -- on orders in the Cruise segment, we maintain a cautious stance here. We're going to see -- there are some clients that are talking about new projects, but it's really too early to say.

The next question is from Monica Bosio with Intesa Sanpaolo.

The first one is on the third quarter, did you release any provision in the third quarter? And if yes, can you please quantify it? The second question is a follow-up on 2022 profitability. Given that you are confident to offset the raw materials and considering that there are no major disruptions and considering the better pricing, I know that it's premature, but do you believe that there is room to improve your margins by 100 basis points to 8%? Or would you be more prudent on the back of the cost inflation scenario? And the very last question is on CapEx. CapEx has increased for this year. What about 2022?

Monica, you're posing too many budget questions.

I know, sorry.

Budgeting process is ongoing, but it's premature to comment. For the moment, you have to live with our recent confidence on next year. Therefore, I leave it for other conversations and for the next conversations, let me say. On Q4 of 2021, we see a good quarter coming in. We maintain the guidance even though we are clearly saying that EBITDA margin will be slightly above 7% for year-end. And on provisions coming from the delivery of cruise vessels, of course, there were some provisions that were released given the very good operating performance that we have had and we are having right now. But we do not specifically [ mute ] the numbers that we have missed. But delivery of 3 big-sized cruise vessels with a very good performance means very good results. So on very good releases, let me say.

Okay. I will skip the budget question over the next months. But as for the Naval segment, can you give us some -- any flavor for your MOU with Navantia? Does it mean more, let's say, proactive approach toward the consolidation of the Naval segment in Europe? Or is there some project which the 2 companies can cooperate and get new awards?

Well, the agreement comes on the back of the 2 companies, ourselves and Navantia. I'd reference shipyards for the respective countries and also European level. The target of the agreement is to assess any future opportunity for the national navies but also in the framework of the development of the European programs like the European Patrol Corvette. And that's the rationale of this agreement.

Okay. So the European Corvette could be the focus for the players in the tech over the next months.

Among other initiatives, this is the first -- of course, we mentioned it because it's -- it has been already formalized and launched at the European level. It's the first in line of many others that could come in the future, again, for the national navies and at European level.

The next question is from Matteo Bonizzoni with Kepler.

I have 2 questions. The first one is related to the slide on Page 12 of the presentation in which show that, clearly, the weight of the Naval business in the 9 months of the year increased compared to last year to 26%. Last year, it was 21%. The question is if you can provide a rough indication of how much the Naval business could weigh in 3 years as a percentage of total. I guess this percentage is going to further increase, thanks to various contracts which you have taken, including the last one in Indonesia. And also, you have never disclosed in your account EBITDA margin delta between Naval and Cruise, but I remember that in the past, you commented that Naval is around low double digit, while the Cruise business is not more than mid-single digits. Is it still true despite the reshuffle of your portfolio in Naval with the addition of large noncaptive contracts like U.S. -- let's say, U.S., Indonesia, then you're digging Qatar in the past. So the question is just to understand if the margin delta between Naval and Cruise is confirmed at several percentage points. And the last question is also related to Naval. The timeline for the closing of the contract with Indonesia, I think it's more likely first half next year than by year-end at this point. And if you can confirm that the advance payment related to this contract will be at least 10% of the nominal value. Hello? [Technical Difficulty]

Ladies and gentlemen, please hold the line. The conference will resume shortly. We lost the connection with the moderators. The conference will resume shortly. Thank you.

Hello? Matteo, are you still there?

Yes. Yes, I'm here.

We had some connection problems. So we were -- I was -- actually, I answered to your question, but I was not aware that the line was down. In any case...

No, I think nobody heard it, at least myself. So I think...

Going back to your questions. We do expect the share of the revenues in Naval business to increase. And this is embedded already in our backlog. Of course, and we -- I mean, I reiterate the message that the margins are somehow higher in the Naval business, as we shared in the past, in the high double digits. Whilst at the same time, margins -- EBITDA margins in Cruise show a very good pickup, thanks to the improvements that we are realizing right now and also thanks to the fact that, as we said many times also in the past years, the ships were acquired in -- starting from 2015 onwards were acquired at very good prices, and therefore, at very good potential margin. The good news is that these potential margins are becoming actual margins as we are delivering those ships. And these were the questions on EBITDA. I'm sorry, but on -- can you repeat the second question that you asked?

Yes. It's an update on the finalization of the contract with Indonesia...

Yes. So yes, we can only say that whilst we target at the end of the year, probably will be most likely in 2022 as we are quickly reaching the end of 2021. We are working -- the teams, the Fincantieri team and the Indonesian Navy teams are already working together. Our people are in Indonesia right now, but we can't expect it to be closed by year-end.

Let me just add another comment. When we look at Fincantieri, we see a design manufacturing company which is somehow showing a unique positioning. I mentioned several times -- we mentioned several times the word diversification. Diversification is very, very important in this business. We're not depending on just one engine. And by the way, Cruise, which has been through hell the last few periods, has been recording very positive performance in absolute terms, but even more starting -- when compared to competition. Our Naval business, this is second and growing part of our business. And clearly, all the work which has been done for years for our National Navy has been even strengthened in a very, very visible, significant way, thanks to the awards of the U.S. Navy contract, which allowed us to have a different positioning versus the past, clearly, in competitive terms. We're also exposed to a growing part of this Shipbuilding business, which is represented by the trend in offshore wind farms. As you all know, renewables would be a key part of this net zero emission global target for all of us, and we are there in a leading position. Therefore, we somehow reinvented our company, which is Vard, shifting its production from oil and gas to wind. And by the way, wait, probably all will be needed for sometimes. And therefore, we still have capabilities with that respect. Plus fishery, plus aqua farms. And if you look at these sectors or specific sectors, you can see that the growth characteristics are quite positive. Therefore, Fincantieri can boast diversification, scale, scale and financial resources to invest, to innovate. We'll invest in technology and to have a first-class network of partners with whom we can sit down and talk and be at very edge of innovation. This is very complicated business in which, by the way, we can boast a global leadership. Therefore, we are exposed to some growth sectors like tourism, which has shown its resiliency once again, 9/11 crisis, different crisis and now the pandemic. But you know that like any researchers, you can see that tourism is there and that this kind of tourism, cruising, is performing -- is expected to perform better than average. Defense -- and by the way, I'd like to highlight again that we're a leader in the frigate segment, which is probably the highest growth part of defense investment. And again, we talk about wind and renewables. Therefore, when we talk about our different pillars of the business plus the extension of our skills, which are all deriving from what we do in our core business, that's nothing strange. It's just the extension of what we do in our ships. So we think that is a competitive position. It will allow us to be competitive also in the future.

The next question is from Gabriele Gambarova with Banca Akros.

The first one is on Offshore and Specialized Vessels. We touched this point a few minutes ago. I was wondering if you have any visibility on the possible, let's say, margin evolution for this business, which now is at 0 margin basically. So if -- basically if the offshore offers better opportunities in terms of margins. The second one, second question is on Naval. We saw that Greece chose another group for its big frigate program. But after a few weeks, you showed a certain interest in rescuing the Greek Elefsis yard. So I was wondering what's behind if you see other opportunities on this market. So basically, what is the rationale of this move, of this possible rescue of the Greek yard? And the third one is a little bit more strategic. If you want, I saw that around 1 week ago, the Chinese GSI yard delivered a very big ferry boat, 70,000 tons, 550 berths to an Italian client. So it's almost a cruise ship, a small one, let's say. So I was wondering if you see any, let's say, threat or any evolution in the competitive landscape in the cruise ship market and specifically from China.

Okay. On Offshore and Specialized Vessels, the -- of course, we are not happy with the EBITDA levels that we have right now. But still, we are, let me say, starting to enter this market. We acquired 7 plus 8 vessels this year. The benefit of these other acquisitions in terms of margins are going to start to flow in [ from '23 onwards ]. We say we do not have a specific guidance on this, but the target is to improve and to reach possibly the current EBITDA levels that we have in Shipbuilding, okay? But this is long-term strategic targets. On Greece, of course, the fact that Greece has awarded the contract for the frigate to Naval group, that does not stop us to discuss with the Greek Navy, with the Greek government of any other further opportunity. And the agreement that was announced 2 weeks ago falls within this attitude in this process. We want to see other things, too. Greece does not need or does not want only the frigates, I mean, to put it this way. The ferry boat and the competitive landscape, we do not see any evolution as of now in the competitive landscape when it comes to cruise shipbuilding. We have a joint venture in China that's performing well and almost according to schedule, notwithstanding the COVID-19 pandemic. But as of now, we don't see any change. And the ferry -- you saw the ferry was delivered, yes, it was a big, big ferry. But size does not close the gap between ferries and cruise vessels. Still, there is -- and I'm not a naval engineer, but I can tell you -- and you should come and visit our yard in Monfalcone, where you will be able to show how complicated is the production process and how complicated is the product in itself. Okay?

Okay. If I can, a very short follow-up. Given that, let's say, the COVID issue is almost, let's say, a thing of the past and that your, let's say, perspectives are somehow improving, do you think you will -- do you plan to have, I don't know, a Capital Market Day or, let's say, an occasion, an event to do -- let's say, to speak about the company, the perspective, the plans, long-term plans or something similar?

We do plan this. But circumstances as -- have not been, let me say, beneficial for such a plan at this point in time. Right now, you said it right, we are moving out of the crisis notwithstanding the recent increase in daily cases. We keep our finger crossed, but things are working very well. And in due time, we will organize and set up an effective way to communicate our direction and our strategy and the future of the company.

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

Well, thank you very much.

Thank you.

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