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

Good morning, ladies and gentlemen. This is the Chorus Call conference operator. Thank you, and welcome for joining Fincantieri Half Year 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Folgiero, Chief Executive Officer and Managing Director. Please go ahead, sir.

Good morning, everyone. Thank you for joining us, and welcome to Fincantieri Half Year Financial Results Conference Call. This set of results shows once again a solid top line with revenues up by -- sorry, 4.5% to EUR 3.7 billion. This is line with expectations and with development of the backlog. EBITDA margin stands at 5%, in line with 2023 target and improved when compared with first half 2022 results, 2.6% and fiscal year 2022 results, 3%. 2022 was, in fact, impacted by the inflationary pressures one-off items and the lower marginality, especially in the infrastructure business. In the first half 2023, we recorded a positive adjusted net income at EUR 3 million, before extraordinary or nonrecurring asbestos-related litigation costs. Net loss ends up at EUR 22 million. Order intake came in at EUR 2.1 billion with a positive contribution from wind offshore. During this period, the U.S. Navy exercised the option for the fourth brigade while just a few days ago, we received confirmation regarding the construction of the third new generation submarine for the Italian Navy. We have now a total backlog of almost EUR 33 million securing 4.4 years of work when compared with 2022 revenues. Net financial position landed at EUR 2.8 billion, in line with cruise delivery schedule with a total of 4 units expected for the second half. Now just 3 for the rest of the year, since just a week ago, we delivered the first of 4 luxury ships for the new MSC brand Explora journeys, EXPLORA I. Giuseppe will give you further details on the main financial and operating performances of the period later on. Let's now move to Slide 7 for some business updates. Our operating performance has been consistently positive throughout the first 6 months of the year. Indeed, the group's shipyards are running at full speed with 11 vessels delivered from 8 shipyards, highlighting the global reach of our operations with local capabilities. Offshore business accounts for 7 units delivered out of these 11. 11 units were ordered, resulting in a total of 88 vessels in the period. Noteworthy mentioning that just last Friday, the order for the third year future summary become fully affected. We confirm our tireless effort to become a model of excellence in the sector already well recognized at international level. During the first semester, Fincantieri has signed some agreements with [indiscernible], such as FCD and UniCredit in order to promote awareness and improve the ESG profile of its Italian suppliers. As a result, suppliers with better ESG performance will be able to benefit from a better rating, accessing more advantageous financing terms. Current finance aside rating of AA to Fincantieri now among the 50 strongest Italian brands. We also received the Top Employers Italy 2023 Certification from the Top Employers Institute. All ratings are confirmed. Just a few comments on our order book. As you can see, we are loaded with deliveries for the medium to long term. Hence, our visibility of our revenues is very, very high. As we speak, Cruise accounts for 24 vessels in portfolio, the construction of 31 defense units is expected up to 2029 and 33 further vessels in the fast-moving offshore business for a total of 88 ships in backlog. Macro coverage stands at 3.0. Commercial opportunities are up and running in all businesses. Now I will hand over to Giuseppe, who will discuss our financial results. Please, Giuseppe.

Yes. Good morning, and I continue starting from Slide #10. Order intake in total backlog, all the order intake it's worth to note the very important increase in the offshore business, which recorded 84% more order intake with respect to last year, and this follows within the growth strategy in the wind offshore sector. We closed the first half of the year at over EUR 2.1 billion in terms of other acquisition in the shipbuilding business. We have 1 cruise ship and a fourth frigate for the constellation program in the United States. As Pierroberto said before, the commercial pipeline is up and running across all businesses. It's worth to note with reference to what the CEO said before on the submarine for the Italian navy we expect to sign the contract pretty soon as it has been approved by the Italian parliament. And we also have, on top of this, another EUR 700 million orders coming roughly EUR 700 million coming from the defense business in the very near future. Going to revenues on Slide 11. Total revenues were up as expected by 4.5% compared to the first half of 2022. Shipbuilding is broadly in line with the same period of last year with cruise accounting for 49% of group revenues and defense for 24% million. Revenues in the offshore and specialized vessel business increased by -- or roughly 28%, and this underlines the positive trajectory in growth that reflects the effective repositioning of the -- or towards the offshore wind sector. And it's a growth that we expect to continue as the order acquisition is going very well. Equipment Systems & Infrastructure business recorded an increase of 45.8% and this is mainly due to the infrastructure business as the project in Miami is going at full speed. Net of eliminations, ship building accounts for 74% of group's revenues, Offshore and specialized vessels for 12% and 14% is related to equipment systems and infrastructure. Moving on to EBITDA, EUR 185 million, and this is, of course, I would say, a substantial solid improvement to say the least compared to the EBITDA margin of last -- over the first 6 months of last year. Of course, the first 6 months of last year was affected by many one-offs. Still, our EBITDA levels reflect high inflation cost and high pressure on raw materials and in the cost of labor. So we haven't seen yet, let me say, a weakening of the inflation pressure. Shipbuilding closed at 6.1%. And this is an improvement with respect to the second half of last year to actually to the total of last year, 4.6%, but lower than the first half. The first, the margin of this all was still affected by the impacts, as I said, occurred in the second half of last year, and this is largely due to the geopolitical context fueled by the Russian Ukranian conflict with a consequent further increase in raw material prices and also affected by the inflation costs, notably in the U.S. labor market and supply chain. Offshore closed at EUR 19 million of EBITDA with an EBITDA margin of 4%, 2.5% at June 30, 2022. And this is broadly in line with the business plan targets, higher margin for offshore, and this is driven by the increase in demand in the offshore. Vard as a company, closed the first semester of 2023 at breakeven, which is a remarkable result compared to the history of Vard. Equipment Systems & Infrastructure. The EBITDA is positive for EUR 7 million. It was negative by EUR 90 million as of the first half of last year. The margin is 1.2%. Of course, this EBITDA levels are still negatively affected by the EBITDA margin recorded in infrastructure business. Even though the electronics and Mechatronics businesses registered a positive margin respective 1.8% and 7.3%, in line with 2023. Moving on to the net results. We recorded a very small adjusted net profit of EUR 3 million, and that is before the unfortunate asbestos-related extraordinary items, which came at EUR 33 million for the first half of this year. So we have a net loss at minus EUR 22 million. It was negative EUR 234 million at first half of last year. Net financial position and net working capital on Slide 14. Net debt at EUR 2.8 billion. We have a net debt situation that is consistent with the progress of the production volumes and as we're working full speed in the cruise business, as you know, very well, net working capital absorption there is pretty high. It's worth to note that we delivered 2 cruise vessels in the month of July, the Explora. Well, we delivered one cruise vessel, sorry, in the month of July, we expect to deliver a cruise, a very big cruise vessel for [ Robes Cruise ] lines next week in our Marghera shipyard. Of course, these debt levels are still affected by a portion of the deferrals we granted to clients after COVID-19 pandemic, roughly EUR 92 million at this point in time. Net working capital is positive at almost EUR 900 million, and the main changes are related to the increasing work in progress and client advances related to the production volumes of the period. And going to the current debt levels and EBITDA when we look at the EBITDA and net debt ratio as of the end of 2022, which was in excess of 11x. Right now, if we, of course, some EBITDA of the first half of 2023 plus the EBITDA of the second half of 2022 and do the net debt over EBITDA ratio, we stand roughly in the low 9x ratio, which is a slight improvement, but this is the path under which we -- on which we are working, and we'll keep working on it. And now it's back to Pierroberto.

Thank you, Giuseppe. Turning to markets and in particular, here at the cruise industry, starting from the third quarter 2022 Almost the entire fleet was back in operations with 93 of the global fleet capacity calculated in lower berth sailing as of December 31, '22 and occupancy rate in line with pre-pandemic values. Bookings for 2023 are likely to get back to historical levels or even to reach new peaks. Such promising signals along with the resumptions in order intake already in 2022 are taking expectations for the acquisition of new orders, taking also into consideration the necessary financial support provided by institutions to client as per industry practice. We are best positioned to seize further opportunities from the near comeback and the green transition of the whole cruise market. Let me remind you that we are fully aligned with the emissions reduction road map for cruise ships. As a matter of fact, the first dual fuel ship propelled mainly with liquefied natural gas and featuring lubrification system for reduced friction resistance is scheduled to be delivered in the first half 2024. As for the Naval, global defense spending is expected to further accelerate in the upcoming years. In such business, we are second to known in the construction of Hi-Tec surface vessels like Frigates and now increasing our role also in the underwater domain. The commercial pipeline with the Italian navy encompassing 1.2 billion orders, either in the process of finalization the European Patrol Corvette and the midlife MOU of the Horizon Frigates are already effective, U212 NFS submarine. Turning to offshore. As of today, worldwide wind farms are delivering a normal power of around 59 gigawatts that is expected to rise to a total global capacity of around 270 gigawatt by 2030. We are market leader with a share of over 30% in the construction of service operation vessels and construction service operation vessels in terms of order book and expect the market to rapidly grow. Commercial opportunities will also come from the subsea installation of -- for the offshore wind, in particular, in the specialized niche market of cable layers. In addition, let me remind you that we have a strong track record in development of cutting-edge offshore units, featuring green propulsion and remote control solutions. Let's turn now to the last slides of the presentation. Execution is key, and these results are proof of the management full commitment to reach our targets presented back in May. A solid top line, with group margin already in line with the target for 2023 and adjusted net income already positive, net of asbestos-related litigation costs. We have a unique business model. Our shipyards are running at full speed. The backlog is robust and the commercial pipeline constantly increasing for all the businesses. We are best positioned to be a front runner towards the next industrial cycle, strong in our financial discipline while improving production efficiency and cost discipline with a core attention on cash flow generation. In the first half of 2023, Fincantieri launched the higher priority strategic initiative to pursue the 2023, '27 business plan targets and evolve the operational system in order to support the competitiveness of the long-term value creation. Actions will continue in the second half of the year to further increase operational efficiency, modernize shipyards and contain procurement costs of material and services as well as production costs. Net of further deregulation of the geopolitical and macroeconomic instability and potential operational and financial impacts, we confirm 2023 operations in full swing, the consolidation of revenues and margins foreseen at around 5%. 2023 net financial position is expected to be substantially in line with end 2022. Now let's open the stage to Q&A.

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

I have 3. The first is regarding the Naval business. In the first half, revenues were down in comparison to the first half of 2022. I was just wondering if you are going to confirm your revenue guidance in the Naval business at EUR 2.2 billion by year-end. And looking at the EBITDA of the Shipbuilding division. The margins were above 6% so beating my estimate. I was wondering if you can give us some color about of cruise business, EBITDA margin trend and the Naval one. I'm just wondering if this bit is mainly due to the improvement of the cruise or maybe to the Naval. And very last is on the infrastructure business, if you can give us some color on the state of the art in the deployment of the backlog in the first half, if I'm not wrong, the EBITDA of the infrastructure was at minus EUR 10 million. What do you expect by year-end if you can give us some indication.

Let me give just an introduction, and then I will willingly leave the floor to Giuseppe. Let me make always the same warning. Looking at movement quarter-on-quarter on a business of the biorhythm of the shipbuilding, it's a complicated exercise. That's the most obvious answer. So whenever you see a movement quarter-on-quarter on revenues, it has to do with the normal deployment and rollout of the backlog, which is not -- which curves are, by definition, not as fluid as you would like to because it has to do with deliveries. So our business is made of blocks, it's not made of smooth curves and this is a matter of fact. So I don't see any meaning in certain quarterly differences. I believe that we have to assess the picture with a time frame that is as coherent as possible with the bio rhythm of the business. So the good point is that all in all, we are working on costs and when you work on costs, you generate benefits everywhere because you generate benefits on the job margin because a portion of your G&A are calculated in the tariff, which tariff is used in order to allocate costs to jobs. When you manage cost, you create improvement in every part of the company and you improve also your G&As that are not allocated to projects. So all in all, this enhancement in the marginality has to do with the initial positive signals of the strong commitment, A strong focus on governance of costs. But I would like Giuseppe to give you a more precise answer.

Well, Naval business revenues, the outlook is really in line with our forecast. We do, we were expecting decreasing revenues in 2023 over 2022, as the programs we are executing from time to time completed. In our business plan, the increase in Naval revenues is expected from 2024 and 2025 onwards. Cruise is working at full speed. So we do not have any change compared to our budget and business plan. As with EBITDA, of course, shipbuilding in total is substantially flat with respect to last year. What we see is an improvement, of course, I can also describe from a qualitative perspective here. But we see an improvement in cruise because first half of last year had some one-offs related to the positions and we had with some clients with respect to their credit standing. So these one-offs were related to the first half, whilst we don't have them, of course, they are already accrued. So we can say that shipbuilding cruise building has improved whilst Naval. The contribution of Naval has decreased because revenues have decreased as expected. This is, in general, the qualitative comment on EBITDA on the state-of-the-art of the infrastructure business of the backlog, as I said before, the major project that we have on the execution right now, the major project, and unfortunately, the project that's making us suffer and the project that we clearly said we're not going to do any other projects like this one, is the Miami terminal, which is progressing and progressing well, although there are several criticalities and several things that require us to be very cautious when formulating guidance and an outlook there. We hope to finish it as soon as possible. That's the message I can give you. I don't know if Pierroberto wants to add something there.

No, just to complement what you are saying on the Naval, you know that there are programs like Qatar that are advanced delivery stage, then there are new programs with the Italian Navy that are kicking in. So we gave today you and additional information on the fact that on top of the overall order intake of the first 6 months, we have in these days, basically secured additional EUR 1.2 billion from the Italian Navy for a number of new investments that are kicking in. So I don't see any -- again, I don't see any disruption apart from the natural sequence of things. So on Naval, we are truly in good shape. And again, we are very focused and very positive on a number of international opportunities in the naval business. So this additional EUR 1.2 billion, which, again, is not already recorded in the first half total order intake, but this additional EUR 1.2 billion is national in Italian. We are not yet disclosing any possible touch wood, less touch wood possible developments in the international market. So the tailwinds behind the Naval is so powerful that I see no issue while analyzing the trajectory of the revenues. On the infrastructure business, as Dario clarified, the name of the game is Miami. And 2024 is the year of the finalization of the job there. So I would say there are no particular surprises at the horizon. And at the end of the day, 2024 will be the year of delivery of the terminal. So we don't need to bet on the future. We need just to work out, fulfill our obligations, deliver impeccably in 2024 finish and get back to Italy.

Okay. I fully agree. Thank you for the call. And if I may just a final question. I've seen that notwithstanding the rising interest rates the financial charges in the first half were a bit lower my expectations. Can you just give us a rough indication of the financial charges expected by year-end?

Well, yes. There was an improvement also with respect to our initial forecast on financial charges in the first quarter. But by this improvement, we maintain our forecast of financial charges in the range -- in the low EUR 200 million at this point in time.

The next question is from Matteo Bonizzoni with Kepler Cheuvreux.

I have 3 questions, I would say. The first one, in regards to the margin, we have already seen in the first half that we have 5% EBITDA margin which is fully in line with your guidance for the year. You commented before that you have not felt in particular benefit from the slowdown of the inflationary trends. Now you commented about labor costs and other input costs. So I just want to have maybe some color on what you expect going forward as regards particularly, I would say, the evolution of the raw material cost in particular, still in the next months or quarters, considering that you have a certain time lag, as you know, from the moment when the steel price goes down or up and the moment when you feel the impact on your P&L due to the normal turnover of your inventory. So the question is basically, if you -- we should expect to see some initial benefit already in the second half of the year or maybe more next year. Then relation also to the question of Monica before, not only we had more benign than expected financial charges in the first half, but you have now commented that in the full year, we should go back to let's say, EUR 200 million, which is more or less what we thought. But also, we had, I think, 2 other items, which benefited your bottom line in the P&L. The first one is depreciation because the guidance which you have provided for CapEx says that you're going to invest EUR 300 million, which is 1.2x the position. So I would infer that the deposition in the full year should be more or less EUR 140 million, EUR 150 million, while the first half, so only EUR 130 million. So I just want to -- it's a technicality. We know that to understand a little bit the dynamic of this trend the depreciation. And the second item, we would then fit the little bit our bottom line is started impacted. We know there are a lot of moving parts, let's say, so the taxes were a positive item instead of being a negative item. Can you also comment also for this item we start? And also an expectation for the P&L tax charge for the full year.