FNM S.p.A. (FNM) Earnings Call Transcript & Summary

Ladies and gentlemen, good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the conference call for presentation of the results of 1H '23 of FNM Group. [Operator Instructions] At this point, I'd like to hand you over to Valeria Minazzi, who is Investor Relations Manager. You have the floor, ma'am.

Now good afternoon, ladies and gentlemen. Thank you very much, and welcome. Thank you for taking part in the presentation of the results of the FNM Group for the first half of 2023. With me, we have Marco Piuri, CEO; and CEO of Trenord; and General Director; and Giavatto, who is the CFO. Now Mr. Piuri will start the presentation with a brief introduction, and then Mr. Giavatto illustrate the results of this period. At the end of the presentation, as usual, you have the possibility to ask questions. At this point, let me hand you over to Mr. Piuri.

Good morning on my behalf as well. Thank you very much for devoting our time to this conference call. We're going to present the results of first half of 2023, which is, well, positive, and margins and volumes are growing if compared to the first half of 2022. We need also to remember that there a couple of things, which define the perimeter of the group and, which have to be taken into account when you compare the results of this period with the previous one. Now in the presentation, you will have also the results of a like-to-like perimeter, considering that we've had La Linea, a company exiting the perimeter. This is a company operating in the road commercial transportation. And then we've had the lack of contribution from regional authorities for e-bike activities. Now our colleagues will later on illustrate the different sectors. Now you see that motorways confirms itself to be the engine of the group, where public transportation, road transportation, considering also the change in the perimeter. And if you take the like-for-like results, we're almost in line, a slight reduction versus the previous year. Now these results are fueled, so to speak, by the demand of mobility. All of these sectors show growing rates when compared to the previous year. And then if you look at 2019, that the year, which helps us to define the trends and how these sectors are moving. All sectors versus the first half of 2022 show an increase in demand. Sometimes such an increase is marked and others a bit less. This applies to Milano Serravalle with a slight difference in heavy-duty and light-duty traffic. And then road transportation on motorways and road transportation in general is growing. And as we shall hear later on, this is also reflected on revenues and margins considering also a number of elements, which make up the financial and economic position of the company. We are witnessing a growth in demand but not as it was before the outbreak of the pandemic. And then we need to understand what kind of recovery measures that we are going to have at the end of the year as was the case in 2022. I'm speaking about any possible support measures by the government. And then Trenord has had a positive trend versus the budget as well. Demand is the engine. Volumes are growing. And also the segmentation of demand is interesting. There is -- we see the strengthening of the trend that we had seen before. There is a general recovery of demand, which hasn't recovered completely versus 2019. We don't think that this will occur very rapidly. The gap between now and 2019 appears partly to be structural because of the change of working modalities, for instance, working from home on the part of many people, yet we see growing trends of demand when it comes to express traffic, airport traffic, which follows the trend of traffic recovery and then traffic-related to leisure is also improving. At this point, let's move on to see the different segments. Now following what we've heard so far, let's go into the details of the figures. In general, revenues have moved from EUR 294 million to EUR 302 million. These are the reported data. There is -- revenues are growing by 2.6%. But if we take the same data on a like-for-like basis, that excluding the effects of the sale of the La Linea/Martini Bus. And the car sharing public contribution the first half of 2022 for e-bike, we see that the like-for-like results show a growth of revenues by 5.8%. Let's now see the operating results of the group EUR 100 million in first half of 2023, growing by 7.1% versus the same period of last year. This is the reported data. If we take the like-for-like results, that is adjusting the years 2022 and 2023 and sterilizing La Linea/Martini Bus effect and car sharing public contribution effect, the growth would be 10.2%. There's a point of discontinuity, which is concentrated on road transportation. In other sectors, we see a growth using a like-for-like basis, revenues and the margins are growing. And as you can see, the EBITDA, which is growing almost in all sectors with a small reduction of the EBITDA that we should see later on when we are going to speak about the infrastructure. And I don't the data of the individual segments. And I leave the floor to Valeria for the data of individual demand.

Now let's see Ro.S.Co. first, an increase in revenues year-on-year by 9.3%, and EBITDA growing by EUR 1.3 million. revenues are growing because of the rolling stock leasing increase plus EUR 1.7 million, and this thanks to higher revenues from new TILO trains, which entered into service and also the revamping of TAF high-capacity trains leased to Trenord. The other revenues are growing by EUR 9.1 million thanks to higher proceeds from IT services, mainly MISE and also thanks to a number of insurance reimbursements. On the other side, we said that EBITDA is growing by EUR 1.3 million. Here, we need to take into account an increase in costs. First of all, higher personnel costs, which mostly related to the increase in head count, plus 11 FTE. And then we also have an increase in operating costs related to IT, servicing fees and marketing, but also the costs related to H2IseO projects, several FNMPAY, which is the start-up which has a number of costs. Let's move on to the railway infrastructures. Revenues are going up by EUR 4.6 million in the first half of 2023, and the EBITDA is going down by EUR 3.9 million. Now as to revenues, we've had higher revenues from public contracts and grants of 2 -- plus EUR 2 million, higher revenues from the network because of the higher train kilometers and adjustment of toll rates, higher revenues also from design activities and of maintenance on the network and especially for terminal to -- in Malpensa and the Rovato hub for the maintenance of hydrogen trains. We have lower fees from Public Service Contract. And this is be related to the new car sharing activity, which has a new contract with lower fees and then higher leasing revenues on the rolling stock given to Trenord. We have a as I said, rolling stock revenues are related to Trenord, EUR 1.9 million. This is managed by Ferrovienord, but this increase in revenues has no effect on the EBITDA. The EBITDA goes -- going down by EUR 3.9 million. And the reduction of the EBITDA is related to a more than proportional costs increase for infrastructure, maintenance and design, also due to maintenance activities on operating machines and the signaling equipment related also to a number of weather accidents, so weather problems that we had and then higher maintenance versus the budget of the forecast. And this leads to a timing effect -- a negative timing effect on EBITDA. Moreover, we've had a higher cost of FTE. From the 1st of November of 2022, we renewed the contract with energy tariffs more in line with the current one. And then we have higher personnel costs due to headcount increase. Please take into account that in the EBITDA of 2022, we had EUR 1.7 million related to sick leave that we could -- or sick pay charges. Moreover, we have had an increase of personnel costs and wages at EUR 2.5 million, and this leads to the explanation of the difference in the EBITDA of last year and this year. As to road passenger mobility, as Eugenio said before, the fundamental difference between the report and the like-for-like is related to the deconsolidation or the disposal of the La Linea/Martini Bus and also the loss of the car sharing contribution. Net of those effects on the perimeter of the group. Well, we can say that revenues are going down by EUR 1 million, from EUR 52.5 million to EUR 51.5 million in the first half of 2023, whereas the EBITDA is going up by EUR 1.7 million. Now like-for-like revenues -- or revenue trends, is related to higher transport services revenues plus EUR 5.4 million. This is due to the higher passenger traffic and secondly, to greater trading replacement services. On the other hand, we have a lower revenues from public contracts and public grants, EUR 6.4 million. Such difference is mainly due to the lower compensations for additional services are equal to EUR 4.4 million in the first half of 2022. These were services that were introduced to guarantee the social distances because of the pandemic. These revenues covered EUR 3.8 million caused by such additional services. Moreover, last year, we also had EUR 2.7 million of government compensation for lost revenues because of the reduction in the number of passengers during the pandemic period. Now these 2 compensations -- these 2 contributions are now there in the first half of 2023. Please remember that between these categories of revenues, there are also public contracts. Such public contracts have lower revenues. And the EBITDA, as you can see, improved by EUR 0.7 million. And this is due to the improvement in margins of this sector. Let's move on to the motorways. Now within this period, revenues have improved by EUR 11 million, which actually reflected directly on the EBITDA. The reasons: higher tolling revenues, plus EUR 9.1 million. These are related on the one hand on the improvement of traffic or traffic recovery and then the improvement of the network extension. Moreover, we've had higher revenues, EUR 2.7 million, which are related to the service areas concessions, which, of course, benefit from the renewal of contracts at better conditions for MISE but also benefit of traffic increase. On the other hand, we also need to take into account that the EBITDA is impacted at different types of costs, which are made up for. On the one hand, we see higher operating costs related to works, which were made on the Po Bridge and Zerbolò gate. Such costs were made up for by release of funds related to maintenance. We had low labor costs mainly as a result of a redundancy incentives charged -- sorry, booked in the first half of 2022. And of course, such was compensates for -- by the headcount decrease. And this is the effect of the renewal of the National Collective Bargaining Contract. We had higher operating costs rating, as I said, to traffic growth, service fees, which are allocated to MISE on the basis of a contract. And then we have had also a net provisions for risks and charges. And the whole picture explains the EBITDA of this segment. Okay. I'll leave the floor to Mr. Piuri, who will be talking about Trenord.

Thank you, Valeria. The trend of Trenord in the first half of 2023 is positive and is fueled mainly by an increase in revenues -- in ticketing revenues. The revenues from the service contract is -- are growing but still dealing with the old contract. And then we've had an increase in ticketing revenues versus the first half of 2022. You see that there is a difference of more than EUR 45 million, more or less plus 33%. This needs to take into account energy and utilities costs, an increase in personnel costs. And then we've had a partial increase on line personnel in 2023. Trenord is operating a higher number of trains versus the previous period. Train movements, which in the past was managed by a contract that was outsourced. This is now managed directly by Trenord. Now EBITDA goes up considerably and EBIT and the net result, as you can see in the first half of 2023, the company goes breakeven. And then perhaps when it comes to Trenord, it will be interesting to talk about the new service contract. Now Regione Lombardia following the regional election that put hold this process. So Regione Lombardia following then the procedure submitted the 2 documents, which are to be evaluated by our [indiscernible], the economic and financial plan and the targets of the services, which are called in jargon PEF [indiscernible] ART expressed a positive opinion and asked a number of inclusions or adjustments, which do not change the overall picture, and now the process continues. You know that the current service contract expired at the end of July, basically last week. Regione Lombardia within its decision issued a law, which is a technical law to proceed with the procedure leading to the renewal of the contract. So the procedure will not go beyond November 2023, and the procedure is, as I said, continuing in September. There will be a kind of a consultation with Regione Lombardia and a number of stakeholders. This shows that there is a political willingness to renew this contract. And as we also said in previous occasions, the new contractual structures and a PEF document, which is built on the basis of what ART requires leads to greater transparency and also leads to a more adequate or correct remuneration on the part of the operator. And this, of course, leads to a smoother management of the contract.

Since we've analyzed the operating results of the companies, consolidated and following the company -- sorry, the comment on Trenord, which is consolidated at equity, which is very important for the FNM Group. Let me remind on you that considering the EBIT of EUR 100 million, we get to the result of the group -- sorry, I said EBIT but I meant EBITDA -- from EBITDA of EUR 100 million, we reached EUR 33.8 million versus EUR 29.8 million last year. Now the main components are an increase in D&As in 2023, which are due to the capitalization of new investments in the motorway infrastructure segment. This leads us to have an EBIT of EUR 48.5 million versus EUR 46 million of last year. And then net a financial income or expenses, we have minus EUR 5.9 million versus minus EUR 2.7 million last year. Here, we have the effect of higher interest rates but also the effect of the application, the IFRS, in the accounting of funds. So 2/3 are due to this second reason. And then taxes, EUR 8.8 million, and then we get to the adjusted net result, EUR 33.8 million. Taxes are below what they were last year, EUR 8.8 million versus EUR 13.5 million. And this is due to a better fiscal balance, so we have a one-off EUR 2.4 million that is due to the resolution of a tax query submitted to the Ministry of the Transportation and which were relate to [ 28 ], which were resolved in 2023. Now the -- if we take the net result of companies consolidated at equity, in the first half of 2023 give a negative contribution of EUR 0.5 million. This is certainly better than last year where the negative effect was EUR 9.7 million. The main result was Trenord, which did not contribute negatively on the country. The other equity -- or consolidated at equity companies contributed a bit better than last year. However, the effect of APL, Autostrada Pedemontana, saw an increase in revenues this year. When it comes to the EBITDA, well, we need to take into account that it is investing in resources. APL has 35 FTE in terms of head count more than last year and is getting ready for the restructuring of Pedemontana. Now -- so you can see that the overall net result are impacted simply by the net financial expenses and D&As basically. This is what leads to the group net result of EUR 33.4 million versus EUR 21.4 million of last year. If we now take into account the CapEx analysis, we had EUR 44 million of internally financed CapEx versus EUR 69 million of the previous years. Now 2 segments contributed negatively with revenue -- lower investments. Ro.S.Co, last year, we had a big spike of investment due to the revamping of TAF trains and then motorways. Despite an increase of maintenance operations, there was a release of the funds, which were above the provisions or higher than provisions. However, in above this operations, if we take a look at the CapEx financed by the Regione Lombardia Authority, we see an increase in railway infrastructure CapEx financed by Regione Lombardia, EUR 67.2 million versus EUR 23.6 million. And as far as CapEx is concerned, this is it. Let's move on to the next slide and see the cash flow. Here we have a number of positive components that have a positive effect on the overall cash, EUR 39.7 million. We have EUR 100 million of EBITDA. We mentioned before we have net working capital of minus EUR 34.3 million, and this is due to a greater payables and especially payables to external bodies means basically. The first half of the year suffers from a negative effect of delays in payments. And then net financial income and expenses, we talked about this before. Net CapEx, considering gross CapEx and contributions, EUR 17 million negative and the cash flow generation of EUR 28.9 million. Then we have to add the positive effects of M&As, dividends from associates. And then dividends paid, EUR 10 million, and we get to a cash flow of EUR 39.7 million. Now if you then take the structure of the debt, there is no changes in the structure of the gross debt, the net financial position as at the end of June 2023 is EUR 712.3 million, slightly improving. Now the structure of the debt, as I said before, hasn't changed. 86% of our debt is fixed rate, and that was negotiated when the macroeconomic conditions are different versus the current one, and this gives us considerable advantage. The average cost of debt is at 1.81% overall. This is it. I'll leave the floor to Mr. Piuri for the outlook, and then we'll move on to the Q&A.

Thank you, Eugenio. Guidance is certainly confirmed in terms of revenues and EBITDA. Now as you can see, revenues between 1%, 5%, reported 2%, 7% like-for-like. And then the EBITDA, EBITDA margin is going to be in line with the 22% or the EBITDA is going to be [indiscernible] terms of guidance to revenues of 1%, 5% reported 2%, 7% like-for-like. And then adjusted net financial position at EUR 700 million within the rating agency requirements. CapEx, we've seen that we have lower investments, which are going to increase in the second part of the year. However, you can see minus 10%, 20% year-over-year in terms of gross CapEx with FNM funds, and therefore, the ratio NFP EBITDA, 3.5, 4x. At this point, we can move on to the Q&A session.

[Operator Instructions] Now the first action by Stefano Gamberini with Equita.

I have four questions to ask if I may. The first on motorways. If you remind us the new contracts that you have with the transportation authorities? Can you tell us if there are some novelties? And can you tell us when the contract is going to be approved? The second question about the motorways and APL. Now why does it have a greater debt today considering that on P&L, I also have the loan on the part of shareholders, what is the current position? And what is types of lines of funding that you have received for APL? Scenarios have changed. Interest rates have increased, do you have fixed rate earning lines or very floating rates. Another question. And now you, Mr. Piuri described the fact that the authority approved the PEF document for Trenord. Can you tell us what are the main themes -- what are the capital to be invested with the returns? How much of the capital investment is going to be recognized in this new contract? And then the last question about CapEx. I have a few difficulties understanding gross net CapEx and discriminating between the CapEx funded by the company and what CapEx are not funded by the group. Now you have -- you are an infrastructure company, you invest money and you get returns on the CapEx that you've invested, then you may have a CapEx funded by others if you get returns, if you can explain on this, it would be better. If I understand well, we have EUR 17 million of investments financed by FNM without public contributions out of EUR 45 million, whereas as last year, they were EUR 75 million out of the EUR 79 million. I didn't quite understand. I want to understand how much CapEx are financed by FNM without incentives, without contributions in which sectors on this CapEx, if I understand. Well, I have a return, and therefore, I would have a related increase in EBIT. Another question about the guidance for the year. Now EUR 110 million that is net when we speak of FNM finance CapEx. And perhaps you can give us an impact of investments on the -- in the financial position. I do apologize for all these questions about investments in CapEx, but it's not easy to understand this.

Okay. I'll try to be very clear and try and help you. Now motorways, the PEF document for motorways was submitted to the ministry. Now this week, the ministry is going to submit the PEF document to the ART. Our expectations is that within the first half of September, we'll have a feedback on this. Now this is about the renewal of the PEF document. And I confirm what I said last time. This PEF includes a part of the increase in costs. Now this PEF extends to 2024. It includes 2018, 2019 and still has inflation elements related to the macroeconomic period. And then if I do not reply correctly to your answer -- to your question, please tell me. Now what is included within the terminal value sees to main effects. First of all, a difference in the inflation rates, which occurred in this period, which will then be absorbed in the next PEF 2024, 2028. And then the other item is related to the COVID contributions and grants. If these were included in fees, which will give us the EUR 489 million that we reported in our accounts for 2022. At the moment, however, we do not have indications and so I cannot confirm this data. The other question. Now perhaps I wasn't clear about APL. Now the debt of APL remains what it was at EUR 1.7 billion that banks have underwritten with the guarantee of the grand of the regional authorities. Now at the moment, the economic accounts or the P&L is impacted by the fees of the contract. And then when APL starts drawing such funding, the money drawn will go on to the P&L up until the moment, construction works do not start. And at that point, you can start capitalizing such costs. Perhaps I wasn't clear during the explanation. Now as far as APL is concerned, you have to take into account the concession fees commissions, which have a reflection on the P&L because funds from the banks have not yet been withdrawn and also construction works haven't started.

Now let me take the question about CapEx. Now the amount of money financed by FNM Group, meaning CapEx funded by FNM Group 2023 closes with EUR 44.3 million. 2022, EUR 79 million of CapEx. So now it is true that part of our group has CapEx that leads to direct investments in motorways. But when it comes to Ro.S.Co., these dynamics is not as smooth. Now meaning what I invest is transforming directly in revenues struck EBITDA. Certainly, any companies that invest has a return on investment, but it's not as direct in this case. So I confirm the reduction of CapEx invested directly by FNM, I confirm the reduction in 2023 versus 2022. And then I confirm the guidance for the year-end, where comps are going to increase in the second part but are not going to be equal to the investments in 2022. Now as to the question of Trenord, I'll hand over to the -- my colleague.

Now let me try to give you a few figures. Now the PEF document figures are the following. First of all, this covers 10 years. So the development spans this period 10 years. We envisage an increase in production plus 23% in 2032 and then an increase in the number of seats offer, so an increase in capacity plus 26%. The PEF document indicates a target of passengers of 1 million in 2032 versus 650,000 -- 700,000, which is the current data and then an increase in demand leading to fees or tariffs increase around EUR 500 million. Within this type of revenues from tariffs, we need to include a number of variables. First of all, inflation. Second, we are not speaking of the individual company's tariff increase but the tariff relates to the integrated transportation network within the Regione Lombardia. And then the PEF document also envisages an increase in demand following the infrastructure works and urban works, for instance, mine, the completion of the connection with the Bergamo airport, which certainly leads to greater capacity and greater volumes, within -- the positive number, 1 million passengers and EUR 500 million of revenues, well, a number of variables are to be included. The PEF document because of the ART procedure envisages that ART indicate in cost efficiency objectives. And it indicated a 6% reduction costs for single kilometer train within 2027. And so here, there are a number of initiatives that not only take this into account, also an increase in productivity fleet from EUR 440 million carriages versus EUR 414 million, so EUR 100 million more. So this is part of the fleet renewal but also an increase in capacity of the fleet itself. Now overall, within the plan, EUR 800 million of investments are envisaged. These are related to regular maintenance of trains, EUR 450 million. And then a number of works on the lines. Maintenance plans as well need to be adjusted to the new types of train tracks maintenance, and then we also have EUR 150 million of investments in digital technologies. Trenord sells 55% of its tickets through digital channels or automatic machines. These are channels that do not envisage the presence of people. As to the PEF document again, the PEF document envisages, of course, the remuneration which is 7.45%. And in 10 years, this will lead our EBIT. Of course, year-on-year, trends will change on the base of different variables, but the EBIT will be around EUR 35 million, EUR 40 million. These are -- the numbers I don't know if I gave you the main figures of the PEF. But this, as I said, is the structure of the PEF document. We still have to understand with the regional authority whether it's going to be 3 years or 5 years when we can review a number of effects or items of the PEF document, which are related to macroeconomic conditions, productivity and so on and so forth.

If I can -- if I may follow up on your reply. EUR 1.7 million debt of APL, what is the structure? Floating rate, fixed rate, when does it expire? Now if I understand well Trenord sees an increase in EBIT. Is this due to tariff increase on investments? Or will there be also an increase in the contribution from Regione Lombardia.

So let me answer the second question first. Now the contribution of Regione Lombardia is going to grow. The PEF document envisages only a payment -- a single payment a year with a flat rate, but we believe that the flat rate is going to be EUR 440 million. Let me tell you that in this moment, Regione Lombardia has in its accounts EUR 490 million. But then, of course, you need to adjust the payment to what it actually is. So the forecast is to have EUR 100 million some more from the Regione Lombardia. So we are going to see certain increase in the contribution from Regione Lombardia. But this is also related to the fact that the plan envisages an increase by 23% of productivity. And so there will be more trains to operate in the [indiscernible]. As to revenues, and margins, well, structure of margins, especially change because this contract is built on the basis of ART decisions approved following the entry into force of the current contract, which envisages a certain level margins related to the WACC, which is calculated in March by ART on the basis of rates and margins. So this is a result, which is on the one hand related to market dynamics and on the basis of operating cost, but it is also related to the structure of the contract, which has a more favorable structure than the previous contracts. APL. Now the APL situation is quite complex. Now the funding is related to 2 parts. One, variable, rates Euribor, 6 months, 2.4%, 3.70%. And then we have a funding by the Regione Lombardia with the rate of 1.5%. Now the funding covers or is covered the 12% variable float and then 39% medium rate and the remaining part, fixed rate. I know it's very complex. The Senior funding, EUR 1.7 billion, which is to be related to restructuring of B2 and C tracks, EUR 970 million funding, 10 years, B and CBT. And then the 23 years debt, which is built with support of Regione Lombardia and EUR 100 million, which are provided by the banks for more commercial operations. So this is the structure of this that the cost also includes commitment fees, up-front fees, which certainly have an effect on cost of the funding line overall, which generates the costs, which we mentioned for 2023, which certainly were lower in 2022. So this is the overall picture. However, let me tell you that this is quite a complex structure. Now within the law that was issued by the Regione Lombardia at the end of last week, let me remind you that Regione Lombardia provided and approved EUR 415 million of -- in the form of a capital increase with the financing that is going to be supported by financial institutions.

So EUR 450 million of the capital increase in APL. And so you are going to be diluted?

Yes, this is the logical consequence.

Ladies and gentlemen, at the moment, there are no other questions from the conference call.

Well, then if there are no other questions, we can conclude the conference call. If you have questions, however, later on, you can always contact us. Thank you very much for taking part in our conference call. And we'll hear from you again on -- in November for the publication of the results of Q3. Thank you, and I hope we can have some nice holidays.

This is the Chorus Call conference operator. The conference call is now over. You can disconnect your phones. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]