Maire S.p.A. (MAIRE) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Maire Tecnimont First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Pierroberto Folgiero, CEO of Maire Tecnimont. Please go ahead, sir.

Good afternoon, everyone. Thank you for attending the first half 2020 financial results conference call. The first half of 2020 has seen unprecedented challenges as the entire world has had to face a situation never experienced before against an invisible enemy. Our group has been very quick and flexible at responding to the challenge in order to adapt to the new normal and ensure business continuity. Such stance has allowed us to maintain our EBITDA marginality, one of the highest among our direct peers throughout the first 2 quarters. We were able to generate strong cash flow in Q2, driven by significant improvement in the net working capital, which contributed to an important reduction in our net debt. The first half has also seen the third highest order intake in the last 10 years, a testament of the resilience of the downstream business. Such a performance has led to a EUR 6.7 billion backlog, one of the highest ever. Our business resilience is also demonstrated by our commercial pipeline, which has increased to EUR 52 billion, twice the amount we had in 2014. Finally, we continue to make significant inroads in green chemistry with a particular focus on hydrogen and Circular Economy as the recent agreements with ENI and LanzaTech demonstrate. All in all, we are ensuring business continuity in these challenging times. Our main consolidated financial results are shown on Page 4 and will be discussed in more detail by Alessandro later on in the presentation. Please consider that the H1 net income would have increased to EUR 25.6 million if we exclude the temporary negative effect of the derivatives, while the H1 '19 net income would have decreased to EUR 51 million. Let's focus now on our operational performance. First of all, let me provide you with some evidence on how we are ensuring business continuity and make sure that projects are started and running, plans are completed and handed over to our clients and the commercial activity proceeds without stops. In the first half of this year, for example, we held 6 kickoff meetings relating to new projects, which were recently awarded to our group. These have been digital meetings with people connecting from different locations, sometimes across different continents. These events are critical as they usually represent the start of the engineering phase of our project. Second, from the procurement and logistics point of view, we have continued to deliver on-site equipment in line with the project's needs. We also successfully performed deliveries of some oversized equipment, including a cold high-pressure separator and drums in Azerbaijan with 3,000 tons of equipment from Southeast Asia to the U.S. Finally, our commercial activity has not stopped nor slowed down as we evidenced by our growing pipeline. In the first half of this year, for example, we added 8 new tenders to the pipeline on a net basis versus the same period of last year. Overall, we were following 130 tenders at the end of June, a remarkable result given the circumstances. At the basis of these results lies our expertise in managing complex situation. Our Digital Advantage Smart Platform, which allowed us to remotely carry out not only engineering activities but also some start-up phases, inspection and lot of local contractual supervisions and, of course, the resilience of our people. We are proud of these operational achievements, and we are confident that the business continuity we have pursued in this semester will lead to a recovery and improvement in the volumes in the quarters ahead. All these, of course, putting health and safety at the center of our operations. To this effect, we have an outstanding and ongoing commitment to health and safety as HSE continues to be a core value in our group. In the first 6 months of 2020, for example, we recorded 0 lost time injury across all our work sites in spite of the ongoing pandemic. Such a performance is not an exception. As the graph on the right shows, we have been outperforming all our benchmarks since 2009 in terms of lost time injury frequency, a standard indication in the world of HSE. This is due to the particular attention that we pay to HSE, driven by a safety culture that has always been part of our DNA, supported by investments we carried out in this area. Our already significant efforts were stepped up over the last few months as new measures were implemented to ensure our personnels' health and safety. Our efforts were also supported by a dedicated communication across the group in order to promote the appropriate health and safety behaviors in these challenging times. Finally, our group has joined the World Day for Safety and Health at Work 2020, sponsored by the International Labor Organization. The event took place over 2 days in April 28 and 29. A series of workshops were organized and were attended by personnel working in 20 construction sites across 8 time zones from North America to Southeast Asia. During this event, Maire Tecnimont's top management interacted with HSE site managers and the teams involved in the daily operations, sharing best practice and spreading the group's HSE culture. We know we cannot let our guard down in this area, and HSE will always be a top priority in our organization. Moving on to our operational performance. Our order intake in the first half was extremely strong. In fact, at EUR 1.8 billion, it is the third highest first half since 2011. The new projects are diversified, both geographically as well as in terms of business segment. We are entering a new promising geography such as Turkey. But at the same time, we strengthened our footprint in countries where we were already present and with long-standing clients such as SIBUR and Total. We strongly believe that this achievement has been driven by several success factors, such as our early involvement with clients through the execution of FEED and early engineering studies. Our strong worldwide positioning as a technology EPC contractor able to provide best technological solution and execute projects in the most challenging situations, long-lasting relations with our key clients and the resilience of the downstream business. Let me now give you some more details about Bir Seba project in Algeria. Last month, we have been awarded an EPC contract in Algeria by Groupement Bir Seba, which is composed of Algeria's national company Sonatrach, PetroVietnam Exploration Production Company and the local subsidiary of Thailand's National Oil Company, PTTEP. The project relates to the extension of an existing oil process facility in the Bir Seba and Mouiat OutladMessaoud oil fields. The overall contract value is around USD 400 million, and each completion is planned after 40 months from the contract effective date. The project entails the installation of a new oil separation train in order to double the total capacity up to the 40,000 barrels of oil per day. The complexity of this project is extremely high due to the very demanding logistical requirements in a very harsh environment in a remote desertic area. This contract, which follows one awarded to us by Sonatrach in 2018 for a natural gas project consolidates our footprint in North Africa and confirms our track record of complex project execution in the area as well as our undisputed leadership position in oil and gas refinery. Thanks to the Bir Seba project and other new orders, our backlog in the second quarter has increased to EUR 6.7 billion, one of the highest ever. Please note that the decrease in the green energy backlog is due to the deconsolidation of the Alba/Bra Hospital project, following the closing of the sale of the majority stake of the company holding the concession. Our backlog continues to be of very high quality, with a good diversification across various geographies around the world and products. Focusing on the hydrocarbon business unit backlog, we continue to maintain a good balance between volumes, marginality and duration. The approximately EUR 800 million increase in the EP portion in the second quarter is due to the acquisition of the second phase of the Amursky project. This brings the E and EP portion to about EUR 1.7 billion, or 27% of the hydrocarbons backlog. This contributes to the derisking of our existing business, a very relevant factor in these volatile times. The backlog cover has increased to 2.3x, providing very high visibility for the future. Another source of great visibility is represented by our commercial pipeline, which has been constantly growing over the last 6 years. It now stands at EUR 52 billion, twice the amount in December 2014. This constant growth has been driven by very increasing investments in downstream activities by our clients in spite of falling oil prices. Gas monetization has been a dominant theme over the last few years and will continue to remain so in the years ahead. Revamping of existing assets, driven by more stringent environmental regulations or by a need to improve productivity has also been important factor behind the sector where we are market leader. In terms of geographical opportunities, more than 50% of them are in the Middle East and in CIS. Africa and Asia remain extremely interesting areas, while North America and the U.S., in particular, has been increasing in importance over the last few months in spite of the current challenges faced by this country. New awards are expected before the end of the year. Let's move now to the Green Energy business unit. We continue to make significant inroads across the Green Chemistry spectrum as we broaden our commitment to energy transition. In particular, we have been increasing our focus on hydrogen. As you know, hydrogen is [ vesting ] to play a key role in the decarbonization process. In the last few weeks, the European Commission has launched the European strategy for hydrogen. This strategy envisages the growth of the hydrogen component within the European energy mix from the current 1%, 2% to around 13%, 14% by 2015. This goal will be pursued through an increase of the so-called green and blue hydrogen. Our group is no stranger to hydrogen. Quite the contrary. Our subsidiary, KT, has a 50-year experience in hydrogen, having been involved in 110 hydrogen units worldwide since 1971. KT has a well-recognized leadership in licensing hydrogen technology based on steam reforming. It is also highly skilled in hydrogen management services through hydrogen recovery from off-gases. Moreover, over the last 3 years, KT has invested considerable resources to develop new technologies, for instance, in the blue and super blue hydrogen. Such an unparalleled worldwide track record paves the way for our group to play a key role to the development and implementation of new sustainable hydrogen technologies as part of the current energy transition. Our current involvement in these areas are described in more detail in the next slide. Through NextChem, our group is strongly committed to developing technologies to reduce green, blue and circular hydrogen, 3 technological pillars with different feedstock which achieve the same goal of decarbonization and the emissions reduction. In green hydrogen, we have a partnership with an industrial company that is developing a new generation of electrolytes with a higher efficiency compared to the current market. We also act as technology integrator of BAT, or best available technologies, of electrolysis within the green supply chain. In relation to blue hydrogen, we are developing a proprietary solution called Super Blue Hydrogen based on steam reforming technology, which implies the process electrification using renewable energy with very competitive hydrogen production costs, combined with a drastic reduction of CO2 emissions. We are developing circular district technologies to use hydrogen, syngas and other chemical products such as methanol and ethanol. We have a partnership with ENI to produce circular hydrogen and syngas, which will be discussed in the next slide. This month, we also signed an agreement with the U.S. company, LanzaTech, to analyze the possibility to produce circular ethanol from nonrecyclable plastic waste and dry section of urban waste. Finally, also in circular technology view, we are working at carbon capture and biomethane projects to produce eco fuels using green hydrogen. We are very excited about these developments, which will provide a positive and significant contribution to the goal of decarbonization and emissions reduction, while at the same time, contribute to NextChem's growth over the next few years. Last year, we have already announced 2 partnerships with ENI concerning projects based on NextChem technology to produce circular hydrogen and circular methanol from plasmix and dry section of urban waste is RDF through a chemical recycling process. This will be implemented at ENI's Porto Marghera Bio-Refinery and Livorno Refinery, respectively. Last month, we have strengthened our existing partnership we were using for [ hydrogen ] project, that will contribute to the decarbonization process of 2 industrial sites in Taranto. The partnership entails the production of circular synthesis gas from nonrecyclable plastic and dry waste based on NextChem technologies. The gas will be produced through 2 separate channels. The hydrogen, which can be directly used by ENI refinery plant, and the syngas with high carbon monoxide, which can be used by the local steel mill, both in blast furnace process and the new direct reduced iron technologies. We are very proud of this partnership, which will drive a significant contribution to the decarbonization and recycling targets, also offering a circular solution to nonrecyclable plastic and urban waste. I now hand over the microphone to Alessandro, who will go through the first half financial performance. Alessandro?

Thank you. Thank you very much, Pierroberto. First half revenues were EUR 1.2 billion, down 27.7%. Volumes were negatively affected by several factors, some of which the final stages of certain projects and certain seasonality effects were described in detail during the first quarter conference call. COVID-19, which had adversely impacted activities in the month of March, had a bigger and more significant impact in the second quarter. The restrictions imposed by the governments of the various countries starting from March were expanded in the following months and led to limitations to the mobility of personnel, shutdowns of the production cycle of the factories, part of the supply chain as well as to the logistics services. For the same reasons, operational activities and geographies slowed down and in limited circumstances, we have been obliged to close the operational sites. However, thanks to our digital platform and the flexible business model, we have been able to maintain a close cooperation with our partners and clients, thus, mitigating as much as possible the impacts on the operating activities. As a result of such efforts, we have achieved a profitability of 9.3% in terms of business margins, up by 60 basis points. G&A were EUR 36.1 million, down 1.6%. Such a decrease was driven by the start of the cost savings plan implementation announced last May, which has more than compensated an increase related to the ongoing strengthening of the Green Energy business unit structure as well as the organization in some foreign countries, of which the U.S. is the most important one. Additional benefits due to the implementation of the cost savings plan are expected over the coming quarters. Our ongoing commitment to Green Chemistry, which was discussed by Pierroberto in the previous section, is also demonstrated by our R&D costs, which in the first half of this year have increased by 33% to EUR 3.8 million. EBITDA was EUR 73.3 million with a stable 6% marginality across the first 2 quarters this year in spite of the challenging conditions that have affected the first half. Net financial charges were EUR 22 million. As discussed in the first quarter conference call, this item was negatively impacted by an adverse valuation of certain derivative contracts worth EUR 9.8 million, while in the first half of last year, this valuation was positive for EUR 2.8 million. This implies a EUR 12.6 million negative change this year. As a reminder, the negative valuation is related to the high volatility that characterized ForEx market last March due to the pandemic. And as a consequence, this phenomenon was mainly felt in the first quarter. Since the settlement of the derivative contracts in place extend beyond 2020, it is more than reasonable to expect that this phenomenon could be reversed in the coming quarters, as already partially occurred in Q2. As volatility subsided in the second quarter, net financial charges resumed a more normal trend and were EUR 6.6 million. Tax rate was 31.5%, in line with our historical average. And consequently, net income was EUR 18.9 million. As commented in detail in the first quarter conference call, first quarter cash flow had been negatively affected mainly by a mismatch between advances from clients and to suppliers and the slowdown in the settlement negotiation concerning projects close to their completion due to the consequence of the pandemic, with resulting deterioration in the net working capital. In spite of challenging conditions, the second quarter has started to witness a gradual return to a working capital normalization, also thanks to an increase in advance from clients related to the recently acquired projects. This has resulted in a EUR 103 million increase in operating cash flows, which was the main driver for the improvement in the net financial position. We expect that this normalization to gradually continue, leading to an additional improvement in both working capital and net financial position. Talking a little bit about net working capital, this slide shows the breakdown of the individual components and how they behaved in the first and second quarter. As you may remember from the conference call we held last May, we explained that a decrease in the net working capital in Q1 was due to a mismatch between advances to suppliers and from clients. At the beginning of the quarter, a series of significant payment to suppliers was made, obviously, under the assumption that these outflows would have been more than compensated by inflows in the following weeks. The COVID-19 pandemic has changed the whole picture, and the remainder of the first quarter was characterized by, among the others, a limited amount of order intake and advances from clients as well as lower cash inflows due to the postponement of the finalization of certain negotiations related to project close to completion. In spite of ongoing challenging conditions, net working capital improved by EUR 54 million in the second quarter. This is mainly due to an increase in the advances from clients, thanks to the improved order intake in Q2 and to a continued improvement in work in progress, thanks to the completion of certain projects and, in part, a shift to account receivable following the invoicing to the clients. Please, by the way, note that the variation in account receivables shown in this page includes an invoicing of more than EUR 40 million, which was outstanding at the end of June and was already paid in early July. On the other hand, the decrease in accounts payable in the second quarter is mainly due to the deconsolidation of the Alba/Bra Hospital concession, which eliminated about EUR 30 million in payables. If the overall COVID-19 conditions don't further deteriorate, we believe that the worst is behind us and we expect further improvements before the end of the year. And I now hand over the microphone to Pierroberto for his final remarks.

Thank you, Alessandro. In conclusion, our operations are running in spite of the critical period that we are experiencing. In fact, the pandemic continues to have important effects across the globe, with certain countries still heavily impacted. That said, our significant backlog provides an excellent hedge against the short-term volatility that may be experienced in the second half of this year. Moreover, our strong commercial pipeline is expected to deliver new projects in the future. At the same time, we continue with the development of our Green Chemistry business as additional agreements are expected before the end of the year. We don't know about the evolution of the pandemic in the months ahead, and the course of it will take in the fall and winter. Nevertheless, at this stage, we confirm our 2020 guidance, provided that we experience a positive evolution in the current situation. In conclusion, we remain optimistic about the future as we believe our group is fully equipped to perform in these challenging times, thanks to its relative competitive positioning and technology portfolio. This concludes our presentation. As usual, Alessandro and I stand ready to answer any question you may have. Operator, please go ahead.

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

The first one is on the revenues versus the guidance for the full year, which I believe is around EUR 3 billion. And we are still running a little bit below that as a full year. I was wondering what gives you the confidence that we can still meet the EUR 3 billion guidance in 2020? And also on the working capital, I think that the positive effect in this quarter was mainly the down payments from new orders. So there's still -- my understanding is that there's still a significant amount of working capital to be released. And I was wondering whether you expect that in Q3 or is going to be more spread in the second half of the year?

Okay. Thank you for the question. On the revenue guidance, as we said, we are taking a view on the developments of the second semester, which is progressively getting back to normality. So we believe that there is a lot to catch up. We believe that the situation has to improve. And therefore, in our expectation for the second half, we have assumed, I would say, progressive speedup of the production curves accordingly. So basically, all the technical preconditions are there because the equipment are underway, the drawings are there and also the sequences of construction are there. So let me say, all the prerequisites, all the preconditions are properly lined up. It is a matter of getting back to normality. That's the reasoning we are following. Obviously, we don't have the crystal ball. So in a moment of such, I would say, an unprecedented volatility. By the way, we have to make a disclaimer that this kind of expectation could be heavily impacted by evolutions of the situation, which are not expectable as of now. Tell him the first question.

Yes. As far as on working capital, you are partially right. Because effectively in the second quarter, the cash flow has been predominantly secured by the advanced payment that we have received, thanks to the commercial success of the first and the second quarter. But they do not represent the only improvement that we have achieved in the second Q. I believe that you have appreciated that, that also work in process, which is for sure, one of the most critical element of general contractor, have improved because the amount -- the net amount has decreased in the second quarter by almost EUR 65 million, which of course, why? Because in the meantime, we have closed the projects, some projects. But predominantly because we have been able to invoice the activities that we have performed. And of course, invoicing is the first step then to monetize in the subsequent weeks. Another element, which relates to -- of course, we have to report on a specific date, which, by the way, now is the 30th of June. But of course, in our business, it's more appropriate to measure the performance in a more longer period. And if we could extend the closing date for -- by at least a couple of days, just to say that on the second of July, we have been -- we have received a payment in excess of EUR 40 million, which was disposed before the end of June, but of course, we received only in July. So just to confirm to you that we are not facing any major problem in monetizing the performance vis-à-vis of the project that we have ongoing. For sure, we have experienced a slowdown in the payments of the clients, in particular during the month of April and May. But in particular, from June onward, the situation is progressively returning to a normality. So we expect this is the reason why, thanks to what we have already experienced in the second quarter and what has already happened in the month of July, we are confident that the situation is due to improve significantly in the second half of the year.

Can you give us maybe a range of what the net debt could be by year-end? Or is it still too early?

But do you mean by the end of June or the expectation within the year-end?

By year-end. I was wondering if you can give us a guidance on either working capital or net debt evolution.

Of course, our efforts are predominantly concentrated in finalizing those activities, which were already ongoing in the first quarter, and referring to the finalization of those settlements, which were ongoing. And now, thanks to the improved situation in certain countries, we are in a position to close those situations. So we expect to benefit from the original -- from the ordinary flow generated by the -- in the ordinary course of business of the project to the finalization of those situations which were under negotiation. And some of them have been already finalized. And, of course, we expect -- since as already introduced by Pierroberto, we expect to be awarded of additional projects before the year-end. Of course, other advanced payments are expected within the end of the year. So just to say that in the second half, a more balanced situation between cash flow generated in the ordinary course of the business and cash flow originated by advances are expected, leading in total to a progressive normalization of the working capital, and accordingly, an improvement in the net financial position.

Next question is from Mick Pickup with Barclays.

A couple of questions, if I may. Firstly, just recently impressed as your comments about issues with workers at the Amur Gas plant. Can you just confirm that had no impact on your activities there? I think there's been riots, unrest and all sorts of things going on?

Mickey, if I understand correctly, you are mentioning the information about issues with workers in Amur?

Exactly. I read about riots on-site and stuff like that.

Yes, yes. No, obviously, let me start from the end. First of all, let me clarify that there is no impact on us and there's nothing to do with our liabilities and with our responsibilities. So this is the most important part of the answer. In general, all the very congested construction facilities are being heavily under pressure because of the pandemic. So the typical complexity of managing different nationalities in very harsh environments, in very logically uncomfortable locations, typically, all these factors together generate congested situation. Pandemic is, I would say, exaggerating, expanding this sense of discomfort because of additional restrictions, because of measures that are affecting the quality of life of the labor. So in a more -- as in any other site, given also the sites and the different nationality, I would say, this kind of physiologic issue. So the client is overviewing full control, and the situation is normal. So there is nothing to be commented. On top of the fact, as I said at the beginning, that we have no liabilities and no responsibility. Consider that Amur environment, it's a very large site with different contractors, with multiple contractors, subcontractors with different nationalities. So again, I would say it is not abnormal. It is normal.

Okay. And then let's move on to the hydrogen. Thanks for putting the slide in there. Obviously, lots of talk about hydrogen. I think most of it so far seems to want to go down the green hydrogen line. Can you comment whether you have any comments with anybody about putting blue hydrogen plant as part of these plants already? So are blue hydrogen being actively used at the moment by some of your clients?