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 9 Months 2020 Financial 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 9 months 2020 financial results conference call. As the world continues to experience and face unprecedented challenges, all our projects are up and running safely. This is thanks to our quick and flexible response that led our group to progressively adapt to a new normal. Safety remains our #1 priority, as evidenced by our anti-COVID measures and the lost-time injury frequencies of 0 in the first 9 months of 2020. Our approach has also allowed us to enjoy a healthy marginality in our business throughout the year. Cash flow generation has continued in Q3 leading to a further improvement in net working capital, driven by lower work in progress. Our business resilience has also been continuously demonstrated by our commercial pipeline, which has increased to EUR 52.6 billion. Our group is well positioned in all the major tenders. Finally, we continue to make significant inroads in Green Chemistry with a particular focus on hydrogen and Circular Economy as the multiple agreements signed this year demonstrates. We continue to add building blocks to this very important part of our business, and we are proud to make a significant contribution in the road towards energy transition. All in all, we are sailing at a steady pace towards better times ahead. Let's focus now on our operational performance. In spite of the challenging period we are all living in, we managed to successfully adapt our modus operandi and have put in place a series of measures that have ensured our business and financial continuity. As I mentioned earlier, all our projects are up and running, as we reduced and improved our operational policies in order to ensure orderly and safe operations in all our construction sites. More details will be discussed in the next slide. We've engineered our procurement logistics in order to maintain a smooth flow in the ever-important supply chain. And in the meantime, we were awarded a series of important projects by our clients with a strong emphasis on gas monetization and energy transition, representing about 85% of the total intake. From a financial point of view, we improved our flexibility through a EUR 60 million cost-cutting program. As of the end of last September, the program was 75% complete, with a reminder to take place in this quarter and beyond. That said, we expect some of these cost cuts to be structural and become permanent in the years ahead. Travel costs, for example, is an obvious candidate for this exercise. Our financial flexibility was also increased through such a guaranteed line and an agreement with CDP, Cassa Depositi e Prestiti. Both initiatives are aimed at supporting our supply value chain, which is a fundamental component to ensure a successful and timely completion of our project. Finally, we continue to work on our digital transformation program aimed at improving productivity and minimizing our cost base. We extended the successful smart working program that we introduced 3 years ago and reconfigured our office space in order to ensure a safe and compliant environment. As a consequence of what has happened -- what has just been explained and thanks to the measures that have been adopted, all our main EP and EPC projects are after running according to the schedules agreed with our clients, as shown in this table. We also feel that the current stage of our main project is providing a competitive advantage. As of end of September, more than 60% of the hydrocarbons backlog is represented by projects which are in an early stage. As you know, engineering and other early services can be performed remotely and do not usually involve traveling nor a physical presence at site. This is also thanks to the digital solution that we have been implementing over the last couple of years, which allow our employees and the engineers, in particular, to perform their work outside the office as efficiently and effectively as they were in the office. By not being particularly impacted by COVID-19-related issue and implications, therefore, a good portion of our backlog is a much lower risk profile as it stands at a very early stage in the life of a project, representing a source of competitive advantage in terms of backlog execution. Thanks to the order intake in the period, our backlog stands at a very healthy EUR 6 billion and continues to show a good diversification across various geographies around the world. The very important thing to highlight growth is that about 80% of our total backlog relates to gas monetization and energy transition projects. This is a testament of our green DNA and that the fact that this group is committed to and is active player in the energy transition process, which will be a dominant factor going forward. Focusing on the hydrocarbon business unit backdrop, we continue to maintain a good balance between volumes, marginality and duration. Thanks to the acquisition of the second phase of Amursky project, the E and EP portion amounts to about EUR 1.6 billion or 7 -- or 27% of the hydrocarbons backdrop. This contributes to the derisking of our existing business, a very relevant factor in these volatile times. The backlog cover stands at 2.1x, providing a 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 52.6 billion. While COVID will have a temporary timing effect on some of these projects, the fundamental drivers behind this growth continue to remain solid. Downstream investments continue to represent an important component of our clients' budgets in spite of lower 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 regulation and by a need to improve productivity, also has been important factors behind the sectors where we were a market -- where we are a market leader. In terms of geographical opportunities, more than 50% of them are in the Middle East and in the 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. Let's move now to the Green Energy business unit. Our engagement in developing energy transition technologies and solutions has never been higher, as we strongly believe that they represent an important opportunity of integration and transformation of our business going forward. In these 9 months, we have worked very hard on several Circular Economy initiatives, both in waste to chemical and plastic upcycling, leveraging on our cutting-edge proprietary technologies. We have enlarged our alliance with ENI, which started last year and consuming the Circular production of hydrogen and methanol in ENI's refineries co-developing a next-gen technology. The new project we are working on relates to the Circular production of hydrogen and syngas for DRI in the Taranto refinery, the latter aims at the steel industry. On the plastic upcycling side, a few weeks ago, we signed a strategic agreement with Aliplast, a subsidiary of Hera, one of Italy's most important multi utilities, to build a new upcycling plant in Italy, which will use our proprietary and cutting-edge MyReplast technology, which we successfully deployed in our Bedizzole plant. Our group will provide the technology as well as perform the EPC services. The new plant we introduced up to 30,000 tons per year of recycled high-quality polymers from plastic waste. In particular, thanks to our MyReplast technology, the plant will be able to provide customized recycled products to meet the needs of individual clients with high-level chemical, physical and mechanical performance on par with virgin polymers from fossil source. During 2020, we also signed some partnerships in order to strengthen our technological portfolio, such as the agreement with Lanzatech for the production of circular ethanol with Saola Energy for renewable diesel and with GranBio to license a 2G ethanol-patented technology. Finally, last week, we signed an MoU with Indian Oil Corporation in order to develop projects to foster the industrialization of the Circular Economy in India. This represents a very important milestone for our Green Chemistry business, as the potential in this country is limitless. Now let's have a quick update on our low-carbon hydrogen commitment. A sustainable hydrogen production is going to play a key role on the path of this decarbonization, which is the first goal of energy transition. We are strongly committed to developing innovative solutions to produce low or 0-carbon hydrogen using and developing different technologies. As many of you know, the production of green hydrogen is still relatively expensive compared with the traditional steam-methane reforming technology, or SMR. And it will take time before this cost becomes competitive. However, today, we can offer our client services along the entire green hydrogen value chain, integrating the best available technologies from renewable energy to the support in finding the offtakers, which are interested in the product thanks to our international network compliance and partners. In terms of blue hydrogen, which is produced by traditional SMR, but with carbon capture, we have developed a proprietary technology named Super Blue, which takes the concept of blue hydrogen to the next level, introducing an innovative aspect to use -- the use of renewable energy as an alternative medium in process. This approach allows for a 50% reduction in the generation of CO2 during production, facilitating its total recovery. We are designing the realization of a pilot plant in Italy, which we expect further developments in the months ahead. Finally, we are strongly engaged in developing the circular hydrogen technology in partnership with ENI, which entails the production of hydrogen from nonrecyclable plastic with chemical conversion. This technology allow a 95% reduction in CO2 emissions compared to traditional steam reforming, also thanks to the reduction of waste burden while producing syngas. Economics of this solution are competitive, especially including the revenue stream from waste management. We are really excited about our waste-to-chemical projects also because we think the different technology which are developing can be integrated with each other giving rise to a substantial Circular Economy model. To this effect, on Monday, we announced the launch of MyRechemical, a subsidiary entirely dedicated to chemical valorization of nonrecyclable plastics and waste-to-chemical processes. Thanks to these initiatives, NextChem can now offer, on an industrial scale, a complete and integrated platform for the recovery of all types of plastic waste, another concrete and material step in our path towards energy transition and mechanical and chemical recycling. I now hand over the microphone to Alessandro, who will go through the first 9 months financial performance. Please, Alessandro.

Thank you, Pierroberto. Thank you. So let's start together with some comments on the income statements. Nine months revenues were EUR 1.9 billion, down 22.7%. Volumes were negatively affected by the consequences of the COVID-19 pandemic and by the measures and restrictions imposed by the governments of the various countries starting from March and expanded in the following months. As the situation improved in the summer, operational volumes resumed a more normal trend, although at lower levels in comparison to pre-COVID times. 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 contract gross profitability of 11.7%, up 10 basis points versus last year despite lower volumes. G&As were EUR 53 million, down 6.9%. Let me emphasize this percentage, down 6.9%. Such a decrease was driven by a cost-saving 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-saving 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 R&D cost, which, in the first 9 months of this year, have increased by almost 25% to EUR 5.5 million. EBITDA was EUR 112.5 million with a stable 6% marginality across the quarter this year, in spite of the challenging condition that has been affecting the world. Obviously, the EBITDA evolution this year has been negatively impacted by those cost components, which are fixed in nature and cannot be reduced at the time of lower revenues. Net financial charges were EUR 33.1 million. As discussed in previous conference calls, this item was negatively impacted by the adverse valuation of certain derivative contracts worth EUR 11.3 million. While in the corresponding period last year, this valuation was positive for EUR 1.1 million. This implies a EUR 12.4 million negative change this year. As a reminder, the negative valuation is related to the high volatility that has characterized the ForEx markets 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 contract in place extend beyond 2020, it is reasonable to expect that this phenomenon could be reversed in the coming quarters. Tax rate was 31.3%, in line with our historical average. And the net income was EUR 31.6 million, while group income was EUR 35 million. Moving on to the balance sheet. We split the cash flow bridge by each quarter so that you can appreciate the different dynamics throughout the year. As you may remember, first quarter cash flows had been negatively affected mainly by a mismatch between advances for clients and to suppliers and the slowdown in the settlement negotiation concerning project close to that completion due to the consequence of the pandemic, with the 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 the advances 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. The improvement continued in the third quarter, which saw operating cash flows in excess of EUR 64 million, in spite of negative ForEx impact of about EUR 20 million. Cash flow generation helped to improve the adjusted net debt to EUR 227.8 million, down more than EUR 117 million in the last 2 quarters despite higher, but all expected, taxes and net financial charges. We expect this normalization to gradually continue leading to an additional improvement in both net financial position and trade working capital. Focusing on the latter, the third quarter has seen an additional improvement of almost EUR 46 million, bringing the total improvements since April 1, to EUR 100 million. This is due, in particular, to a continued improvement in the net working progress item as well as an increase in advances from clients. As a matter of fact, looking at the first 9 months of this year, net working progress has steadily decreased quarter-after-quarter, with a total reduction of EUR 206 million in the period. This is a very encouraging sign after the increase in these items that was the main cause of the deterioration in working capital last year, which saw an increase in work in process of about EUR 270 million. Thanks to the active commercial activity that brought EUR 1.8 billion in new contract this year, advances from clients also played a positive role with over EUR 142 million added in the second and third quarter. As we managed to keep all the main E and P (sic) [ EP ] and EPC projects up and running, we ensure to work with all our suppliers in order to keep the supply chain operating at full capacity in light of the various limitation across the globe. This is reflected in a healthy reduction in the accounts payable in each quarter. As work continues to be performed in all our main projects, in spite of the second wave that we are witnessing, we expect further improvement in the net working capital in the fourth quarter and beyond. And now I hand over the microphone to Pierroberto for his final remarks. Please, Pierroberto.

Thanks, Alessandro. In conclusion, our operations are up and 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 and the high percentage of projects in the early stage provides an excellent hedge against the short-term volatility that may be experienced in the months ahead. 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. We are very happy with the way this business is starting to shape up as we keep on adding new building blocks. 2020 has been an extremely and uniquely challenging year. We have to rapidly adapt to face the reality that none of us had ever experienced in his or her life. While we don't know about the evolution of the pandemic and the course it will take in the near future, nevertheless, we can confirm our 2020 EBITDA, in spite of the volatility that we continue to experience on a daily basis. Our expectation is obviously based on the assumption that the current situation doesn't get any worse. If that were to happen, our estimates may change. 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.

I have 3, if I may. The commercial pipeline -- first one, commercial pipeline remained strong. You mentioned you expect new projects in the future. Can you give us a bit more color on the project that maybe you're bidding you are expecting to win over the next couple of quarters? And the second one is on the HERA project. I was wondering can maybe give us some sense on the economics and whether you can clarify whether you've taken any -- you're taking any equity in the project as well? And the final question on net debt, any guidance around debt by year-end?

Can you repeat the last question, please?

The last question is guidance around net debt for year-end.

Okay. Thank you. Let's start from the commercial pipeline. The commercial pipeline is driven by gas monetization initiatives. So there are a number of fertilizer plants that are around. We are basically well positioned in every tender going on. You know the fertilizer market is picking up again. It's a business that is cyclical. And as we were saying in the past quarters, certain investors are pursuing initiatives in this respect. So there are a number of bids out, and we are well positioned in several geographies. So on the one hand, there is Middle East. And the other hand, there is also America. And for sure, Russia is always ahead in terms of decision-making. The Russian system is proving to be the one more resilient in terms of decision-making with respect to big investments. The Amur 2 project, it's a very clear evidence of that. And there are other initiatives in the region also, not only in fertilizers, but also in the PetChem space so in the polyolefin space. On top of it, we continue to see other smaller projects, even in the refining business, whereby our strategy of picking up possible jobs for process units in the refineries that need to improve the conversion capacity and better exploit the bottom of the barrel. So we are with smaller packages in other refinery initiatives in Europe and not only Europe. So this is the kind of hottest list of initiatives. I have no problem to tell you that we are very well positioned on these tenders. So on a number of that, we are level 1, which means that we are front-running the process. The question mark is not to win race. The question mark is when the client feels enough comfortable and confident with respect to the future in order to proceed with the award. This is obviously very rhetoric question in general and in particular during COVID times. My view is that investments are needed. So you can postpone, obviously, if you feel in a volatile environment. But to me, 2021 -- say, summer 2021 has to be the moment in which this system is unlocked. So smaller project, bigger project, a very robust commercial pipeline in our core business. Moving to Hera. Hera, it's a very admired client. You know why? Because it's not only a multi-utility, but it's a multi-utility that has already pursued a transformation program. So they are probably the utility that is managing the biggest volumes in terms of waste management in Italy, on the one hand. On the other hand, they are already ahead in terms of developing a mindset in products. So not simply how to get rid of wastage, but rather how to valorize wastage into something else. So with this mentality, they are a partner of choice for someone like ourselves, that are very focused on transforming the waste management from a disposal exercise to a valorization exercise. So as of now, this kind of alliance is starting with the chemical recycling and upcycling of plastics. They are so, I would say, ahead in this vision that they have already invested in these kind of plants with Aliplast, that is a company very well known in the plastic recycling. Now we are teaming up with Aliplast to think of new products from plastic recycling, upgrade it, so upcycle it, in order to serve top-tier clients in Europe. So the beauty of this project is that we will push mechanical recycling ahead -- upcycling ahead, demonstrating that it's not all about producing poor products, poor quality programs, but rather to serve clients with maximum standard kind of products with products that are very similar to virgin plastic kind of products. The collaboration will start from replicating with them our Bedizzole plant. So basically, we are in the process of designing and realizing a plant that is similar to the plant we have in Bedizzole, i.e., with a specific focus on compounding the plastic into recycled polymers. The project will start from that. And then as soon as the collaboration proves to be mutually satisfactory and promising, to me, will be the step for further collaboration. So we enjoy a very good fit in chemistry with their vision for the future. Moving to net debt evolution, we gave, on March, kind of indication of -- which is the direction we intend to follow and pursue in terms of speed and velocity of reduction. So we gave a clear qualification of a substantial reduction. I believe that quarter 2 and quarter 3 are giving substance and credibility to this vision. And our vision is to continue in the same direction, procuring that the working capital normalization is progressively taking us to a stock of net debt that is substantially lower than the starting point of March. I don't know, Alessandro, if you want to add something in this respect.

No. Pierroberto, you are completely right. Of course, the worst is, of course, behind us. What happened in the first quarter is the result of unpredictable behavior of our client as a first reaction to the pandemic. Of course, as soon as the situation moved to a more normalized environment, in particular, in the second quarter, the situation has improved a lot. And thanks to, let me say, a more normal behavior of the client, it was possible to accelerate, for example, an important term is accelerating the invoicing procedure leading to a significant reduction accordingly in the work-in-progress items of our balance sheet. And of course, invoicing is the first step then to create a cash flow. Since we are conscious of the healthy project, which are presently ongoing and which will prevail, of course, in the fourth quarter, both in terms of an economic standpoint and all of them are -- have a very positive cash flow. We expect to continue, as already stated by Pierroberto, in the positive working capital dynamics that we had experienced in the last 2 quarters, thus supporting our guidance for an additional significant improvement in our net financial position at year-end.

I didn't answer your question on our possible participation in the equity of the Hera plant. This is not envisaged. So the relationship, it's a relationship in which we are technical partners. Hera is strong enough and has a very clear investment plan, and they will proceed with the investment themselves.

Okay. On the net debt, I was wondering if there is a range that you can give us at this stage. And also, I believe if I look at the cash flow statement, there is a negative cash flow from operations as a bridge from Q2 to Q3 and yet the net debt has gone down. I was wondering if you can clarify that for me as well.

What you have mentioned, of course, is right but is the result of a sort of an accounting approach. Because I don't know if you had the opportunity to look at our net financial position adjusted by the end of September, there is an important element, which contributes, in our view, in our mind, to the improvement in the net financial position at the end of September. There is an amount -- a significant amount of money, which, from a pure accounting standpoint, is classified as account receivable. And accordingly, when preparing the fund statement, of course, the fund statement is based on the accounting representation. But let me clarify an important issue. You know that, in particular, over the last couple of years, for sure, more than in the past, a lot of client -- national, international, privately-owned client, they tend to validate -- to approve an investment only when they have secured financial package. Of course, we -- very often, we help them in securing the financial package and more than that, some time, we drive the process. Of course, to secure the financial package, it is necessary to invest time because it requires at least 4, 5 months. In order to privilege the operations and the commencement of projects recently awarded in -- during the third quarter, we have agreed with the clients, payment conditions of both advances and as well as services already rendered, which extend the normal terms and condition of a commercial relationship. And the client have, of course, agreed with us to privilege the commencement of the project and they have accepted even to recognize an interest on this deferred payment. So in other terms, these conditions qualify as a sort of financing that we are supporting in order to privilege the operation. But of course, there are no risks for the collection because these projects will be then secured through a project financing. And we -- on top of that, we expect to collect the underlying money from the client, thanks to the financial package that will be secured quite soon before the year-end. So moving from a pure accounting perspective to a substantial perspective, we have reclassified, in our net financial position adjusted, an amount well in excess of EUR 200 million, represented by this type of receivables, which, I repeat, will be monetized very soon and for which there are no risks for their collection.

Very clear. And on the net debt, is there any range you can give us at this stage for year-end?

Well, I believe that the most appropriate qualification has been already provided by Pierroberto, saying that we don't want, of course, considering also the uncertainties, which can affect the present times by the COVID. But in -- if we continue to maintain the operations in line with what we have experienced so far, we expect another significant reduction within the end of the year. I don't want to qualify -- to quantify what does it mean a significant reduction, but please appreciate that there will be another significant reduction before the end of the -- in the end of the other year.

Let me add on that. We do want to look transparent. It is -- let me tell you that the -- the last quarter of the year, for us, is always a moment of good monetization. So I think the quarter 2 and quarter 3 were the most, I would say, indicative examples of the cash realization but the last quarter is typically the best. So that's why Alessandro is telling you that we -- for the quarter to come, we are very positive of good cash generation that will again improve significantly the net financial position. The reason why we don't want to give number, it is because the situation is very volatile. And you know that the market can be very punitive. When you tell a number, the number is written in the stone. And we are -- we have no concern in writing numbers in the stone. But with COVID times, I think in terms of guidance and in terms of visibility of the future, we believe to be the ones more transparent. So no one is giving any number around. We have been giving number even quantitative, not only qualitative indications. So please be indulgent. We want to give you the perception and the color of -- and the confidence of the management on this cash generation, but we don't want to give the number for the reason I just told you.

Our next question is from Mick Pickup with Barclays.

Okay. Thanks for answering that one because that debt number looks odd to me, too. Just a quick question on your Green Energy. Obviously, you've done a lot of moves forward this quarter and a lot of alliances. You do have a target in place for earnings from Green Energy for 2023, as far as I remember. Do you think you've got enough in place now to deliver that target?

Thank you for your question, Mick. I believe that the -- all the speed in the energy transition is increasing more and more day by day, week by week. So I believe that the -- obviously, the target is a very ambitious target. We like to be ambitious. And I believe that the COVID is pushing more and more in the possibility to reach that number. So the more the COVID is creating this kind of extraordinary times, the more there will be willingness to put even kind of public money to support green infrastructure, and therefore, the likelihood of our medium-term target is increased. So if you think of all the money that are expected in Europe for -- from the recovery plan and if you consider -- for example, only Italy, and if you consider, which is the big amount of money that are expected to be spent in Italy and was the amount of investment that Italy is desperately waiting for. So if you think of, for example, the Waste to Chemical idea and if you consider which is the overall situation of the waste management in this country, you can easily understand which is the very good position -- very good positioning of our ideas in the country. You know that Italy is exporting plastic wastage at a price that in the south of Italy, it's in the region of EUR 200 per ton. And we spend a lot of money to get rid of something that has an intrinsic value made of carbon and hydrogen. So with such a situation, so you can imagine how our Waste to Chemical idea can change the course of the story and how much our idea that is -- it is not an academic technology. It's not a pilot plant. We are talking about plans that can be EUR 300 million, EUR 400 million. So it's not a small thing, and that can solve the issue of the plastic wastage, procure that the municipalities save this huge amount of money. And at the same time, this plant will produce a chemical that Italy imports. Italy is, for example, a net importer of methanol. Italy is simply not producing ethanol and you know how much the ethanol regulation is going to affect the fuel market. So I'm just mentioning methanol and ethanol to tell you 2 products that can derive from our Waste to Chemical plants, and you can imagine that if you have EUR 200 per ton of gate fee, how much you can support the business case of an ethanol and methanol production plant in a country that is importing it from Rotterdam in the best case. So you can also imagine what is -- how much this kind of idea is "spendable" in front of Italian politics and Italian policymakers. So -- and we are developing it with ENI. So it is not that we are developing it with a small branch of an international company. So we are developing it with the company that will be in charge for the energy transition of the country. So let me say that I'm very positive that what we did with NextChem is proving to be very valid and that the COVID is giving additional impetus and momentum to the story.