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 2022 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Bernini, CEO of Maire Tecnimont. Please go ahead, sir.

Good afternoon, everyone, and thank you for attending the 9 months of 2022 financial results conference call. The first 9 months of 2022 have shown a solid and growing financial performance as revenues and EBITDA have grown at double digit rates versus the corresponding period last year. Our Green Energy business continues to grow at a significant pace with revenues of EUR 202 million, up almost 4x and a record backlog of about EUR 1.2 billion, which has increased almost 5 fold over 1 year. This solid financial performance has been accompanied by a very strong cash flow generation of EUR 213.6 million, which has led to an adjusted net cash of EUR 65.3 million. This is the 10th consecutive quarter of improvement in the net financial position. Our EUR 8 billion backlog, net of all the Russian projects that will no longer be included from now on, continues to be extremely healthy and well diversified, and the group is not dependent on any single geography. A 2.8x backlog cover makes us confident about our immediate future. At the same time, our business drivers continue to remain solid, as reflected in our commercial pipeline worth almost EUR 54 billion, of which almost EUR 8 billion in Green Energy. In conclusion, we are successfully executing projects while energy transition is taking off. Our main consolidated financial results and KPIs are shown on Page 4 and will be discussed in more detail later by Fabio during the presentation. Before we discuss our operational performance, we'd like to give you an update on our Russian projects. As communicated last July, no economic contribution was recorded in Q3 as projects were suspended in the course of the second quarter. Moreover, as the premises that led to the suspension have not changed over the last few months, projects have been or are in the process of being terminated. As a consequence, Amursky 2 and Kingisepp 2 have been taken out of the backlog as of September 30 and the Russian backlog is now close to 0. Please note that all historical figures relating to the better presented in this document have been adjusted in order to exclude the Russian projects in order to facilitate the comparison on a like-for-like basis. Contractual conditions related to the terminations due to sanctions will be applied as customary. And finally, we confirm that the project financial position continues to remain in equilibrium as communicated throughout the year. And now let's analyze our operational performance. Our order intake up to the end of September was EUR 1.6 billion. This year's intake has been extremely diversified, both in terms of geographical locations, contract type and business. This is thanks to a healthy commercial pipeline that continues to offer a variety of interesting prospects all over the world. Moreover, our increasing success in Green Energy is demonstrated by the fact that half of the entire 9 months order intake is in this business line. A testament of the validity of our technological leadership in the energy transition. These were to set has continued this month with over EUR 450 million of new orders, leading to the overall total to date to about EUR 2.1 billion. Based on the various ongoing tenders that we have submitted, we are fully confident to further increase this year's order intake and reach a book-to-bill ratio of at least 1. Let's take a look now at the Rhourde El Baguel project in Algeria that we just announced a few hours ago. This morning, we were awarded a $380 million EPC contract by SONATRACH. The project is related to the execution of a liquefied petroleum gas extraction plant inside the already existing Rhourde El Baguel oil and gas treatment complex situated in the Northeastern Algeria. The project scope of work entails the implementation of a new LPG extraction plant that once completed, will have a capacity to process 10 million metric standard cubic meters per day of associated gas coming from the existing facilities. The plant completion is scheduled within 36 months from the contract effective date. The objective is to increase the LPG and condensate production of the existing gas treatment complex. The majority of the construction is expected to be performed by local subcontractors representing a significant contribution to the in-country value development in the area. This is a very strategic project that we affirmed our track record with SONATRACH and confirms our leading position in gas monetization. As previously commented, the Russian projects have been taken out of the backlog in the course of this year. In particular, Amursky 2 and Kingisepp 2 have been removed in addition to Amursky 1, which has already been taken out. In order to have a comparison on a like-for-like basis, however, we also adjusted the backlog data at the end of June by taking out the corresponding amount of all the Russian projects. The result is a slight decrease of about EUR 250 million. The decrease in hydrocarbons due to these adjustments, however, is almost fully compensated by an increase in the Green Energy backlog. Thanks to the various energy transition projects, which were acquired this year. Moreover, the order intake of the last couple of years has made the backlog even more geographically diversified than ever. We feel there is a good balance between the Middle East, our strongest historical area and the other regions in the world from Europe to Africa, Asia and North America. Let's focus now on our 2 business units, starting from our core business. The E and the EP portion of the hydrocarbons backlog has remained relatively stable at over EUR 600 million. This continues to contribute to the derisking of our existing business, a very relevant factor in these volatile times. The backlog cover is 2.8x, providing a very high visibility for the future. Moving on to the commercial opportunities in our core business. Our pipeline has increased to EUR 46.1 billion at the end of September, up EUR 5.5 billion this year. The last quarter has seen a significant increase in the new initiatives about to be tendered, driven by the resilience of our core business, strongly supported by powerful business drivers. Such a positive environment bodes well for our group's growth prospects in the years ahead. All the geographies where the group is active continues to remain extremely attractive. In particular, the Middle East continues to remain an area of incredible opportunities driven by a new wave of downstream projects. At the same time, we are witnessing an increase in activity in North America driven by abundance of gas as a feedstock for fertilizer plants as well as renewed investment in other gas monetization plays. Asia is also an area that continue to show significant potential. Overall, our pipeline remains extremely strong and geographically diversified, continues to provide solid support to future awards in the short and medium term. Let's move now to the Green Energy business unit and our efforts in the energy transition and sustainability. We continue to grow our Green Energy business, offering our clients sustainable solutions to enable them to successfully face the energy transition challenges. In this respect, half of the 9 months order intake is represented by energy transition projects, as we highlighted earlier in the presentation. We have been awarded contracts not only by historical clients, but also and especially by new customers. They are all working to transform the processes and their products in order to tackle the climate change challenge. We are particularly active in the area of low carbon fertilizers and green hydrogen with several engineering and EPC awards across the globe. Biogas, sustainable aviation fuel and the second-generation ethanol are another area that we are actively pushing also tends to our international partnerships. Last but not least, we are increasingly playing a relevant role in circular economy, thanks to our unparalleled kins and competitors. In this respect, let's take a closer look at the waste-to-hydrogen project in Rome, which is going to benefit from a significant EU grant that was just assigned to NextChem. We are extremely proud that the NextChem has been assigned EUR 194 million grant for the development of a waste-to-hydrogen plant as a part of the IPCEI Hy2Use project especially considering that only EUR 500 million have been assigned to Italian projects overall. The project sets up the Hydrogen Valley in Rome, the first industrial-scale technological hub for the development of the national supply chain for the production, transport, storage and use of hydrogen for the decarbonization of industrial processes and for sustainable mobility. Thanks to the proprietary technology developed by NextChem, the plant will use 200,000 tonnes per year of nonrecyclable solid waste as a feedstock to produce circular ethanol and circular hydrogen, the latter and the competitive cost compared to traditional hydrogen production from fossil fuels. The project will also contribute to the optimization of the waste treatment cycle in roll through a conversion process that will significantly reduce total CO2 emissions. As a matter of fact, following the life cycle assessment approach, which calculates CO2 emission from the raw material to the final use of the products our waste to ethanol and hydrogen technology produces fuel savings beyond 70% of greenhouse gas emissions compared with traditional process and the hydrogen produced can be considered EU taxonomy aligned. NextChem is acting as the promoter of this important initiative. As such, we are actively having conversations with qualified leading industrial players and the strategic infrastructure funds about the future equity structure where we may consider retaining a minority investment. In the meantime, as I announced last Monday, engineering design activities have been started also including the award of the process design contract for the circular ethanol unit. We will keep you updated on these exciting projects as developments will take place. All these significant and diversified new projects have translated into a sizeable increase in the Green Energy backlog, which has gone up 5 times over the last 12 months to almost EUR 1.2 billion. Such an increase has already translated to higher revenues, a trend that is expected to grow in the future. The backlog is widely diversified with projects spread equally between Europe, the Americas and Asia. The other side of the coin of the Green Energy expansion is given by an increasing commercial pipeline. As of the end of last June, we were pursuing opportunities worth EUR 7.7 billion, up to EUR 1.1 billion this year. While Europe remains the target geography we are experiencing an increase in opportunities in other areas such as in Asia and in the Americas. I now hand over the microphone to Fabio, who will discuss our financial performance in more detail.

Thank you, Alessandro. Our 9-month revenues grew 22.6% to EUR 2.5 billion. Such an increase is mainly due to last year's acquisitions, starting to provide a positive contribution to our pipeline. Business profit was EUR 214.3 million, up 14.2%, thanks to the revenue increase. G&A were EUR 56.6 million, a decrease of about EUR 1 million or 1.4%. This remarkable achievement is due to our continued attention to cost improvements across our organization. As a result, the percentage of these expenses on the revenues has decreased from 2.8% to 2.2% over the last year. R&D has increased by over 3%, mainly driven by our Green Energy expansion. EBITDA was EUR 151.5 million, up 22% with a profitability of 6% in line with the previous quarters and with this year's guidance. Net financial charges were EUR 26.4 million and were mainly impacted by a higher derivative mark-to-market valuation also related to the tools in place for the buyback of our own shares and by a marginal increase of the gross debt. Such a positive operating performance has led to a consolidated net income of EUR 61.4 million, up 7.2% and the group net income of EUR 61 million, up about 1%. Moving on the balance sheet, let's analyze the cash flow dynamics. Our adjusted net financial position has improved for the tenth consecutive quarter and now stands at EUR 65.3 million. Such an improvement has been driven by a significantly healthy cash flow generation of EUR 213.6 in the 9 months as projects started to shift gears in the second quarter and delivered over EUR 180 million of cash flows in the last 2 quarters. This positive cash generation more than compensated EUR 60 million in dividends and EUR 97 million additional outflows due to taxes, net financial charges, CapEx and acquisition of treasury shares. We expect this trend to continue in line with the guidance provided at the end of February. Let us now take a look at the working capital for now. Working capital has improved by about EUR 132 million to negative EUR 137.8 million. Such an improvement has been mainly driven by the positive effects of project advancements on accounts receivables and payables and advances to suppliers. This drop is further proof of the ability of our projects to generate cash as well as the effectiveness of our working capital management. Please remember that our net working capital was positive EUR 288.8 million at the end of March 2020. This implies an improvement of over EUR 420 million in 2.5 years. I now hand over the mic to Alessandro for his concluding remarks. Alessandro?

Thank you, Fabio. But before moving to our final remarks. So let me provide you with an anticipation about how we are modifying our market approach. Our group has always been very fast at responding to the ever-changing external environment, and our business structure has evolved over time to adapt to these transformations. Our core business has always been in Energy Services serving our clients in the downstream business. Our leadership position in the petrochemical, fertilizer and oil and gas refiners is undisputed. Our competitive advantage has always relied on a comprehensive and significant proprietary technological platform driven by almost 2,000 patents. For this reason, following the implementation of a new strategic approach in 2014, we booked technologies at the center of our organization as the key and clear differentiating factor vis-a-vis our competitors. Clients are choosing Maire Tecnimont for its technological DNA and the value added that we would bring in delivering energy services solution. By the end of 2018, the launch of NextChem represented an important disruption event whereby we grouped our existing energy transition activities and competencies under the Green Energy business unit, which started to represent our main platform to develop our energy transition efforts. We were the absolute first among our peers to make this move, which was supported by our existing in-house capabilities and anticipated a trend that would become more obvious a few years later. The move towards a world defined by energy transition is now clear and evident, and the green acceleration is taking place right now. For this reason, our clients are increasingly demanding E&C solutions that are more and more integrated, helping them to successfully face and anticipate this energy transition trends. The synthesis of these market trends and demands is that the key to win will be the ability to apply and integrate these different E&C and technological solutions across a wide variety of industries and geographies, each of them with their own peculiarities and characteristics. And the combination of a technological DNA coupled with expertise and the proactive problem-solving culture is already giving us the chance to compete in the Premier League, if you allow me, a structure analogy. Only those who can master different technology and know-how to efficiently apply them will be able to stay on top. We have been dealing with these issues for the last few years, as we started to develop and integrate our energy transition expertise into our traditional business, developing successful E&C solutions means putting together our projects and risk management capabilities, which will result in superior project execution and integrated solution. Being a leading technology solution providers means building together all the value-added activities centered around the development and the deployment of proprietary and third-party technologies as well as proprietary equipment to offer our clients the best sustainable technological solutions. As we move forward towards an energy transition world, we are enhancing our competency, which while being very focused, are strictly interrelated among each other in order to leverage cross-fertilization of ideas and synergies under the same growth. As a consequence of what we have just explained and to better represent business evolution towards energy transition, we will adjust our reporting system to reflect, on one side, sustainable integrated E&C solutions that carry higher volumes and margins. And the E&C on the other side, sustainable technology solutions characterized by lower volumes but higher margins and higher growth rates. This change will be implemented starting with the full year 2022 financial results. More details will be provided to all of you in due course. Moving now to the final remarks and having said that, the 9 months financial results have confirmed the pickup in pace, which is showing a double-digit growth. Our energy transition business continues to develop significantly as new projects have been awarded and started leading to a more than fourfold increase in the backlog over the last 12 months. Overall, our total backlog is providing a solid foundation to 2023 revenues and beyond, both in the traditional and in the energy transition business. At the same time, our strong and growing commercial pipeline supported by our leading technology portfolio will continue to deliver new projects. As such, we expect the full year order intake to go over the next couple of months, leading to a book-to-bill ratio of at least 1 and backing a further growth for the year end. As a result, we confirm our 2022 guidance that was communicated to the market on February 25 namely revenues in the range of EUR 3.4 billion to EUR 3.6 billion and EBITDA profitability in line with the last few quarters and an improving net cash position. We will continue to consolidate our overall growth while expanding our existing energy transition business to higher levels. And this concludes our presentation, and Fabio and I stand ready to answer any questions you may have.

[Operator Instructions] The first question is from James Winchester with Bank of America.

I just wanted to talk about contract assets again. In your annual report, you wrote that you expected the trend of growing unbilled receivables to turn around in the coming quarters. But there's only 1 quarter of decline. So can you provide a bit of color as what didn't materialize that you expected at the beginning of the year. And then secondly, in parallel to that, trade payables are now about EUR 2 billion. And I know previously, you mentioned that this is because you're waiting to get paid. Can I confirm that you basically agreed with every subcontractor that they won't get paid unless you do? And then the final one is, could you just provide a bit of detail on the use of factoring and reverse factoring for Maire Tecnimont?

Let me start with the last question you made on factoring a reverse factoring. I understand your second question was on trade payables. And if you can rephrase the second question you made. Let me start and then maybe you can rephrase. Factoring and reverse factoring has been used since sometimes at Maire Tecnimont. It's the process in a way to really discount receivables for clients and be able to grant a steady flow of cash flows that you see in our reporting. As you know very well, our business is not a business where we can predict the steady growth over time because you have sometimes certain cash in or cash out which can make a huge difference on quarter-to-quarter. So we have always been using working capital tools, trade finance tools to smoothen the curve. And this is the case with factoring, which allowed us to anticipate cash flows due in other periods, just again, to be able to provide a smooth growth of the cash in as well as reverse factoring to our suppliers, which are able to -- as trade finance tools to give us 2 advantages. First of all, we can delay the payments to suppliers in case of delay in the cash in. Second, we give our supplier base certainty of payment. So in a way, when we give a prior certainty of payment through reverse factoring, you are also able to negotiate better conditions. There is also a tool to become more efficient in the supply management. Can -- your other question was on...

Let me provide you with an answer with respect, in particular to the value of the contract assets, which has been -- and I'm realizing is still a lot of interest of everybody. As you have appreciated, we have maintained more or less the same amount, which we have experienced by the end of June despite a significant increase in the volumes of our operations because in the third quarter, we have generated more than EUR 900 million in terms of production, which represent an important milestone for the growth of our group. And of course, this -- the possibility to manage and to reduce the contract assets, it depends on the contractual conditions defined with the clients in terms of possibility to invoice the various milestones. Now since we have ongoing different packages, different projects, giant projects, in particular, in Nigeria, in particular, in Middle East, in particular in Europe as well as in U.S. Of course, before being in a position to release the invoicing, it is necessary to reach the milestone agreed with the client, which depends on -- and since the contract assets represent the photogram at a certain standpoint, in this case, 30th of September, -- it means that for -- in some circumstances, it was not yet possible to building the client with the work that we have done. But -- having maintained the same amount that we have experienced 3 months ago, when the level of volumes was absolutely lower than what we are experiencing and delivering so far. It's a great result because it means that we are managing properly all the works that we are providing to the client as well as the building facilities. I don't know if there is something else that we have lost.

No. I mean just in terms of the contract assets, I mean, the point that I was trying to make was you kind of knew what your revenue is going to look like for the full year. But you kind of highlighting that you're expecting it to decline over the following quarters when you set the guidance, but we've only had 1 quarter. So it was just more a question of what didn't materialize versus what's actually happened. But can I also add one other question is the closure of the EuroChem, the project in Russia. What -- did it have much of an impact on the CFFO in the third quarter?

Let me take this one on Kingisepp 2 and then we go back to the view on contract assets. So the termination of Kingisepp 2 as you are rightly reminding us, has been closed in on October -- on August 8. The overall impact in terms of financials, this is what you're asking is with a positive sign in the sense that from accounting perspective, we are balanced in terms of assets. One thing that needs to be reminded is that the client trying to call our bonds. This is known to the financial community. And clearly, at these bonds, we're not -- were frozen just because banks are not allowed to make any payments to sanctioned subject. So in a way, the financial situation in Kingisepp 2 is balanced and will bring on discussing with the client and negotiating going forward.

As far as the question relating to the contract assets, let me say that everything is in line with the contractual framework that we have agreed with the various clients. There are no particular event simply, of course, what was ongoing in the past has been transferred into the receivable cash. And now we have the new work, which is going to be delivered to the client, which I repeat, if it has not reached the contract on milestone, it is not possible to build it. But there are no particular phenomenon behind. There are no, let me say, pathological factors, it is simply linked to the contractual structure that we have in place and the type of work that we are executing on behalf of our client, nothing particular behind the value of this amount, which, by the way, of course, we are trying. And I believe that we have all the way to try to reduce this amount within the end of the year since in particular, in the last quarter, there are different type of efforts in trying to convince the client that we have achieved the various milestones. So I am expecting that within year-end, the amount of the contract assets that we have experienced by the end of September could be reduced within the year-end.

Next question is from Mick Pickup with Barclays.

James, it's Mick here. Just looking ahead, Alessandro, you obviously talked about 2023 being a year of growth. I think I'm right in your calculation, you're saying that you're going to end up with a backlog at least EUR 8.4 billion. And so my type of math, I would say you probably best part of late 3s in hand already. Can you give us some guidance of what you're already in hand for next year? I'm just looking at lower end of consensus, which shows very little growth in next year. And it's looking at the moment that you're [indiscernible] should be going a bit north of that quarter.

Well, you are right. I think we are enjoying a very high level of backlog even without -- after having taken out the Russian project, we have remained at an amount which is well in excess of EUR 8 billion. And a significant portion of this backlog is due to be realized, in particular in 2023 and the year after, of course. But on top of that, as we have already stated, we are more than confident, let me say, almost sure that very soon, other significant orders will be awarded, leading to a total order awarded in the 12 months ended December even in excess of the turnover that we expect to deliver for the entire year. So it means that by the end of 2022, based, what we say, on our expectation, but let me say that are more than expectation. Our final backlog will be higher than the backlog that we have enjoyed by the end of September. So as you have correctly stated, the 2023 is already backed by orders that are already on board. So now we have quite a good visibility of what we have to do in 2023 and even in the year after. But in terms of economics, let me say that we are used -- of course, as you know very well that we are used to provide financial details as far as the 2023 is concerned when we deliver the year-end accounts. But what I can anticipate is that even in 2023, thanks to the already existing backlog and the new awards that we expected to achieve within year-end in the traditional space, traditional business space as well as the orders, the business, the contracts that we expect to transform into production in 2023, as generated by the green business, the energy transition business, it is useless to say that the growth that we are foreseeing for the next year will remain in the double-digit space. So this is what I can anticipate confirming the visibility that we have. But I prefer before providing additional details as far as, let me say, the margins are concerned and all the other financial elements that we are used to provide when we will deliver the year-end result.

Okay. And can I just ask you about that. Obviously, you're pretty confident on winning new awards and you talk about the traditional market. And now I could see a refinery somewhere in the Middle East region that you well placed on. But what is it that's driving that shorter-term backlog expectations? Is it that Middle East downstream? Or are we starting to see the first of the fertilizer projects coming through yet given pricing dislocations in gas?

Absolutely, no. Absolutely, we are not seeing any reduction in any level of business and in any business space nor in the, let me say, traditional and traditional, I'm saying already we have correctly stated refining, petrochemical, fertilizer, all of them are expressing a lot of opportunities. As you have seen, our commercial pipeline, which have grown more than EUR 5 billion this year is almost entirely covered by this type of projects. All over the world, a lot of -- for example, in the refining business space, a lot of refining units must be updated, must be, let me say, revamped a bit in order to be able to produce type of fuels, which are more aligned with the prevailing international rules Euro 5 diesel with a low level of emissions and something like that. And in particular, in the West Africa, North Africa, East Europe, there are a lot of units, which must be revamped. As you know, one of them is one of the project that we are presently executing in Nigeria, which represent one of the most remarkable projects that we are doing so far. But at the same time, let me say that on top of the project in the traditional space, a lot of clients regardless the regions, regardless of geographies, they are accompanying projects, investments in the traditional type of projects with, let me say, new solutions in order to achieve the decarbonization path. So in many situations, we have been requested by potential clients, potential because, of course, we are talking about offers that we have already submitted to those entities, submitting proposals, for example, to decarbonizes their industrial infrastructure with a CO2 capture. But then the CO2, which has been sequestrated, not simply utilize -- not simply inflated into an exhausted well, but to be utilized as a raw material for another industrial process. So it means that what we are seeing at what right now prevails in the market, our request for investments, request for projects whereby almost every time, the client request an efficient solution for a traditional type of plants, but more or less always accompanied by the submittance of a technological solution in order to reduce the emission of the CO2 or to introduce a new industrial process, which leverage on, for example, renewable energy sources or similar type of products. So it means that the energy transition process is something which more or less in a very short period of time will affect all our business. It's not a matter of maintaining a completing difference between traditional projects and the green projects. Almost all of them will represent an integration between technological solution for, let me say, traditional products, but almost always, I repeat, accompanied by technological solution in the green space. This is what we have in front. Of course, we are extremely well equipped because our technological portfolio can deliver solution in both space, but in particular, thanks to the investments and the effort that we have dedicated in announcing our green portfolio over the last couple of years, 3, 4, 5 years. Now we are ready to cope with the market request with the most efficient and state-of-the-art solution in the green space. So this is what we have in front of us. And for this reason, we are extremely positive about our future.

The next question is from Kevin Roger with Kepler Cheuvreux.

Questions have been already asked, but I have just an additional one for you, please. Related to the ForEx impact that you see on the balance sheet and the weight on the net cash position, do you have any view where basically you would see the ForEx turning back into the cash flow? Would you say it's probably for Q4 or more for next year? Is there any idea in terms of timing on that subject, please?

Yes. Sure, sure. Well, first of all, we're talking of mostly sale of dollars going forward due to the nature of our business. And I would say that it's relatively shorter than it used to be with roughly 30% by the end 2022, 60% in the first half of 2023 and the last portion in the second half of next year till the beginning of 2024.

Okay. Exactly. But just to be sure that I well understand, it means that on the paper, you should have a positive cash contribution from those ForEx effects of something like EUR 40 million to EUR 50 million -- EUR 40 million in Q4.