Tesmec S.p.A. (TES) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Tesmec financial results as at the 31st of December 2019 conference call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ambrogio Caccia Dominioni, Chairman and CEO of Tesmec. Please go ahead, sir.

Thank you. Thank you, everybody. Good afternoon. We are happy to be able to introduce this presentation for year-end closing results. As you know, we apologize, we had a 1-week delay due to technical reason connected to the current situation we were operating. We reorganized our team. We are organized now on the smart job organization. And so we are now working full capacity in our offices to fulfill our commitment. The situation, as you know, in Italy is not easy, but we have positive thinking that things are going to be managed in the next weeks. I will transfer now the presentation to Mr. Mosconi, General Manager of the company, that will introduce you about what are the key milestone of our activities performed in the last year and last quarter and describe what are our technological drivers for the future. Thank you, everybody.

Thank you, Mr. Caccia. Good afternoon to everybody. Yes, I will try to summarize the main effects that characterized our business sectors last year. As usual, we'll start from the Stringing business. Mainly, we -- mainly, last year, we started the mass sales of the -- on different markets of digital and full electrical machine, creating the important technological gap with our competitor. As you know, our strategy is to develop constantly in innovation on new solutions. So this permitted us to have a technological gap, a technological differences with the competitor present worldwide. The second main factor that I would like to underline that we have laid a solid foundation for important growth in North American market that we identified like one of the main markets for the future, for our company. In this market, our company -- our products are recognized as a premium product. And so we had -- we signed a collaboration, a commercial collaboration with one of the most important renting the house on the construction equipment. And the second important innovation is that we reinforced our internal sales forces of our company, Condux Tesmec. Passing now on the Automation division. We had a very, very huge improvement in technology. In fact, we expanded our portfolio of the -- our devices. And now we have a complete or full range of products for medium voltage distribution lines, and we are developing -- we developed the solution for substation -- primary and secondary substation automation. From the market point of view, I'm happy to say that we want important contracts outside our, let me say, traditional markets, that are Italy and South America. In fact, we are now present in Russia, North Africa and Middle East. Turning now on the main business, that is Trencher division. I will say that in the telecom field, the introduction in U.S. and North America of the new standard 5G gave us the opportunity to move our technology clean and fast from Europe, where we tested in the last years to U.S. We had excellent demo and relevant approvals of the technology in different areas of the country, and now we expect to have mass sales in 2020. We had also important successful in the renewable field, mainly in the wind and solar firm -- farms. In fact, we are working strongly in Asia Pacific region for the interconnection of the wind and solar farms. We go now in the -- one of the newest division, that is rail. Here, last year, we completed our certification process. Now -- nowadays, all our fleet of products, our fleet of machine are certified in accordance with the latest safety standard of the European Community. So our working cars are able now to travel all over the Europe like train, passenger train, and this is the important technical advantage versus our competitor. From the power point of view, I say that the important factor is our effort and our develop of a new digital platform to automatically record and management of the diagnostic data for -- have -- let me say, more safety railway infrastructures. Coming on to the market, if you remember, one of our main point was to have a different market worth work and to exit from the Italian market. I can say that last year, we started our internationalization. In fact, we won a project in France, Czech Republic, and we are finalizing in this period -- in this quarter in central part of Europe countries. I think this is all, and I give the room to Marco Paredi to show you the data of the year. Thanks.

Good afternoon, everybody. So we can move on Slide 14, in which we can show you the main KPI of 2019. First of all, we need to underline the important target in revenues, as attributed by Tesmec, hitting the EUR 200 million of turnover. This is an historical result for the group, with an increase of 3.1% comparing the last year 2018, 1.7% at a constant exchange rate. The growth was mainly driven by rail and Energy Automation business segments, confirming this way the validity of a strategic action made by the company over the past few years. In terms of EBITDA, we achieved EUR 27 million of EBITDA effect, with an increase due to 2 important actions. One is related to the better mix in sales. The second is related to the efficiency and the management action rolled out in 2019 due to the negative or positive result of 2018. Thanks to this result, we generated an important growth in EBIT that achieved the EUR 8.4 million with an increase more than 100%. The point -- moving on, in net financial position. The net financial position increased up to EUR 99.8 million, mainly connected -- linked to the valuation of our net working capital. So we can say that it is not a structural problem, but is due to the fact the increase of stock and trade receivable linked to -- mainly to the Railway's orders. So that's all to explain the different results. We can move of the business, of the segment. We can move in Slide 15, in which you have the different segments. So starting from the Energy. We can underline an increase of 6% of revenues, mainly due to the performance of Energy Automation segment. This segment growth of 31% -- 30% in this year from EUR 9.5 million to EUR 12 million. Thanks also to the growth of the European market, we are able -- we were able to achieve this important target. The EBITDA is increased, thanks to the volume but also the mix of our product. And that is what's concerning the Energy Automation -- Energy segment, Stringing and Automation. About the Trencher. The turnover were EUR 125 million, in line with the previous years, but we have 2 different important things to underline. The first important thing is related to the increase of sales concerning the booming of the U.S. market and also the development related to the mining and 5G businesses that allowed the group to achieve important results and also important margin in this business. And the other point that I mentioned is related to the Australian market that we changed our business model so to mitigate the negative impact of 2018. So the group redefined the organization and the business model to be focused mainly in smaller number of projects, but with quality and profitability. The last one of our business is Railway, that show us an increase of 13% in -- due to mainly 2 important projects: TSO that is related to the French market and the Elzel project related to the Czech Republic. So that is very important point for us that show that the Railway business is going to grow and to grant us a future. But first of all, we have to underline that we don't -- we had some postponing the project -- one of the project in 2020. If we move in the Slide 16, we show the performance of the fourth quarter, in which we can see that the EBITDA ante IFRS 16 is around 16%. So we had a big performance in this quarter comparing the previous years. And so that show us that our market or the market in which we have to point on and going on. In terms of revenue, if you move in the Slide 17, the growth comes from the Italy for the Railway business and Automation. Instead for the Trencher, the impact is in U.S. and Africa. In Africa -- we talk about Africa because that is related to the mining business, so the business in which we are investor from -- since last year. If we move in the Slide 19, we see the flow about the EBITDA. We see the impact of the Trencher division. I repeat the point about the increase of EBITDA are related to many factors. So the mix of sales and the efficiency action rolled up in 2019. About the financial results, we move in the Slide 20. In the Slide 20, we see our financial information related to the net investment capital. This is impacted by the valuation of net working capital. So as I said before, this impacted also the net financial position. If we move in the Slide 21, you see that the main difference is coming from the trade receivables, the inventories and the work-in-progress contracts. That, I repeat, I reiterate the point, comes from the Railway orders. And so we can say that the cash generated by the operational cash flow has been impacted by the increase of net working capital, but due to the fact we talked about net working capital connected to the Railway business and Trencher business are something that is not as part or a problem in terms of net financial position. So if we move in to page -- the Slide 20 -- 22. We see our net financial position from the end of 2018 to the end of 2019, in which we see the fact that we generated operating free cash flow, but this one was impacted by the valuation of net working capital. The CapEx is less than the previous year, is around our target. And just only to remark a point that in 2019, the new principle -- the new IFRS principle generate an impact in terms of right-of-use for EUR 18.2 million. So I can stop and pass the floor to Mr. Caccia.

Thank you, everybody. We go to Slide #25. In this slide, there is the commit of the shareholders in this situation. But in the group side, we were at the target in a yield growing investment. Though opposite, we have also to face not easy situation in the market. So this is a message that the shareholder intended to give towards the stakeholder that there is a strong commitment as a private listed company to support the company to stay in the market. And for this reason, today, the Board has approved a shareholder finance open line to give flexibility to cash with rules that are basically described in the deal operation, EUR 7 million -- up to EUR 7 million with a low interest rate. This is a message that we intend to give to the market that we think that our company is a strong company with high technology, and these circumstances are probably not easy to manage, but we are positive lately. In connection to that, I think that also the shareholder are on their way to monitor the situation, and we are also under review for our future strategy. Normally, we view the guideline of the futures, but we prefer today due to the volatile situation on the market to give you -- to tell you that, first of all, we are even monitoring the situation. We are -- it's 4 weeks that we need to -- we are managing the situation where, of course, we are not in this area of Bergamo. It is one of the most dangerous area in Italy, but all our customers is fully available and like -- we are very likely to have -- no one of our employees as of today are positive. For this reason, we are on the way to manage, but we think that in next 4 -- 2 to 4 weeks, we have to be careful because the situation in Italy tends to be closed and probably will slow our production, probably also -- might be able to [indiscernible] location. But on a medium term, we are looking that the impact of this is not on the global market. Our revenue, as you see, are 80% out of Europe. And basically, we are looking that in certain area, the business is bigger now. The basis of opportunity existed, and we confirm our strategy, that is to invest in Energy conditions, to invest in telecommunications and to invest in asset security procedures. For this reason, I hope that our strategy can be confirmed, and we are -- in the next weeks, we've the target to give you better information what can be our new program and new sensitivity planning because we're under visibility to evaluate a new strategy and to try to be able to give a positive reply to the market. The opportunity are huge, but the risks are also existing. So we are -- but -- and we give priority to the safety of our personnel. But on the big way, we are looking that everybody in the area are supporting us and pushing the business. Originally, our regional problem was connected to the supply chain. Now it seems the opposite. China is now coming back and the market is a little bit more stabilized. Thank you, everybody. We are ready for any reply. Thank you.

Sir, are you ready for questions, sir?

Yes.

[Operator Instructions] Our first question is from Mr. Giuseppe Grimaldi of Mediobanca.

The first is on the project pipeline. Given the current situation related to the COVID-19, have you seen any postponement or delay in the tendering process? The second -- I guess, second point is on the current financial situation. Can you postpone CapEx for this year or limit as much as possible, given the -- I mean the liquidity situation right now? Or -- and the last question is, do you think net working capital is going to revert for the next year and the Railways operator are going to pay in the next month?

I will give you reply to the questions. About tender delay, it's too early to understand. I can tell you that, no doubt, the private business is slowing. The long-term business, there's not an impact. We have -- we are, for example, negotiating specific area like Automation and rail long-term projects and see that these projects are not going to have an impact out of probably more healthy components in connection to the performer -- the performance of -- regarding procedures. So in that area, we will give you a reply on the medium term. What we are looking, especially in the business of Trencher, the priority now is given to be faster, flexible, and basically, we are looking that the rental business is growing faster than the safety because basically no one has been willing -- has been giving priority to less -- that commitment if they can find a short-term solution. About CapEx postpone, we are totally sensitive to the question. And we are under review to optimize. We will reduce our CapEx, and we would like to optimize our research and development procedures to be able -- to be better performing the priority to things that are going to be great in the short term. This was already a commitment, but now the current situation is the priority. About working capital process, the increase basically was mainly connected to rail procedures. We were in the stepped up phases. So we were in the big work of offering the staff with a rather [indiscernible] in connection to the certification, as Mr. Mosconi told you, within this first month or within this year and the rest procedures are going to be completed in between May and June. All our vehicles are going to be certified. So the retention ones are going to reopen, and we are going to have a -- back a normal working capital situation that we can have an impact, especially from the first quarter due to the growth traffic procedures, especially [indiscernible]. So we're expecting to have become normal between the second and the third quarter of this year.

Okay. So it's something that you consider somewhat temporary and have been looking at the business prospects, which you don't see any diminution in the midterm, correct?

So basically, we want to do that on 38% of revenue or around 30%, so we will have a strong impact in the normal situation. Now probably -- we don't know what is going to happen opposite in -- after this question of coronavirus because basically, we are expecting that somebody to have a delayed payment because the cash is moving slowly around. So this is going to be -- and the reason why our shareholder loan was to gain flexibility, and we are not in the decision also with banks because we think that liquidity is going to be current problem to all our clients in the next period.

[Operator Instructions] The next question comes from Henry Hillgarth of Quaero.

I had a few questions. The first question is really, again, just a follow-up on working capital. So when you say that it's not structural, then I understand that the current situation is distorting the effect somewhat in the first quarter this year. But just trying to understand how are you managing your inventories during this period? And the second aspect is in terms of receivables, when do you expect the effect of Railway to become less important on your working capital? I mean is it a question of 1 year, 2 years, 3 years, just to try and understand that. And then the other question on the loan. I understand the reason for it, and it's great to see shareholder confidence in this loan. But just trying to understand why it's not a bank loan or a bond or if you could maybe elaborate on that?

Okay. We can reply to the 3 questions. Working capital, inventory. No doubt that, as I can tell you, in this situation, some inventory can be also good because we are expecting to be growing production, and we have machines ready for delivery. One of the reasons we are adding inventory is that financially, we are also connected to the big problem -- logistic problem that now exists in Italy, the connection between the manufacturing and the Italian ports. We are unfortunately connected to the Genova and Savona ports, and due the big accident that happened on the highway, we have heavy transportation, we are basically facing a lot of delay. Now it seems that with a good season, things are hope -- they were supposed to become better. Now with this corona, the logistics and the transportation will have to be connected through the compliance of the road. But no doubt that inventory is our concern, especially when the situation was connected to the 2 businesses: one, rail and second one in the Trencher. So that is -- opposite -- is basically -- is a connection to the second question, accounts receivable. Accounts receivable are basically connected with the fact that the stock gets released partially with payment of between 20% and 40% of the payment were connected to the certification. Our outstanding balance we will generate for the eventual end of the year was EUR 16 million or EUR 18 million. In the normal situation, we are supposed to be, dollar is less than pence. For this reason, the situation in the second quarter is going to become a little bit better, but first quarter is also a little bit better. But we are going to restore the situation at the end of second quarter, beginning of the third quarter because at the end, we're going to have the clearance and certification that allow us to cash -- to be cash [indiscernible]. About the loan. This was basically -- we understand that our financial position was heavy, and we were moving to develop the budget 2020, but we're lagging with cash generation. But due to this current situation that we think that in the next couple of months, 3 months, we are going to have concern about the shipments, about what we invested to our stake financial holders that we have positive thinking that we are making a lot of actions to increase the positive monetization of our company. This is a loan, and no doubt that in the current situation, this is our option we have to go. We are going to have other options to increase the strength of -- financial strength of the company.

Sorry, just to follow-up on that last point. I'm just trying to understand why the loan was structured in this way. I mean is it because you didn't want to approach the banks? What is the...

No, because basically, we were in a hurry to grow. The banks were asking us what was the commitment of the shareholder. We thought we can't, in this situation, think that to have an increase of equity is something that we understand that the company will be stronger. We believe that the company can grow on due to the fact that this is a private business, the shareholder want to give [indiscernible] to give the time. No doubt that we were on the way to make the long-term negotiation with a couple of banks to organize in a better way our financial situation. But in this current, we prefer to give this priority and to take the offer in the next couple of months because we are weighting what are the best options for our financing -- bank financing because as of today, we are a little bit confused. You know that basically the bank in connection to this as well as corona are on standby. We will later know exactly what to do.

[Operator Instructions] We have a follow-up question from Mr. Giuseppe Grimaldi from Mediobanca.

Just a very brief follow-up question on the growth prospects of the Railways. Given the backlog and assuming that basically this coronavirus will be limited in time, what can be a reasonable growth rate for the Railway business, if you want to share this?

Okay. It's very easy. Let's say, going back, we want to give a leverage between long-term commitment and short-term commitment. No doubt that, if you're looking, we have not had any order intake in the last quarter for rail due to -- this was basically due to a low performance connected to the big safety problem they have in the last period [indiscernible]. But there are a lot of standards directed by due to the new rules of safety and health. For this reason, we were not pushing the increase of volume last year because we were directed by -- trying to have a better balance between clients. As it has already been anticipated, we have a strong backlog, and theoretically, we can increase more than double digit, but strong double digit at volumes. We are now giving a privilege to have the medium-term strategy to keep the business in balance between different clients. Our target is relatively -- is okay in, say, the first quarter and second quarter to have a backlog that is 50-50 between Italy and the export business. At this point, we can push more on the growing businesses. No doubt that -- and the second step, we made an acquisition last year in diagnostic, and diagnostics seemed that in regular business, it is going to become the new priority due to safety and due to also predictive maintenance. But diagnostic is a big, big problem for everybody. Just we are shortlisted for a pretty big -- a bigger tender in that area. But there's a player who bids lower because the rules have changed in a dramatic way. For this reason -- for these 3 reasons, we are expecting, on the medium term, a strong business. On a short term and the next, we dedicated this second quarter to evaluate how -- what is the best for our company. We don't want to take excessive risk if everything is not correct.

Okay. And just another very brief question is, among the 3 businesses that you are managing right now, which is the one which makes you more comfortable in the growth prospects in the short term? I know that in the midterm, you are confident, but in -- clearly in the short term, which is the one that you think is safer?

I see that things are changing. I don't know -- I don't want to make a mistake because every time we give a short term, the things are changing.

No. No. I mean it's a matter of feeling. It's a matter of feeling. I know...

The feeling, as we told you, the strong business is Energy. Energy transmission connected to telecom. We have always anticipated that, and we don't know really how big is the market or not. Our methodology has been accepted in -- for AT&T and Verizon. But the things are so big and the market is so strained because in these bigger changes, there are a lot of political impacts that are putting the market not totally under control. For example, in telecom business, where we are in the strong position is U.K. because basically U.K., Openreach, as you know, their basic advertising, Openreach is utilized in our methodology for the new telecom grading in the U.K. But finally, the question that is very difficult to understand the timing. In a way, we are expecting -- out of this virus, we are expecting 5-year commercial growth base with clean and fast technologies that are going to be easy -- very positive year. And looking to our technological approach that's basically given, we're working more on service contracts. We are entering into maintenance and service and predictive and diagnostic more than new installation. We are expecting to have a stabilized business in the next year.

[Operator Instructions] Mr. Caccia Dominioni, there are no questions registered at this time, sir.

Thank you. Thank you, everybody. I hope that the next meeting can be in a positive environment. We invite everybody to come. Unfortunately, today, we are not authorized to make parties on, but we are awaiting next quarter to be something different, to be positive.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.