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 results as of the 31st of December 2020 conference call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ambrogio Caccia Dominioni, CEO of Tesmec. Please go ahead, sir.

Okay. Thank you, everybody. Good afternoon. We are pleased to be here with our top line to make presentation of year-end results. As you for sure know, we are a group that is leader in the market of technologies for infrastructure. This is a market that in the current situation is supposed to be a positive trend due to the situation worldwide and specifically to the need of pushing the global economy in the area of service. Basically, we have specialized in the area of energy. And when we talk energy, energy transmission we talk about. And mainly in energy business, the big development we are making is a go from the traditional energy to the renewable energy. Telecom for fiber installation, mainly conventional to new fiber big projects. Rail for rail maintenance service and, generally speaking, for underground jobs where we move from the traditional business that is installation of pipes and cables to the bigger business of surface mining basically committed to the commodity [ mindset quality ] commodity business that is in this situation, mainly for as all the mines connected to renewable raw material that are going to be very popular in the future. In connection to that, we have an evaluation now that -- generally speaking, our company is a global company. As you know, we have a location -- defining location in Italy, France and U.S.A. But we have also -- we have a good organization in Asia Pacific and in Africa. This market, due to the fact that the economy -- traditional economy is not growing, it is obviously globally growing. The power, this market is growing with a CAGR of around 23%. This market keeps on growing. The installation of fiber is a market that is, especially in wealthier countries, is going to become a huge market in the next future for 5G installation and fiber to the home. And then in rail, the -- we are in the same position. Due to that strong situation, I think that we are looking to a positive trend of our company. No doubt that the year 2020 was very difficult for us due to the fact that basically, you -- our main location in Italy was mainly closed for 12 weeks during the first part of the year. And that, generally speaking, the fact that we are global is putting us in a not easy situation sometime due to the new COVID situation that is putting a lot of things very difficult. I will transfer now to Mr. Paolo Mosconi, our General Manager, that will explain our strategy for positive development.

Thank you, Mr. Caccia. Good afternoon to everybody. As Mr. Caccia told, we are in a very positive -- we are starting on a very positive period. And so we prepare to develop our corporate strategy to discontinuity with the past. And we -- as you know, we had several years in the past where we put in place our product line and with internal development and also with measuring the acquisition of small companies, in particular, in Energy Automation and delivery. Now we are at the very beginning of a new age where we change our business model, and we try to keep the much more advantage of the new drivers that are the main drivers for the growing market that are based the digital solutions, sustainability of system. And, of course, one of the main is the energy transition. Taking in consideration these drivers, we develop our proposal to the market, giving it to the company a new future. In fact, today, we are very much connected with solutions that are sustainable and can build sustainability to our products. We have a integrated system for current projects, mainly for the maintenance in all the business line, in Trencher, in Energy and in the Railway applications. If we enter a little bit more deeply in the 3 business units, we see that we translate to the corporate strategy in innovation in each of our business units. In fact, starting from the traditional one is construction of power lines. We develop and we are in the market with a new methodology for refurbish of the grids overhead and underground. And basically, we are now the first company worldwide with green technology for sustainable job site. In the Energy Automation, there is a big change that we did this year, and we entered in the transmission sector with the digitalization of the primary substation and we put in place a solution for the cyber security for the grid. The Trencher -- as you know, the Trencher is the main division that we have. It's very much -- it's on the, let me say, the state of the art of the new solution for cabling of urban area was both of our fiber optic networks and for distribution, energy distribution sector. In fact, we have business solution that we call clean and fast. All the systems that we have are connected to the cloud. And so we can control the job site from the remote. And we transfer also this technology to the new segment, that is the mining [ recording reminder ] for a clearer and more efficiency operation in the mine sector. Then, we have the Railway. The Railway is the last in terms of timing of our business unit. We are -- we developed completely all our vehicles, and we finished to have the certification for the European countries about our vehicles. And we developed new devices, apparatus for the diagnostic of the infrastructure, using that with artificial intelligence and, let me say, a system for a big data management. All our products are becoming green products. So we are moving also in this sector with, let me say, hybrid or electrical solution. So if we go now in the highlights of the year. I don't want to repeat, but we [ decline ] here for each business unit, the products and the activities on the special product. I would like just to underline that we had -- we started a very important project for our group. So the implementation of the new ERP management system. So we go -- we went live at the beginning of this year, last -- the last quarter of last year. And we expect to go live with all the branches of the group in the next 2 years, I mean 2021, 2022. This means, for us, important step to control and to have faster and better control of the data group. And so that mean at the end, a cost saving for the operations and operation plans [indiscernible]. So now [indiscernible] Paredi [indiscernible] explain the numbers [indiscernible].

Thank you, Paolo. Good afternoon, everybody. If you move on Slide 9, we show the main KPI of the consolidated report of the 2020 year. So in this slide, first of all, I would like to remind the fact that we show the pro forma data. The pro forma data are related to the integration of 4Service Group on annual basis. I remind I said that in April the group bought the 4Service Group, the group specializing in the rental activities. And so we would like to show the pro forma to consolidate that full benefit of integration on a yearly basis. So we try to compare the pro forma result of 2020 against the pro forma result of 2019. In terms of revenue, we see a reduction due to the -- set by the action taken by [indiscernible] authorization to contain the spread of the COVID-19 in the first part of the year. So first of all, we need to divide the year in 2 steps. The first step is related to the slowdown on activity. The second step is related to the [ expansion ] of the production activities. And thanks to the second part of the year, we were able to achieve a turnover of around EUR 100 million in the second half of the year. So moving in the KPI, we see that EBITDA is a reduction around 23%. So we have around EUR 23 million of EBITDA in the pro forma 2020 against EUR 30 million in pro forma 2019. The main impact is related to the drop of its sales concerning the French division. But -- and the performance in the second half related to the Railway business due to the production and the delivery of lower-margin vehicles. The positive impact to mitigate the drop of around EUR 30 million of sales come from the rental activities with high-margin and also the positive impact come from the efficiency action starting from March that the group undertook to mitigate -- to contain the fixed cost. Analyzing the EBIT, we see that the EBIT has been impacted by the 4Service fleet depreciation, that this info service fleet we apply and a full depreciation and a faster depreciation. So that impact -- and we don't put -- we don't accrue on the depreciation for not used period related to the COVID-19 situation. The result of the profit before -- the net income -- the net result of the period is a negative result of EUR 6.5 million against EUR 1.6 million of pro forma. The result has been impacted by the negative impact of the Forex of products [indiscernible] and mainly related to the U.S. dollar currencies, U.S. dollars and the related currency to U.S. dollar. In this case, we talked about EUR 3.3 million of impact in the pro forma results. Unfortunately, in September, we didn't forecast a worst situation, but due to the contingency situation of U.S. market and also U.S. governance situation related to the election, we have impact the flow of the purchase of Forex and so impact also our result, our position in U.S. dollars. In -- therefore, we have to consider the fact that in this quarter 2021, we see a better, stronger turnaround of the currency, the -- of the U.S. dollar, and related currency like the Australian dollar or New Zealand dollar. So we see for the first quarter a better impact -- a positive impact because the majority of these losses in 2020 are not realized losses. And the last, but not the least, KPI is the net currency position of this slide is related to acquisition the end of 2020. The reduction is connected to 2 elements. First of all, it's related to the cash impact of success of a share capital increase. And mainly, we can say that we generate cash in the second part of the year thanks to the operational activity and the reduction of the net working capital. If we move in Slide 10, we see the performance of each business. So we see that business is down. The Energy show us a resiliency after the lockdown of the [indiscernible] because we see just only 1% of reduction in terms of revenues. In the same time, we want to underline the positive growth of Energy Automation in the second half, that we achieved the best results in one half in its history. So we achieved EUR 10 million of revenues. And we were able to maintain the same percentage, more or less, of EBITDA on revenue. And more of this is the continued order backlog that now is EUR 76.2 million, of which EUR 64 million are related to the Energy Automation. And as Mr. Caccia and Mr. Mosconi said, we are in the right -- in the -- we are straightaway in the right sector, and we have a big opportunity in 2021. In terms of Trencher, unfortunately, the Trencher is impacted by the COVID. The drop is mainly due to -- by postponing of the deal related to the lockdown slowdown, and the situation in the U.S. market in -- for the sales in the second part of the year. Instead, we can see that if you look at the percentage of EBITDA of -- on revenues, you see that the percent is better because we talked about 14% against 13% of 2019. In this case, we want to underline better integration of the rental activities in the period that bring us -- brought us a higher margin compared to the sales. The continued order backlog for the Trencher is EUR 84.6 million. For the Railway business, we see that the majority of the debt is related to the slowdown/lockdown activity in the first half of the year, and the delay of the acquisition and tender confirmation in the second part of the year. So we have some impact in the acquisition -- in the tender acquisition, but we don't lost but just only postpone the [indiscernible] lower activity of the authorities in the acquisition and confirmation of the tender. We need to underline fact that second half of the year has impacted also by the production of lower-margin vehicles. And so if you compare the 2 years, we are not only in impact in sales -- in drop of sales, but also in the margin. Before the end of the year, we achieved the confirmation from RFI about the award of the tender related to the diagnostic vehicles. We know that these vehicles will be implemented in the 2020 [ mark ]. 2021 we brought higher margin because the diagnostic brings more margin than the maintenance vehicles. In Slide 11, we see the summary of the backlog. We achieved EUR 282 million of backlog in the division in the split that we mentioned before. I think that is better to move in the Slide 14, show the main difference of -- in 14, in the main difference about financial information, net investment capital and financing. So we see that first of all, we have a decrease of net working capital from 2019 to 2020, but I would like to remind the fact that end of first half 2020, the net working capital was EUR 83 million. So we reduced the net working capital in the second half about [ EUR 19 million ]. Instead, in terms of not recurring assets, right-of-use, we have to consider the fact that we changed our perimeter thanks to the acquisition of 4Service. So we increased the fleet and also the right-of-reuse related to the fleet of 4Service Group. In terms of net financial position in the next slide, we see that we had an impact of EUR 22 million of IFRS 16, and EUR 82 million in terms of net financial -- ordinary net financial position, has been reduced by a true impact. Obviously, the success of the share capital increase with a cash impact of EUR 24.7 million. And also EUR 13 million -- and also improvement in term of net working capital. I remind that the net financial position end of June was EUR 143 million. In terms of cash flow, if you see the Slide 15, you see the situation, the flow. If you split the year in 2 parts, first half [indiscernible] related to the reorganize phase and ordinary phase. So thanks to [ rest ], you see that we have a big impact in net working capital and in share capital increase. In terms of CapEx, we maintain more or less the EUR 13 million that we are expecting in the year. And the main -- majority of this CapEx are related to intangible assets, so I mean the development of our products or the maintenance of our product, the fleet. And I remind the fact that this year, we invested a lot of our resources in the implementation of the study of the ERP system, Microsoft Dynamics 365. And we went and go live in the beginning of January of 2021. And that is our main -- one of remaining investments in the year. So now I pass the floor to Mr. Caccia to go to the outlook, macro trend.

To the outlook, we have the [indiscernible] presentation in this finance section. First one, give a general picture; second one, given the commitment of our management, basically for [indiscernible] and figures that we expect to reach in the year. As you know, basically starting from our increase of equity, we are now keeping pretty controlled on our medium-term budget and the guideline is going to be disclosed. The generation value, macro economical value in this period concerning to our business is already positive. That because basically, we are looking at -- in specific area of the world, coming now from, let's say, Australia. If you start from East to West, it is the world that the economy is coming back to a normal situation. And this is connected to a big committee of every government that tried to push back the economy. The situation in certain area about the Pacific is already starting to change in an important way. We are basically our location. We have an impact on our business in New Zealand, Australia and China, but we think that this is going to be a general trend in the area. As impact on our figures, we are looking at the 2 main and -- main factors that are going to have an impact. At first of all, there is a huge push for our government to deploy recovery planning, and this is to give incentive to digitalization and to conduct the investments. This is not only impact in Europe, but it's going to be for the same also around the world as the negative impact. But in a way, given the [ viewpoint ] that the market trend is positive, is that we have noticed that especially in the first part of the year, we are going to be [indiscernible] regards to key supplies, especially in electronic part because we have delayed delivery. And basically, we have to make a reorganization of our operation process to be ready to -- or the market trend that, in a way, the RBA is characterized by, first of all, by long delivery terms, and second by standard problem in shipping transportation and case of cost. This is in [ national ] where we are looking at the main bank currency, that mainly are the U.S. dollar, Australian dollar. And Far East currencies are positive, and we are -- we are expecting to have a positive impact on our figures. The specific -- the COVID is still existing, as everybody knows, and this for a short time can have an impact especially on the first quarter in European area where the market, the decision are going to be taken as [ slow move ], and basically, we are going to have logistic problem for making transportation and deliveries. But we are effectively starting on the second quarter, especially in connection to the new general situation of [ assigned ] [indiscernible] activities that a lot of countries, things are going to change. The news with [indiscernible], we can confirm that are going to have an impact on the economy, but especially on the way of how we can move, how we can develop our business. Now going to back more to specific products. And to the financial trend of our company, we purchase [ to convert cash ]. That is exactly idea to why we have it and what we're going to do.

Thank you. So for -- as we said in this presentation, we see a strong outlook for 2021. That is basically coming on different -- let's say, different [indiscernible]. So first of all, we have a good investment in our sectors, also thanks to the [indiscernible] that did impact some of our key markets, such as Western Europe, U.S.A. and Australia. And this will surely boost some of our results part that we have started in some of the key business. For sure, the strong outlook is also coming from our back end business. As Marco showed a few minutes ago, it's higher than ever, especially in some of the specific [indiscernible] and our generate business. And this gives us a very high visibility especially on substation automation and diagnostics for the Rail business. But also the outlook in 2021 is positive, also, thanks to the increase of the recurring revenues, especially in the Trencher business, also thanks to the acquisition of 4Service. Last but not least, another very important point is the strong position in the good strategic positioning that we have in some of the key growing sectors, such as telecom sector, mining and renewable energy. These are -- let's say, these are trends and results that we see positive for -- in 2021, These translated in these numbers that we show in the chart to '21, where we see revenues where you foresee revenues at the end of the year that will be strongly better than end of 2020 and basically 10% more or less higher than 2029 (sic) [ 2019 ], so around EUR 220 million. Also thanks to the strong performance of the businesses where we have a longer visibility such as Rail and Automation and thanks to the strong impact on the year of the recurring revenue in Trencher. The profitability comes back to a higher volume number of -- from 2019. So is foreseen higher than 16% at the end of the year on EBITDA, thanks to both better product mix and also our rationalization process in our product portfolio. And also lastly, the ratio between debt and EBITDA, that is seen improvement not only from 2020, but also improving from 2019. This will be strongly supported also by the process that we have already starting in 2020 of improvement in net working capital. So I guess for the presentation. [ Mr. D. ]?

Just to complete, you can notice that we are in a good phase for the development of 2023. So basically, we are more than in line with our original guidelines of the planning. Hopefully, the [indiscernible] to go to average here, but we are thinking that -- and this has been done and is supposed to be done. Basically, we'll be not making any investments that for the proceeds of the -- right now for the proceeds of the equity increase. If Mr. Paredi can tell you where we are, just for your -- mentioned the U.S. factory, what or where dollar increase of the equity [indiscernible] where we are.

So in Slide 22, we show you our newest procedure related to the share capital increase. We showed you the same concept that we use it over and over the -- over the part of the share capital increase. For sure, the use of proceeds in the sale are related to the improvement of the financial structure. But we are under evaluation of our initiative in the different -- our business, these initiatives are related to the consolidation and to take opportunities in each market. So we talk about Energy. So I mean in Stringing in the North America about -- to integrate and [ fastening ] the presence, even organized America and the distribution sector. Then for the Energy Automation, try to follow our main customer around the world to achieve -- to improve the result. In terms of Trencher, we are analyzing the opportunity -- best opportunity in terms of rental -- in terms of rental business. Instead -- the last but not the least, in terms of Rail, we are working to implement and to give support for the Genesis system and for the staff from -- necessary for the maintenance of the Railway network. So we are in this phase. In the next month, we are going deeply in this step.

Thank you very much. I think now we are open for any possible questions. Thank you.

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

The first one is on trading update. If you can give us some color on how they are -- the first month of the year started? And especially on the 4Service side, is the company developing, let me say, in line with your expectation? The second question is related to the backlog. Are there any, let me say, some ongoing negotiation that we should expect to have some positive impact on the backlog in the short term? And the last point is on the raw material side. We saw several industrial companies mentioning some, let me say, challenges in raw materials and problem in shipping. Are you experiencing this kind of dynamic? Or are you okay with your, let me say, with your production and supply chain?

Thank you. I'm Caccia. I will start on the last one. Basically, just trying to [indiscernible] that is the business division that is going to have the most important impact on the only [indiscernible] delivery, that is automation. We are with the full backlog, our client are pushing back to back and back but now [indiscernible]...

There is -- in fact, we are looking in the first few months of 2021 on some issues on the supply chain market, especially on electronic components, but on not only electronic components, basically is also coming from different type of raw materials. The explanation that we are receiving is basically that there are some, let's say, longer terms coming from the, let's say, the kickoff of the new year after the COVID situation, especially that is impacting, especially in China. So what we are looking now is a longer lead time for -- especially for components. But the forecast should be that it should get better in the second half of the year. So we are pushing, in fact, as we -- as I also presented in some of the outlook of 2021, we are receiving many -- in the back of the situation is very strong. And also, all our customers are pushing for new orders. But we are -- on the other side, we are dealing with this situation, and we will, say, do our best in order to reduce the impact in the next coming months.

Coming out to 4Service revenues update. The first quarter is not going to be an easy quarter because -- for 4Service because especially the 2 key markets that are our drivers in this business. First -- is to be first, the United States; and second, let's say, France. United States, as you have seen, that we had a very strange generally. The icing situation that basically where our location, where is the [indiscernible] near Dallas. And basically for [indiscernible] due to icing climate averting. Basically all the projects there have been stopped. We are [indiscernible] very likely because our fact we have no impact on our logistics and everything now is moving normally. But the situation for 2, 3 weeks in U.S. -- in Texas was traumatic with shortage of energy, shortage of water, there was the situation was like that. In France, the business is now going on, but with the current short-term situation of COVID, that is not moving full capability because we have to be careful about safety therein and we go 80% of all our capabilities. Anyway, for the 4Service, and this is basically connected to backlog, we are now under negotiation for long-term projects, mainly in the area of fiber and mining. Full wet rental contract around the -- this year can have an impact probably first quarter or second quarter, but we are expecting for the strong year in this recurrent revenue, specifically in the area where the client, due to the situation, prefers to rent instead to buy. This is a difficult situation when short term, the market is moving very fast, but one has cleared year on a long-term commitment. On backlog opposite, we are still in other business area. We have a strong pipeline of standards that are supposed to be towards a forward demand in the second part, but we're expecting it's a rather better increase of order during the period, but with a strong increase in the second quarter due to -- especially area of Rail and Energy Automation that are big tenders that are now on the way to be grown. The success rates are normally very high. And for this reason, we think that the backlog also in the situation that we are going to increase our revenue is going to be stabilized or increased again also during the year.

I have some -- let me say, some follow-ups. On -- always on the raw material side, do you think that you will be able, let me say, to pass to the client an eventual price increase in the semiconductor market? And the second one, which is a quick one on the Railway sector, should we expect some, let me say, a relevant recovery throughout 2021, given the backlog that you have at the moment with higher profitability as long as you have much profitable vehicles to be delivered, if I got it correctly.

We start from the Railway, we pass it back to the pricing of raw material. No doubt of that, with the Railway, we are expecting, due to the backlog, due to a better mix and due to the new philosophy that we are going to develop more retrofitting and upgrading of technology, that we are going to have a strong year this year. And one of the point that we are willing also to go due to the fact that the [indiscernible] technologies were known all now also in Europe, we are going to develop our export business, mainly in Europe and in [ other of ] countries. We are on the way to close our deal in France, but we are expecting also, in East Europe, to have a better success on economical point of view and a mix point of view. Technologically, we are also in a big trend, connected activity, and we are in very way now and in a good position to develop artificial intelligence devices that are going to be tested during this year that can have an impact on a long-term basis in the connectivity of all our vehicles, and this can be the current revenue for the future. In connection to raw material is long term, especially there of Rail. We were lucky to have a long-term commitment with supplier and the price changes are not to happen before end of the year. Now they're going up opposite when we make input on external side...

In terms of [ truncal ] components we faced this, let's say, we foresaw this issue end of last year. So we are more than with the customers, we are well covered with all our suppliers. So we will not be impacted on margins and so on. Also thanks to the fact that, especially in Energy Automation business, the bigger volumes are helping us in obtaining better prices with the suppliers. So when we deal with public tenders, it's not -- we're not allowed to change the price. Let's say, we win customers such as [indiscernible], but we made some good arrangements with our suppliers. So we will not be impacted in margins in those kind of issues. So we are -- let's say, we are well covered on that topic.

The next question is from Enrico Coco of Intermonte.

Two questions, please. One is on the top line. And another question is on working capital. So on the top line, you are guiding to revenues for this year of EUR 220 million. It's around 25% to 30% year-over-year increase. So my question is about your expectation for the first quarter of the year. I assume that you believe you will be below this yearly target of growing between 25% and 30%. And then the second question is on the working capital last year. So in 2020, you reduced the working capital by around EUR 9 million to 37% of sales. Now this year, you expect sales to grow by around 30%. And so my question is, what kind of movement in working capital do you expect? And so possibly, if you could provide some indication on the net debt position you expect for the end of the year, including the change in working capital. I'm trying to understand what kind of absorption of working capital you could have given that you even grow your top line by around 30%?

I will transfer to Mr. Paredi for the working capital. About top line, as you noticed, starting from the third quarter, we had an increase in revenue quarter-by-quarter. We're expecting to win generally, to have an increase, no doubt, as we told you. In this first part of the year, especially January, it was a difficult market also because in these [ actual ] markets we were working in a very difficult currency situation. And opposite in Italy. We probably -- we have a new organization in our company, and we have installed our ERP, new ERP system where that is now putting us in a very good position to [indiscernible]. But we had one of the weaker of difficult production, especially due to the fact that we were changing from a old system to the new dynamic system is we were working in Microsoft platforms. And this had an impact on our production for, let's say, up to the 15th to the 20th of January. But there's no doubt that we are expecting a strong increase in compared to last year, and we are expecting anyway to be in line with the rate of increase, probably not enough for LIBOR, but the rate of increase in the first quarter is going to be probably more than this [ passing year has redefined ] because the first year, the first quarter was very [ baddest ] year. But now after that, we think that we are going to be mainly in line with what we have done in the second half of the year. But no doubt that the real push is going to come on the second quarter. Now Paredi is to tell you about the working capital.

About the net working capital, our target generally is to achieve the 35% on revenues about net working capital. For sure, under the 2020, let's say, in the second half, we have a better position in working progress concepts and better flows and better balance of DPO/DSO. But for 2021, for sure, we need to support the growth of the period and the sales that we've seen from the second quarter of the year. But we still focus to maintain the 30%, 35% of net working capital on sales. We work at the -- in both division, in all business units, starting from the energy and still rail obviously really more related to the working progress contract. So this could be impacted because we grow in rail. And so we grow, thanks to the working-in-progress contract related to RFI tender. For sure, in the other end, if you look in the energy sector, we try to perform better the inventory that we show.

[Operator Instructions] Gentlemen, there are no more questions registered this time.

Thank you, everybody. I know that today, there is a very busy day for everybody. I hope that we will give you very good future news, and I think that. Thank you for your participation.

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