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 First Half 2021 Results 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, everybody. Thank you. We are pleased to have the chance to give the major communication of our results for the first half of 2021. This is the first year that we can come back -- we consider a normal year because no doubt that after a difficult year, we are coming back to normal business. And if you go basically to Slide #12 of our presentation, where we are trying to confirm our corporate strategy about how we are changing our business model. No doubt that up to 2020, our -- we were a manufacturer of equipment, with equipment that are based on different technology, but was it -- we were in a traditional way in the next development that are going on, in the last period. But also for next year, we become, let's say, a green company that basically is trying to develop a new generation of integrated system, new digital solution and a wider range of full service application that are going to be stabilized revenue in connection to our business. To meet this need because the need of the market that's changing and the [ layout ] in the market is changing. For this reason, everybody is now talking about digitalization, sustainability and energy position. We have already in our development target these 3 priorities. And for this reason, [ I'll pass you ] to Mr. Mosconi as our general business to start to clarify what is going on now and what were the key action that have been placed in taking into consideration during the period of the second quarter.

Thank you. Thank you, Mr. Caccia. Good afternoon to everybody. We are here in the Slide #16, we try to summarize the market scenario on the last quarter and key facts to start. So first of all, we are in a growing economy that is [indiscernible]. We have the world divided in 2 different families, markets in which, thanks to the local or national stimulus, there is a strong will to grow the economy, thanks to the investment to the infrastructure. Generally speaking, Western countries, Europe and North America, first of all; and other areas in the world where the economy are still the [indiscernible] like South America or part of Africa. The second point that we noted that is starting a possible inflation time. In fact, we are facing 2 main -- 2 differences with the previous years. So there's difficulties in supply chain, difficulty in delivery times of the raw material and the technological components and increasing in the cost. Another issue that we had, and probably we will have also in the next month, is a restriction to the free circulation of the people. As you know, we are -- we approach the market with a direct presence, both commercial and technical presences. And in this period, to travel all around the world is not easy like before. So to that, I would like to put your attention what we did the previous quarter. Basically, we had been successful in the trencher business unit due to very important growth in the projects that we have in New Zealand. In fact, we grow with the revenue more than 150% versus 2020. And we have a very important projects for the next period. This turnover, this revenue are -- had a different quality. In fact, we are involved in renewable projects and in telecoms. For the energy, we have a substantial growth due to the double of the revenue that Energy Automation had in the last period. And after -- and we are well positioned in the strategic markets like the Italian and let me say that we are one of the main supplier to our national entities like [indiscernible]. And we have a huge pipeline of opportunity that we're translating in backlog for the next month. The thinking there is more conservative. We improved also in this sector. In fact, basically, we finished the first step, and we put on the market the new generation standard of all our, let's say, basically 90% of our offer now is a digital solutions and the market accepted this, our offer, and this is one of the main differences with the competitor that will guarantee us grow in the future. About the rail business unit, we suffered a delay due to the new way to work this network or the worker remodeling delay in the acquisition of the new orders. As you know, the rail sector, mainly the -- our customer and national entity, public entity and the bureaucracy to award the contract is a -- has slowed down due to the this period. We are focalized in an internal visualization of our presence. In fact, we are participating in several tenders in Europe -- Italy, Europe and North America. And we are developing, and we are becoming a player in the new technological [ generator ] sector also for infrastructure, developing new solutions to detect the condition, the situation for the safety reason of the infrastructure in general. Mr. Caccia told you very briefly that the sustainability is one important focus for our group. In fact, we are starting to prepare a sustainability plan with the goals in line with 2030 agenda of the United Nation (sic) [ United Nations ]. And this plan will be a part, important part, fully integrated in our review of the industrial business plan that we are preparing for the next 3 years. I think these are the key points, and I will leave the floor to Marco Paredi to show you the numbers of the period.

Thank you, Paolo. Good afternoon, everybody. If we move forward in Slide 18, we show the main KPI result of the period that show a performance that a record and a strong improvement in all indicator compared to June 2020, bring back Tesmec to a pre-COVID level in terms of revenue but with higher profitability margins and net results. Starting from the revenue. Tesmec recorded EUR 96.9 million of revenues against EUR 70.8 million of the last year, in the first half last year. Last year, in the first half, we have been impacted by the COVID. But in any case, the growth is related to our sales, our backlog and is related to the sector in which strategic sector which Tesmec operate. Obviously, in this period, we have taken in consideration also the situation of the market related to the supply chain freight critical points. But in any case, we were able to achieve the same level in terms of revenues of 2019 revenues in the first half. As we grow, it relates to the relaunch of the activities and it's related to the new energy and the segment related to the energy business. In particularly, we take into consideration all the aspects concerning the green and the automation -- Energy Automation segment. Moving in EBITDA. The group record EUR 13.7 million of EBITDA, with a percentage of 14.2%. That's to show a different impact. First of all, a positive impact of a trencher and energy performance, in particular, the Energy Automation segment. Instead, in terms of impact from a trencher, we talk about the rental projects and services. So we talk about the recurring activities that [indiscernible] us high margin and more profitability over the year. Moving in the EBIT. The EBIT is positive against the negative of the last year, positive for EUR 2.9 million against that last -- the negative EBIT of last year for EUR 1.6 million. This, from EBITDA to EBIT, we remind the impact of the fleet depreciation for service that can generate a positive impact in EBITDA, but obviously, we have to consider it, consider the amortization of the fleet. In terms of result in the profit before taxes achieved EUR 1.8 million of positive impact against a negative result of the last year for EUR 5.3 million. In -- where in this period, we have a positive impact of the U.S. dollar and the related currency for EUR 1.1 million is positive again, comparing the last year, but is less than comparing the first quarter. Moving on at the end of our profit and loss. We achieved EUR 1 million of net income against losses of EUR 4 million, around EUR 4 million. In term of net financial position, we increased our net financial position due to the exchange rate and net working capital. The net working capital will increase around EUR 12 million due to the increase of stock -- mainly due to the increase of stock to face the tension in the supply and freight activity. And we want to then underline the fact that we have some delays also in the cash-in in the Railway business. Moving in the Slide 19. We saw the main result for the different business unit. The first one is Energy and underlining the amount comparing the last year. But for sure, we want to underline the performance of Energy Automation business that bring us also a better margin [indiscernible] and profitability. In the same period, we want to underline, too, that the Stringing segment increases margin compared with last year because we are finalizing our product range transition in the Stringing segment. The confirmed order material is around EUR 81.1 million, of which EUR 61 million are related to the Energy Automation and due to the fact Tesmec operating in the market, also the output for the year-end is positive in terms of acquisition. In the Trencher division, a record, around EUR 59 million over -- against the EUR 41 million of the last year. For sure, we have an impact in -- back to the sales. Last year, due to the COVID situation, this was well blocked. But this year, thanks to the relaunch of activity, we rebound. We achieved around EUR 59 million of turnover. The EBITDA is better in term of percentage due to different topics, the impact of the energy sector, renewable energy sector. And in the [ third time ], also the impact of the rental and service activities. In any case, we want to -- the result has been impacted by the U.S. market situation that is lower than our expectation for the first half due to the current situation related to the change of environment and also relative to the worldwide critical situation in terms of freight and lead time or the supply. About the backlog, we achieved EUR 82 million of backlog. And also, For the second half, we have a lot of expectation to increase this number. The Railway business was less impacted last year for the COVID situation. Due to effect, the revenues are related to the medium-long term contract. But in any case, so we have EUR 14.5 million of rail -- of revenue against EUR 13.2 million. But the profitability -- the margin is better than last year, but in line with 2019, where the percentage was around 70%. About -- if we move in the backlog, just in order to summarize. The total amount of our backlog is EUR 270 million, and we have some delay in the acquisition in the second quarter, but still increasing the opportunity in the Energy business and also in Railway business. In terms of net working capital. If you move in the Slide 26, we can see the valuation of the net working capital is [indiscernible] by the inventory valuation and the trade receivable valuation. The valuation in terms of stock is related to counterbalancing the impact in supplying and logistic tension and also to perform the railway project that we have in our backlog, which by Our estimation is -- [ will be reducing ] the net working capital within the end of the year 2021. In the Slide 27, we show our evolution of the net financial position, and we see that the valuation of the net working capital for EUR 12 million. That is the main -- the net reason of the valuation of the net finance acquisition now in [ EUR 180 million ]. And in terms of CapEx, that we are in line with the plan. And in this half, we underline the impact of the acquisition of [indiscernible] and Tesmec in Middle East area. Now I'll pass the floor to Ambrogio Caccia about the outlook of the company.

Thank you, Marco. Reminder on -- if we go to Chart #30, we have a look at the outlook of the company that we see in the macroeconomic scenario on with [indiscernible]. We see some -- for sure, this year, we see some strong opportunities that are coming from the impact of the recovery plan. That means high invest -- strong investments in infrastructure, where we basically have a stronger market positioning. And this is basically something that we're looking at in Italy, something that we're looking at in some of our main markets in Western Europe and also, let's say, U.S. and Australia. That means that also coming from, let's say, a COVID period, we see a market that is for sure a very strong and vital. On the other side, we see some trends that we are looking at, especially on the supply chain. That means a trend of inflation, that means the increase of cost on raw material and especially and also on logistic costs and a shortage of materials and, let's say, shortage of materials and [indiscernible]. On the other side, compared to last year, we see some involvement of some of the foreign currencies [indiscernible] in the market [indiscernible] such as U.S. dollar. Looking at the number -- slide -- Chart #31, we see, as I just mentioned before, the strategic -- we see a technical -- we've got strategic positioning in some of the key growing markets worldwide that are, for example, smart grid for the energy market; railway, of course, for the Railway business, Railway business unit; and the telecom and renewable for the Trencher business. So this is the reason why basically we see a positive outlook for Tesmec for this year, but not only for this year, for the next [ 2 years ]. On the other side, we see, as I said, positive outlook, but also a strong process of innovation that was started by Tesmec in the last few years that is creating a strong shift towards a sustainable turnover. That is a key point, but also the market is asking to Tesmec and where Tesmec is managing its own strategic positions. We see, in fact, these, let's say, investments that are bringing new digital and sustainable technologies. Just to give you a few examples: full electric machines for the application for power line construction and maintenance; solution for the smart grid and for digitalization of the substations; let's say, a complete value chain for renewable energies, that, is [ they refer ] to our Trencher value proposition, but not only the Trencher one; and of course, a strong suite towards hybrid and electric railcars now for the [indiscernible]. So this is general -- the clear -- the general feature of the outlook. I leave back the floor to Marco to give you some, let's say, some info on the action managed by the company to face this, let's say, macroeconomic scenario.

Thank you, Carlo. The group, first of all, if you look over the year and the results [indiscernible] results in the 2021 confirm the guidelines that the group Tesmec shared with the market. For sure, we -- why we confirm this point, because in terms of the sales, we have a high backlog in the different business units, mainly in energy, in particular in the segment Energy Automation, also in the Rails and in the Trencher division in terms of FTTH industry and the renewables industry. For sure, one important impact in the sales in this growth is the backlog, is the mix of the comparing also the 2019, if you are comparing the result of the last year impacted by the COVID. But let me say that different points relative to the backlog, the Energy Automation, and in general, the Energy business trended, the recurring revenues that grow with the -- compared the previous years. Thanks to that with impact in terms of volume, we see that we can confirm also the performance in terms of profitability in EBITDA, that we come from a 16% due to this impact. First of all, the impact in terms of volume over the second half. The second impact is related to a better mix of product and system. For sure, we cover our cost and the [ 2 actions ]. And since 2020, Tesmec has been developing some cost-saving action that we can see the impact also in the second half of 2021. The current organization, the structure can support the growth of the second half. And in terms of net financial position, the target is to improve the position and to reduce the net financial position under the result of the last year, 2020. It was EUR 104 million. Why? Because we are focused in the [ improvement ] of the net working capital, mainly in the stock. The stock [ will increase ] to support the second half. And our expectation is to add the [indiscernible] performance in terms of cash generation that bring us a better result in the second half of the last year. So our expectation is down, and the net financial position of EUR 104 million. In the Slide 34, we see the [ KPI ] that we share with the market, and we confirm. In our analysis, we have not already analyzed the impact of inflation, the supply chain criticalities of this period that we already mentioned. And the group will be evaluated in the coming months, the impact on the plan. Now I pass the floor to Mr. Caccia.

Just in closing. [ By pressure, ] we are positively thinking. And as we told the future, in our opinion, can be basically in line with our expectations, but with the big change in our approach. So basically, we are on the way to review our approach, where basically [indiscernible] is going to be given to sustainability and green technology. It is no doubt that the external environment has changed and the priority due to climate change [ with a lot ] of new projects that are coming out basically with a different priority. And for this reason, next month, we will keep you updated about our new priority and our new possible planning. Thank you very much, everybody. Thank you.

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

I have 3 aspects to ask to you. The first one is on the Trencher business. You mentioned some slowdown in U.S. market in the second quarter. Is the situation now sold? The second question is on the railway. You mentioned in the presentation some positive opportunities. Do you expect some intake to come in the second part of the year? And the final question is on the cost inflation and margin outlook. Do you believe that the price increase that you are going to announce in the second part of the year will be enough to compensate the cost inflation that you are seeing at this stage?

Thank you, Mr. Grimaldi. I will give you a personal reply on trenching and after we transfer to Mr. Mosconi for railway, to Mr. Paredi about inflation. The trenching market in U.S.A. was, in the last year, was basically connected to the Trump policy. The big project were connected especially from Canada to kind to U.S.A. that were connected to gas and oil transportation and mainly to safety problem in connection with -- on the Mexican border. Due to the change of policy and the second point is due to also the different financial environment or a lot of positive [ behavior ] because the new projects that are basically connected to, first of all, to wind and solar. And second point to connect it to the new big electrical lines that are going to be installed for safety reason underground has been a little bit delayed. There are used for [indiscernible], energy transmission that have been impacted also now Italian player [indiscernible] that are going to be for underground installation of [indiscernible] line that are going to impact the second part of the year. No doubt that the change of president normally is given for the first period to the big projects delay because everybody is waiting and what is going to happen and where the economy is going to go. No doubt that looking generally speaking, the American economy is very strong on the consumer point of view. On investing point of view, the real problem now that is coming out is there is a shortage of personnel, a lot of positive delay because labor -- there is a shortage of labor, and this is going to have an impact probably on a short term. On the long term, all the new machine technology that has a low impact on labor are going to be a priority for us, as the trenching business can be very good in that area. Talking to the [indiscernible], I'll pass it to Mosconi to explain what are the opportunities.

Yes, as I told you before, thanks to our experience that we did with RFI. And to reference the RFI and the recent order that we had with [indiscernible] in France, we are now recognized as one of the main European player in the sector. We are pushing our presence [indiscernible] industry vehicles for maintenance, construction of infrastructure and vehicles for end system and solution for diagnostic. Today, we are involved in several tenders with the public entities in Europe, Italy, Czech Republic, Bulgaria, Romania, North America. And we have more appeal, and we are entering also in the private sector. In fact, our solution can be utilized also to the contractor in the construction and refurbish of the new line. We have, let me say, a huge pipeline of opportunities that we have to close and probably we will close in the next month within this year. The program of the different nation is improving. The investment in the railway sector are huge in Europe and also in Central Asia. So let me say that now we are only at the very beginning of our road to be one of the most important player in this sector in Europe. Marco?

In terms of cost inflation, if you look on the short term and saw the result of second half 2021, we put in place some terms of measure in the first half with our stock. In this way, we can reduce obviously, but because as we write in the opening the Slide 34, we are going to analyze the impact of the plan in the coming months. Now for sure, in the short-term period, we think that we already cover it and to achieve our target of the year. For sure, some cost impact in some -- for some business, we are going to transfer to the sales price from 1st of July. But -- and in case in this moment for the target, we are confident, firstly, because we had all the tools. We activated all the tools in the first half of 2021.

The next question is from Enrico Coco with Intermonte.

The first question is about the profitability in the second half. You said that the -- on the top line, you have visibility because of the backlog. So you also know the profitability included in this backlog. Now my question is, to get to the target of 16%, you need to have around 18% in the second half. Is this achievable? This is the first question. The second question is about the working capital. I would like to know the installment in the Railway segment that you expect in the second half, if you could quantify the installment.

Okay. About profitability of the second half, for sure, to achieve the 16% overall, our expectation is to get to 18%. Is [ reasonality ]? Yes, for sure, because we have a better mix in product, thanks to the Energy division and particularly to the segment related to the Energy Automation. In the same time, as we explained in the results, our Railway business during the first -- in the first half, we have a better margin in terms of Railway business. We took the balance between the diagnostic and the maintenance, the maintenance [ category ]. And in the Trencher division, we have the impact of the renewable and FTTH program and the process that, for sure, very impact in New Zealand and in Australia. But in terms of this target, we are confident according to the plans about...

Excuse me. About rail, about the cash generation of rail, there are 2 positive points that can have an impact on the second half of the year. Firstly, there is a new law in Italy that is obliging all our so-called utility company to give an advanced payment to own the current project and the new project that has to be minimum 20% to 40%. If you think that, originally, what counts as the maximum down payment of 10%, this is going to be a big change on the current quarter, so we are going to finalize the agreement in these weeks. And this has been accepted by [ LFRA ]. And on the new contract, this is going on -- will have also a positive impact on the new projects. The second point that is really important for us, specifically, has nothing to do with that, is that we are on the way after a year of delay due to COVID to finalize the famous certification that have basically a master in this current [indiscernible] to release a partial payment for some of the old machine supply. In this area, we are expecting to have on our maintenance vehicles that the position to be completed. It's already completed, but the documentation are going up and down. Probably in the first quarter are going to be completed. And before year-end, this can have an impact to at least on 10% to 20% open ballast that have been frozen, waiting for this certification. This can have a nice impact on our cash situation. That are 2 good news [ in terms of business ] that I think -- we think that can have a positive impact on the current year and also next year.

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

Thank you, everybody. I hope that our presentation was clear. We are available for you. We keep open our offices for any extra one-to-one discussion. We are ready to give a reply to any question. Thank you, everybody.

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