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 September 30, 2022 Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ambrogio Caccia Dominioni, President and CEO. Please go ahead, sir.

Thank you, everybody. We are pleased to be here. This 4th of November is important day for Italy. No doubt that this quarter was really a key effect of our changes because we have had a lot of changes in our remuneration, but also we can confirm that after the COVID period, in this quarter we started new activities and we came back. We are on the way to come back to a normal level. We had the chance to make participation in important shows in Europe, starting from Paris, Berlin, Munich. Second point, we have started developing new business approach in different areas of the world. This number, we are pleased to the point -- to come to the description of our numbers. For this reason, I will pass the conference to the CFO, Gambini, that is now full operation in the company. In the new organization, Mr. Gambini is managing CFO. Mr. Paredi is our key responsible for the area of trade. Paolo Mosconi is responsible for Railway and Carriage; and Carlo Caccia is responsible for Energy division. No doubt that now we can go into with Mr. Gambini who will talk to you and will start to make a description of our numbers.

Thank you, Mr. Caccia. Welcome, everybody. We circulated some documents regarding our 9 months results. And I'm making reference in my brief intervention to the presentation. So starting from Page 17, a high-level view of the key economic and financial results, also in the third quarter of this year, sales growth captive momentum. And as a result of these, the 9 months sales increased by 20% versus the last period of 2021. In terms of EBITDA, we reached in the 9 months more than 90% of the whole EBITDA that was achieved in the full year 2021, doubling close to EUR 26 million, a 22% increase versus like period of last year, while the operating results doubled, passing from EUR 5 million to EUR 10 million. In terms of profitability, the EBITDA margin reached a level slightly below 15%, thus highlighting the performance marginally better than last year. So we gained around 20 basis points. But the key message here is that on one side, it was possible revenues like mostly thanks to Rail and Trencher divisions to contribute to the profitability by means of higher value-added products, as well as a better mix, also facilitated by a positive view on ForEx. And on the other side, those elements were partially offset by -- in terms of contribution margin, but a very well-known situation on a worldwide basis affecting the supply chain and, in particular, the cost of materials and energy, as well as the ones of freight. And on the other side is a significant increase in terms of the fixed costs. So between the contribution margin and the gross operating result represented by some one-off expenses, mostly related performance allowances and for another portion to some one-off charges relevant in particular to our -- to the consolidation of our controlled company, Saudi Tesmec. Saudi Tesmec participated at 39% at the end of August and starting from the 1st of September at 65%. These nonrecurring items accounted for roughly EUR 2 million, so working something more than 1 percentage point. So adding this to the 14% to 15% that was actually achieved in the period with market 16%, which is very important to be noted because if on one side, we position ourselves slightly below the floor that was anticipated during last call. On the other side, it is necessary to highlight that the group as a whole in terms of aggregate performance, so independently from the specific performance of the [indiscernible] divisions as a group based on a well-diversified broad business portfolio showed a very huge resilience vis-à-vis turmoil that everybody was experimenting regarding the external scenario. Going towards the bottom line of the P&L, we also benefited of -- like it was during -- for the first half result by different -- positive differences in exchange. These are mainly represented by the devaluation of euro, fueled throughout the year, especially towards the U.S. dollar, thus letting us achieving a pretax profit of EUR 14 million, a strong increase if compared to the like period last year. But as a matter of fact, letting us closing the 9-month period with a net profit above EUR 9 million, so more than 4x the one that was achieved last year. In terms of financial results, here in page 17, we are proposing the comparison towards versus the net financial position of the like period of last 2 year. If we -- if you remind the level of net financial position that was achieved at the end of June, EUR 133 million. In August, we anticipated our estimate, our forecast for reduction of this net financial position. These result was achieved. As of today, we are presenting ourselves with a net financial indebtedness, slightly below EUR 126 million. This is still marking a slight increase towards the end of December last year. But at the same time, we have to stress that gains that this EUR 5 million increase in net financial position in the 9 months versus December last year, the net working capital backing our sales on one side. And on the other side, in terms of the increased trade receivables. And on the other side, backing our increased backlog and also establishing a safety stock in order to manage and mitigate the turmoil of this volatility in the supply chain. It was possible at all those elements, the marked increase in net working capital by EUR 16 million. That means that by difference of the company, excluding net working capital generating a positive free cash flow. That was very important and was also reverberated in the composition in the mix of our balance sheet. In terms of backlog, Page 19 of our presentation, it was possible to reach a record level well above EUR 300 million, even after casting off some contracts regarding the Railway. That really was a record level and you could easily appreciated while we also took the strategic decision in this phase to increase our safety stock. Two very quick comments, and I'm referring Pages 20, 21 of our presentation. That is by the way available for download on our website. The group confirmed itself as really a global group with sales achieved outside Italy above 70% of the total. And at the same time, if you could appreciate those at page 21 of our presentation, the fact that now 2/3 of our sales to other confirmed generating by the so-called -- what we called recurring revenues, meaning revenues not linked to spot base, but directly depending on the mid, long-term contracts. Now going -- shifting very quickly to the financial results, and I am jumping at Page 24 of our presentation. Net working capital is clear that we appreciate the level of our net financial position. But I would say also to appreciate the solidity of our financial structure as a whole, it is definitely important to understand what is backing our debt, meaning net working capital. The increase of EUR 21 million in inventories was motivated, as I was mentioning before, on one side by the exigency of granting continuity and avoiding [indiscernible] stocks, giving the backlog and the orders that we have. So vis-à-vis the level of [indiscernible] sales for our fourth quarter, but I would say also for the beginning of next year. And at the same time, we decided as it was already mentioned -- to establish, to set up a strategic level of stock. These are raw materials, [indiscernible] materials and other components for really added value products, both in Trenchers and Rail on one side. On the other side, a EUR 10 million increase in trade receivables considering that in the 12-month rolling period, October '21, September '22, we achieved a record sales of EUR 220 million, shouting for a floor of EUR 240 million and above that for the full period this year we consider this increase in trade receivable something absolutely in line with our historical values. In terms of cash flows, Page 25, excluding the impact -- the noncash impact linked to IFRS 16 and focus our -- focusing our attention to the real free cash flow that was generated in the period here, you can have a double check of what I was mentioning in my opening comment. If you exclude the EUR 16 million of net capital -- net working capital increase, as commented at the slide -- at the previous slide. And we focus our attention on the manager generation of free cash flow. So linking really to the industrial operations, excluding the net working capital, we would appreciate the fact that we were able to generate an operating free cash flow in the tune of about EUR 26 million, EUR 27 million, more than enough to cover both investments and this variation in our consolidation perimeter represented by Saudi Tesmec. Last comment, I would say, regarding our financial structure. If you pay attention at Page 23 of our presentation, there are 2 lines here that, in my opinion, very important. And I would like to guide you through those 2 lines to really appreciate and understand why we are considering our net financial position as of today as solid. Net financial indebtedness. There was, in this case, so excluding the effect from IFRS 16 and IAS 17, there was a EUR 6 million trade in net financial investment. Please now look at the very first line, net working capital. There was a EUR 20 million -- EUR 16 million increase. So if you just consider those 2 lines, you could immediately appreciate, first of all, number one, that most of our debt is -- net working capital. It is really a working capital. So on a rolling basis, renewing itself on one side. And on the other side, if you calculate, if you consider the so-called industrial debt, meaning the portion of the net financial investments, not covering net working capital, but covering the portion of fixed assets, meaning CapEx and capitalized costs for R&D, now generating -- now yielding results, by the way. You will see that this difference test from the EUR 20 million of 2021, meaning from 2021 to around -- to roughly EUR 10 million in -- at the end of September. This is -- recurrent with the generation of free cash flow in the tenure of around EUR 10 million I was mentioning before while commenting the free cash flow. In terms of financial structure, please consider that at the end of last year, we closed 2021 with a gearing -- debt-to-equity gearing in the tenure of 1.7%. At the end of September, this number, including the acquisition linked to -- I call it nonfinancial net debt depending on the IFRS 16 of 1.3. So 1.7 at the end of last year; 1.4, sorry, at the end of September, excluding the element, the IFRS 16 add-on, the gearing would pass from 1.4 to 1.1. Once again, and here I will stop myself, 1.1 of gearing, considering that most of our net financial debt, excluding IFRS 16, is backing net working capital. I will stop myself here and I would invite my colleague to give an outlook. My colleague, Carlo Caccia Dominioni, for the outlook of the year.

Thank you. Good morning, everyone. Going to Slide 29 and also coming from the presentation that was issued by Ruggero, let's say that in terms of revenues for the end of the year, we confirm the initial target communicated [indiscernible] with the market. So in terms of revenues, we foresee final results above EUR 240 million revenue. In terms of EBITDA, profitability will be -- we expect the profitability for the end of the year in the range of the 15% to 16%, so basically in line with what we declared -- bit of a drawdown coming from the Q3. And we expect a net financial position improvement around EUR 120 million end of the year. In terms of what is important, so we keep following also for the next year the positive scenario coming also from our 3 years -- 2020 also because we do see Tesmec well positioned in all markets that are growing in terms of investments, especially on technologies for infrastructure. So we confirm on the range of revenues foreseeing the year's trend around -- from EUR 275 million to EUR 290 million. We confirm continued growth of profitability reaching a level of 17%, 18%, still in line with our previous plan, and [indiscernible] come from this year. And we confirm the path that we started a couple of years ago of -- and the trend of improvement in net financial position that we'll go on also this year, end of the year and next year again. So this is just to give you a very quick overview. So let me confirm the positive growth of the financials of the company and the improvement in financial position. This is thanks to the growing backlog, thanks to the growing opportunities that we have in daily activities. And so it's well supported by our sales activities in our different business units. I guess I'll leave the floor to Q&A part of the session. We are available to reply to anyone who have the question.

[Operator Instructions] The first question is from Enrico Coco with Intermonte.

I have a few questions. The first is about the investment you're doing in Saudi Arabia. I know that this is a really interesting market for construction. So the question is, you are doing this move. But then in that area, usually you need a partner. So my question is, if you can provide the rationale, if you want, of these financial investments. So what's going on there, if there would be commercial opportunities or you had other things. Second question is about the margin. My understanding is that despite the cost inflation we have, the improvement in margin is driven by the mix towards the rail. And within the rail is related to the kind of contract you are signing. My understanding is that at the beginning, you were in sort of development phase and now you are taking contract probably with the same product, so margins are going up really quickly. And my question is if this trend will continue also for next year. So the kind of margin you expect in 2023 according to your targets will be close to 20% if you have this kind of visibility. And then the last question, if I may, is it possible to have the absolute amount of fixed cost?

Thank you. I will transfer to Mr. Paredi to illustrate the strategy for Saudi.

For sure, the Saudi market is one of the main markets for the next month or year 2023 for the Trencher view, but are not only for the Trencher view. We raise our share to 60% to 65% because meanwhile we think that there is a booming of the market. We are looking obviously for a partner locally to support in terms of financials and also to create the right network inside -- the partnership in the Arabia market. So at this stage, so we closed first step in which we are going to take the control of the company. Now we are in the second phase to reinforce our financial structure in Saudi Tesmec. And from there -- let me say, from there we have about -- starting from October. And in 2023, we are going to stabilize and moving in terms of activity in Saudi Arabia. Thanks to these financial support of the local partner.

We follow basically your consideration that stand-alone is a possibility to Saudi, but we need to have a common partner. Second question -- why the decrease is moving and what are the points -- is going [indiscernible].

Yes. On the Rail, we are starting the second phase. I mean, in our strategy, there is the internationalization of the business. And we are now put in place the strategy. And we are balancing the initial orders that was basically connected with our initial Railway authority with export orders. In this period, we are completing the supply to the Czech Republic customer and the [indiscernible] customers so that we have 2 main parameters. One, in the export, we have a different margin, and we have also a sophisticated equipment. Last, but not least, we started the important contract that we signed just a few weeks ago with the Bulgarian authority and that can guarantee us, let me say, better marginality in line with the marginality that we had in this quarter also for the future. On the other side, we are managing and we are trying to managing this better we can, the increase in cost for the long period contract that we signed a few years ago. Do you have any other questions?

There was a question about the absolute amount of fixed cost. And if I may, I have rather 2 really quick questions. In the press release, I see that you are expecting bottom line this year in line with market expectations. My estimate is EUR 9 million. I just saw the [indiscernible] consensus is EUR 9 million as well. But actually, you did EUR 9 million of net profit in the 9 months. So is this because there are some adjustments or some particular items in the last quarter of the year? Or maybe I didn't understand? And then on the net working capital. You were really clearly explaining that the working capital is taking the net debt. My question is -- so you're doing this investment in strategic inventory, let's say. But these kind of inventories, I don't know how to say, I'm not expiring, right? So is not like electronic components that if you -- if there would be a slowdown in sales, then you waste money, so you are talking about tangible assets. So you're investing in these kind of inventories that will not expiring. And so if there is a slowdown, it's okay, in any case. Is this right?

2 points. I give you -- the first one is the [indiscernible] No doubt that if you're seeing, we have very strong profit in the first 9 months -- profit, we are also impacted of currency situation. No doubt that we have a new CFO that is trying to keep quiet the situation because last quarter, probably, we are not going to have this contribution coming out from right over change. But no doubt we are expecting operational net profit. What is in line is for us that no doubt that there's going to be much better than now. But effectively, in comparison to -- we are thinking in investment. But we think that no doubt we are going to have contribution. Also we are expecting probably a small negative situation of that currency because we cannot think that the dollar rate is going to go down again for the last quarter of the year. About the second question -- your inventory. No doubt that our policy now is that our situation due to the delivery times we have components long-term deliveries that we are glad to keeping inventory because -- especially for staying in and Trencher delivery for 5 months and the long-term items that we have to put in inventory -- 9 or 10 months before because the delivery time we also plan 12 to 15 months. We have to be really careful because no doubt that on the long-term, the technology changes. But of these type of things, normally less technology because as of today, especially for pollution -- the situation is going to change in the next 2, 3 years. But anyway what the situation [indiscernible] forward, we can also interact this flexibility to increase the volumes.

The next question is from Emanuele Negri with Mediobanca.

I have 3 questions. The first one is about the control of the company you just acquired. I was wondering if you can give us some more details about the financials of this company, namely some revenues, profitability or net debt position, just to understand how much it's contributing to 9 months and how much it will contribute in the full year? The second one is about the extra costs you are expecting to receive from your major customer as a recognition of [indiscernible] -- how much you received in the last 9 months, and how much you're expecting to receive in the next quarter and in the next year? And the last one is about your cost of debt. And if I remember well, and if you can confirm this, the capital financing was kind of -- 6 months plus 5% spread. So you can confirm this? And if you can give us some more details about your overall cost of debt following these new issuance.

I will give you the rough contribution of the [indiscernible] cost of our debt in the quarter has increased in comparison to year before now, and [indiscernible] basis points. That is basically the media of all our sources of financing. No doubt that the new financial line are a different position now -- on the medium term or the benchmark is to have -- flexible rate between 250 to 350 [indiscernible]. Other question, will pass it to -- you talking about Saudi, Mr. Paredi can give you an idea why we acquired, but the contribution this year is basically only negative.

And of -- okay. Before the consolidation in case end of September, the contribution was negative because -- we faced some cost for the consolidation around EUR 1 million. And so obviously, that impacted our results in fourth quarter. But that is the stage was the stage to -- let me say to start the new -- we started with a new partner. We mentioned in the question before provided by Intermonte because for sure, the second step for us is to reinforce our presence with local financial partners. But in stage in terms of internal status, we have also impact of in the net financial position of the consolidation as Mr. Gambini showed in the previous slide [indiscernible] related to the net financial position, there's EUR 3.6 million of impact in the net financial position end of September. So now we are -- starting point to grow with a new project and a new partner.

This year anyway, we have managed that [indiscernible] but what we're expecting in the next future also to use our technology for automation and digitalization and redoing the current -- so basically, we are expecting to have a strong backlog now for the current business that will have an impact probably on the last quarter next year. But second point, we are expecting on medium term also going to be using the [indiscernible] division to Saudi -- the first question, if I remember correctly, Mr. Negri -- to Mr. Gambini.

Yes. We accounted especially -- throughout the 9 months, we accounted extra force for around EUR 1 million mainly linked to 2 extraordinary one-off allowances on top of a EUR 1 million linked to Saudi Arabia. Some of this is exactly the EUR 2 million we were mentioning at the opening of our commentary on the results. These allowances were linked for 50% of them to our -- control company in the U.S. while the balance 50-50 shared between Italy and France. And if you are referring to what was reported in the presentation while commenting -- within the commentaries to the divisional performance throughout the 9-month period, you were making reference to the relaunch of the commercial activity, I would say, full launch with -- in the first full operating year after the COVID pandemic, there was actually a relaunch of the commercial activities supporting the increased backlog, especially in the Trenchers. In terms of traveling expenses, participation to fairs. And together, we've also -- strengthening of our business organization. But we consider these amounts, let me say, not in contradiction with the maximization of the operating leverage, where the item is completely different from the one-off I was making reference just a minute ago. And in any case, they are supposed to yield the good returns starting from the fourth quarter.

Yes. Just a quick follow-up, this question was about the past extra cost you had last year in the project you were negotiating some recognition on this cost with your client to receive kind of the difference of the expected cost of the project and the expected cost of the project to share the increased cost with the customer. Remember we talked about this in the last conference call. So I was wondering if some of these recognitions from clients of your extra cost that you entered in the project was -- somehow in the first 9 months? And do you expect something more in the next quarter?

The general comment then I guess in occasion of the publication of the relation on the 12-month full year results, we will share some additional comments. Those negotiations are proceeding very well. This is what we can responsibly share. We are in a very advanced phase. And our hope is to have proven to be a bit, let me say, prudential in assessing what we cover. But I wouldn't say -- I cannot physically add anything different because we did not include this in the communication. We are communicating on the actual results. But responsibly, we can say that those assumptions are proceeding very well in terms of double check with the [indiscernible]. And we are more optimistic today than even a couple of months ago.

[Operator Instructions] There are no more questions registered at this time.

Thank you. We are pleased to have you on the conference. [indiscernible]. We confirm that our Investor Relations, Mr. Paredi is available -- any possible contribution on your side is good for us.

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