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 30th of June 2023 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. It's a pleasure to be here with you. We are going to announce the interim consolidated financial figures that have been approved by our Board this morning. But also [indiscernible] for us an important year because after the growing business of last year, we are facing new economical challenges, and we have a lot of things that are changing during the year. The period was reporting to us growing revenues, a strong increase in our backlog, mainly also though we have to describe where and which the business units [indiscernible]. But we have a forecast for the year-end that we are going to share with you. After that we have to notice that the first half of the year -- we had the 2 key issues that [Indiscernible], our profitability was lower than our expectations, but in line with our budget due to reason that our CFO Gambini will describe. And second point, we are growing from the net financial position that is a result of our decisions taken in our [indiscernible]. For these reasons, I think it can be important to have a deep dive in our numbers, and I will give the word to my -- to our CFO Gambini that can describe exactly what is the situation and what are our perspectives. Thank you and good day.

Thank you, Mr. Caccia. Welcome, everybody. As usual, we circulated our presentation that is also available for download on our website at the Investor Relations section. So in this brief presentation of mine, while commenting the first half results, I'm using reference to this presentation. I would jump straight to Page 16 of the document. Our -- let me say, the summary of our P&L. At the present mentioning -- as Mr. Caccia was mentioning it, revenues grew by 11% in the first half of this year, is compared to the period of 2022, while at the same time, EBITDA marked a decrease of around EUR 3.5 million. Have to say that out of these, more than 50%, more than half of this decrease is motivated by one-off items that were accrued to the P&L of the first half of the year, therefore, a decrease in the total level of gross operating results. The balance being represented by incremental operating expenses relevant to the investments for the strengthening of our business development activities in line with our project of growth that was anticipated at the beginning of the year. Clearly, the incremental costs are accrued in the first half and sitting in terms of costs, but are not yielding yet incremental results in terms of additional sales. Think that we are expecting to materialize throughout the second part of the year. Going down in commenting the P&L to the line of the financial results. Here, you can notice the big gap towards 2022 because in the first half of last year, we had a very important contribution from unrealized ForEx variations that turned into a negative contribution with a gap of some EUR 7 million. The good news here, if you want, is that on one side, let's keep in mind that this EUR 5 million of positive contribution last year eventually turned into EUR 4 million of loss in the second part of 2022. While on the other side, even the EUR 2 million negative are mostly unrealized. Then the net financial charges passed from a negative contribution of EUR 2 million last year against something more than EUR 5 million this year, but marking a decrease, a worsening of EUR 3 million. This worsening is fully reconductable to the well-known increase in prime rates operated by the central banks throughout between the second part of last year and the first part of this year. The joint result of all this led to a net loss in the period of EUR 2.6 million. Here, the good news, if you prefer, if you want, is that the second quarter of the year led to net results very close to breakeven because if you keep in mind, the EUR 2.5 million loss of the first quarter, clearly, the difference is represented by just 0.1 negative contribution. Clearly, our objective is not to operate with a breakeven in P&L. And as a matter of fact, we are expecting a very positive contribution in terms of net profit in the second part of the year. But anyway, this is a clear indication of an improvement in our economic results, already materialized network -- towards the end of the first part of the year. In terms of financial position, and I would invite you to do make reference to Page 24 of the presentation. You will notice this financial translation of what Mr. Caccia was mentioning in his addressing opening message. When say that -- if you remember, this important increase in our backlog that will be materialized in terms of incremental sales as per our expectations in the remaining part of this year, so in the second half of the year, clearly, in financial terms, implied a very important investment in net working capital and mainly in stocks. Work in process linked to the Rail business and stocks as for Trenchers, Energy, and Rail. Our expectations clearly is to establish these investments and net working capital in order to drive the sales increase in the second part of the year, finalizing the backlog and the orders that we already have the balance being represented by a seasonal difference between the gross cash flow generated by the business in the first half of the year and the relevant investments, including investments increased. Last comment in terms of debt composition because clearly, as the President was commenting -- in addressing to you the outlook for 2023, we are aware that EUR 150 million is a number marking an increase of around EUR 22 million versus the net financial position at the end of last year. First of all, most of this increase, once again, is motivated by investments in stocks. Net working capital and stocks for segments at -- marked by a very important added value profile. And actually, if we make a sort of deep dive, this is not included in this presentation where in which segment these negative variations in terms of investments in net working capital was brought. We can say that most of the investments were done in the Rail business. As you see, as a matter of fact, the backlog relevant to the Rail increased notably versus the end of last year. But I would say if you considered 1 year ago at the end of June, the total backlog increased by some 50% because the value was at around EUR 285 million and it reached EUR 440 million, roughly -- EUR 428 million. So that means actually a 50% increase. The other component in terms of business segmentation, the other contributor to this -- that increase is represented by the Energy business. And also in this case, you will observe that actually the backlog linked to Energy increased notably reaching EUR 120 million of [indiscernible]. Clearly, this backdrop again [indiscernible] the duration of 3 to 4 year in line with the expectations, let me say, approaching the magic number of EUR 0.5 billion is clear an increasing 50% in the last first month period on a rolling basis, is a clear indication of the reasons why certain numbers are presented to install strategic [indiscernible] to invest in [indiscernible]. Debt composition and financial structure, please, it is always important to understand how the debt is composed. We present ourselves with a net financial debt of around EUR 150 million, 2/3 of this is represented by net working capital. Net working capital, mainly inventories, iron, pieces of iron, intermediate and finished products that by orders already in hand. The remaining of the balance in 1/3 is represented for roughly 50% by IFRS 16. IFRS 16 is a principle obliging us to accrue the present value of all the future, multiyear contract, for instance, rental and also machines that are generating the rental fees. But on the other way, it does not allow us to incorporate the positive future contributions from the backlog to back which we have this kind of investment. The balance of this leads to a real industrial debt of roughly EUR 29 million. This is the real industrial debt of Tesmec. So this is what we are talking about, and we are talking about debt-equity ratio ran in this way, going from 1.80 to 0.36. Clearly, our objective since again, our target is to create value translated to reduce net financial position, meaning generating free cash flow. Our target is to focus with the guidance that we gave to ourselves for the 2023 year. I will stop here and leave it to Carlo Caccia Dominioni, Business Unit Director for both Energy Stringing and Energy Automation.

Thank you, Ruggero. I sum up in quick minute -- in a few minutes. The key facts on the main outlook of each business unit for the coming months. Let's start from Page 11. Obviously, we start from Trencher, that is our main business unit in terms of volumes. Trencher, the key points [Indiscernible] in strategic countries such as Saudi Arabia. [Indiscernible] certain deals in the first half, we foresee the evolution of prospective and backlog for the next coming months. And on U.S.A., where we are having a very aggressive approach on the development of the microtrenching technologies. The last few months have been also very important from a technological perspective where because basically, we introduced some new models of machines or let's say, oriented on digital technologies and let's say, the significant impact on the sustainable solution. Going to the Energy. Let's say, the stringing part. So Page 12. There was an acceleration of the introduction of new technologies for new job methodologies. And this we see that for the future, we bring significant opportunities in the way of a new business model oriented on services. And also on string there was a significant acceleration also in the introduction of the new [Indiscernible] of our technology events towards the [Indiscernible]. Going through to Energy Automation. Energy Automation -- important perspective coming from new tender publications with the main Italian TSO and DSO and let's say, also the investment coming from the digital transition. And also say the first half was very important for some key milestones in terms of the of the [amalgamation] of our substation automation systems that we've seen significant opportunities both in [Indiscernible]. Last but not the least, the Rail division. Rail division is facing many new opportunities not only with our main client [Indiscernible] but also with significant [Indiscernible] on international markets, both in Europe and outside Europe. Another significant topic, for sure, the digitalization of our railway [indiscernible] say, strong opportunities coming from the, say, from the data management market. And of course, I think probably most of you had already know in the last few months, there was a significant agreement made with Skoda in June with Czech player that will boost our transition to new electrical vehicle, both Italy and international markets. So these are our key milestones and key drivers for the future development of the company. I request our CEO to [indiscernible] the presentation.

Thank you, Carlo. To summarize what we told you on the -- what we are writing in the Page #26. Basically, this is -- in this slide, we can show how our company was changing in the last 3 years and what we're expecting year end. You remember that we have done 3 years ago planning. We -- in 3 years, our company were moved only for internal deals from a static point of EUR 172 million revenue, and we expect the year-end last year, we made EUR 245 million. End of the year, we have a range of our forecast of between EUR 280 million and EUR 290 million. That means that in the second half of the year, we are expecting to do -- to make something like EUR 160 million of revenues. On EBITDA, we are from EUR 22.9 million, last year was EUR 35 million. We're expecting to end this year between EUR 45 million to EUR 50 million, depending on the mix, depending on a lot of points. One of the real important points coming out the second quarter of the year, we look at the starting from June inflation rate for our material is net to zero. And in certain areas, we are also decreased, of course, because the inflation rate for industrial prices is going down. We are still a growing factor in our impairment cost, mainly for service and mainly for cost of life for our employees. But generally speaking, the inflation rate that we are pushing from supply chain and everything is now stabilized. And we expect also next year to have a positive situation about cost increase which is good because the opposite point is that it will not increase prices. And one of the reason why because basically there is a [Indiscernible] from competition, and we have to be careful about increasing prices. Last but not least, the further important item, as we told, we have a net financial position in June that is not positive. We are expecting to grow year-end lower than normal [Indiscernible], that was last year. We have not expecting [Indiscernible] we are going to improve, but what is very important that in the period, we can disclose that we made a full investment in different business which will be about around EUR 100 million. And this investment was only financed by cash generation, profitability and by keeping control under over our working capital situation because on front of this EUR 100 million, we increased our financial position of around EUR 20 million. That is in a way for us, looking on the 3 years, a positive scenario for our company, and we are expecting to launch before year-end, a strong program for next quarter. The next few years, and we will be to share the guideline with this [indiscernible] of the year. But no doubt that national challenge is important and going to achieve technology. We think that in different businesses, we have a lot of opportunity to go, especially because we are really competitive in every segment. And with our policy ESG compliant with strong opportunity to grow in the digital world and in the [indiscernible]. At this point, I think that we are ready for any question because no doubt that our numbers has to be explained, but we have a full commitment [Indiscernible] to reach the respective results at the year-end.

[Operator Instructions] The first question is from Emanuele Negri of Mediobanca.

My first question is about your guidance, which implies given the first half results, a strong acceleration in the second half for profitability which in terms of EBITDA margin should be kind of 19%, 20% from 12% in the first half. And you should also generate kind of EUR 20 million cash in the second half. So if you can maybe just explain a bit better to drive [Indiscernible] right where you see for this acceleration? And the second one is again on profitability. You said to have recurring item in the first half. And I was wondering how large is this your recurring item.

Thank you. And so as for the -- I will start from the second question, another part can be quantified with a very conservative approach in around on an incremental basis towards to the first half of last year and around EUR 2.0 million. Out of which 1/2 roughly are leased to the Trencher business unit and the balance of roughly EUR 0.5 million to the Rail. This is as for the second question. As for your first question, yes, you are definitely correct. We are currently estimating the 20% on an average basis, EBITDA margin in the second half of the year. And of course, as you can easily appreciate, there will be a sort of, let me say, seasonal difference between the third and the fourth quarter, mostly to the nature of the businesses that we are going to put in place. Mostly services starting from the fourth quarter and revenues and sales in machines in the third quarter. And then there is also, let me say, a changeover in the mix lead to the Rail business because I think that around half of the second of the -- of the third quarter, we are completing most of the oldest orders and starting up the orders that were acquired between the second part of last year and the first half. In terms of contribution to cash generation, Rail is estimated to generate a very important contribution to the cash mostly for 2 reasons. First of all, because as you will notice in the detailed number when as soon as there would be communicated between the 11th of September and 12 -- August, sorry, on the 12, we will appreciate a high level of working process around EUR 24 million. This is not really linked to the Rail business and relevant to job orders that are going to be completed, then transformed the [indiscernible] and subsequently discounted in our report. There's definitely [Indiscernible]. Then also from Trencher, clearly because in the first half of the year, I have to say, while sales and bank cash flows in the U.S. remained substantially aligned to the level of last year and the second part of the year, we are starting up sales in new market segments in line with what Mr. Carlo was captured -- on he was anticipating and micro trenching notably and these are almost cash sales in very high [indiscernible] segment. And then, of course, automation as I was mentioning before, while commenting the first half results, the 2 major contributors to the increase in net working capital as at June end were Rail and we commented the rebound that we are expecting by December end of this year. And also, Energy Automation and actually, since we are a [indiscernible] here in Italy, we know that there are very important investments. For the time being, we are operating in Italy. As for the efficiency and the growing in productivity in the energy business, and we operate in such a business with proprietary technologies, [Indiscernible] the orders, we manufacture the product, and then we are expecting to finalize the orders we already have in our hand. So also automation will be a very important contributor.

Last point also, increase of volume, we are expecting to go from 125 to around 160 and basically, our organization is ready to go with no extra investment in fixed cost and in our operation fixed expenses. That means that the operation is going to give us support that we have always basically around 3% of our profitability in a way given [Indiscernible] present business. For this reason, decrease from, let's say, EUR 15 million or EUR 17 million of the EBITDA in the first quarter up to reported around EUR 30 million that we are expecting in the second quarter is a mix in -- on all different business.

The next question is from Enrico Coco of Intermonte.

First, clarification on the guidance. So just to check my understanding, you expect growth sales by around 20% year-over-year in the second half of this year. And this is achievable because in the second quarter, you increased sales by 18%. So assuming you will grow 20% in the second half of the year, it's not clear for me how can you, at the same time, reduce the net debt, given the fact that you expect to accelerate the top line growth. And then on margins, if I understood correctly on this 20% incremental sales, you expect to have strong margins because basically -- because of the operating leverage. So there would be no, let's say, one-off items in the second half in terms of profitability, just the operating leverage. Is this correct? And then I will ask other questions.

The increase of revenue, 20% is totally correct. Basically, why we increased and why we think that we can reduce our debt is basically connected. We are expecting to reduce our inventory and to sell the machine that we could use to basically in the first part of the year, mainly in the area of Automation and Trencher. While the point that is sometimes keeping us in is situation for certain months and then a better [indiscernible] second point that especially for Trencher, we produce everything in Italy, and we supply from Italy all our branches all around the world. And for this reason, from the day that we complete our production, from the day we can make revenues normally take from 60 to 120 days to basically ship and transportation and there are a lot of -- connected to a [Indiscernible] that in the last year become more digital. So for this point, the increase of 20% is mainly due to the increase of sales of [Indiscernible] that we are already producing the first half of the year. About our margin operation, no doubt that we are expecting to have a better mix in certain area because, for example, in Automation, we have fixed costs that we're expecting around to double the revenue in the second part of the year. For this point, Automation is going to drive our increase of profitability. Second point, what we are expecting to have a better mix in the market because we are expecting to grow in high value market, like you say or [Indiscernible] in Middle East, we have normal the prices and [Indiscernible] condition are better. For this point, we are pushing basically also our strategy to grow only in the area where financial situation is a little bit more easier. In certain areas like new developed country, the light -- with high interest rates and with the financial situation of the country that is now in [indiscernible], we have to be careful and be -- to be supported by the export credit lines that are existing everywhere. But now this export credit line that made in Italy are made with the insurance of such that we can [indiscernible] reason to positive delay. This is a point that we have -- is our challenge, and we have to be really careful to keep control on this forecast. On this forecast, we have possibility to evaluate analytically all the points and [Indiscernible] test everywhere. Risk factor, but we think that our financial organization and the organization is able to keep control and to avoid any major one-off problem that can happen sometime, but you see that now are under control it seems.

Okay. And then if I may, I have another question on Saudi Arabia. I would like to understand if the one-off costs included in the first half EBITDA for the Trencher part, I think, was around EUR 1.5 million. If this cost is also related with the strengthening of the local presence in Middle East, so in Saudi Arabia. And then in your slides, you say that you closed the important deals in Saudi Arabia. I would like to understand if this -- if you could quantify this deals and if they are included in the around EUR 30 million intake in Trenchers you had in the first half?

Okay. So as for the first question, I will provide you with an answer. While for the second one, I will leave the floor to Mr. Paredi, our Business Director for the Trencher business unit. The answer is no. We did not include the incremental cost deriving from the extension of the consolidation payment linked to Saudi and Peninsula as extraordinary incomes because then we also had the margins, like Marco will immediately comment. These are costs relevant to other markets -- one-off costs relevant to other markets.

To be clear, the project close with comprising Australia, basically one of the major points, we have a discussion of technical point, we prefer to close a discussion to avoid any possible future problems. Second point about the big Saudi. Saudi, we -- as we told last year, we are now fully [Indiscernible] from end of last year. We are in full control of our local company. This is the big business, to be led by -- Mr. Paredi, will explain you what are the possible business in sales and service sector [Indiscernible] previous.

Thank you, Mr. Caccia. And for sure, [indiscernible] spent resources, [Indiscernible] closer to boost the sales activity and develop activities in the Middle East. Last year, we closed the year in the Middle East with USD 3 million around or less [Indiscernible] million. And also so [indiscernible], we closed around USD 50 million in Middle East area, mainly in Saudi Arabia. We have several opportunities in vision 2030 in [Indiscernible]. And obviously, we try to follow and to confirm this trend also in the second half. We have opportunity both in sales and also in perform rental activities in these areas. Productivity and all the assets that we mentioned related to our capability in digitalization and also in remote control of our machine to give [Indiscernible] performance to the group. So our expectation is maintain the same growth of the first half or better and boost the 2024.

One important decisions taken by -- normally [indiscernible] in the first part of the year because this 6 months we have installed our ESP system 365 everywhere and [indiscernible] and [indiscernible] new CFO, new sales manager. So we have made a huge investment to be ready for [indiscernible] business. Saudi is a competitive opportunity, but there is a [indiscernible] Not to understand exactly the [Indiscernible] are used for this reason. There is a new team and for [indiscernible] we were selling everywhere for financial control, people from [indiscernible] Because we have this [indiscernible] because in the past a lot of people who are not so well in managing the company.

[Operator Instructions] The next question is a follow-up from Enrico Coco.

Yes. I will have a quick follow-up, is about financial charges. I would like to know if an estimate of around EUR 10 million financing costs. Of course, I'm excluding the ForEx part. So I was saying EUR 10 million financing costs is reasonable for this year and your expectations about next year.

Okay. No, I can. Mr. Gambini is telling me that, yes, it's reasonable, because as you have seen, basically, our net financial lines are normally medium term. Now if you go basically EUR 90 million of our line or long-term. Likely -- and unfortunately, this line were made in a better condition and now. So for this reason, we are expecting. However, during this year, around EUR 10 million because nothing is going to change materially, we are expecting to have a decrease in the debt, but interest rates are not going down. Also this [indiscernible], we're expected to decrease in our net financial position because no doubt the interest rates are going. So basically, [Indiscernible] has to go. We have to be really careful because we are expecting to have an [Indiscernible] next year, 1 or 2 basis point [indiscernible], but way, in newer now for new medium line, we are talking about 6% -- or 6% to 8%, and in dollar also was the best. Our net debt is mainly expressed in Euro, but no doubt the interest rates are going. What we are expecting at opposite end to have new long-term line starting from end of '24 because we were expecting the medium term to have decreasing interest rates. But as of today, we are still expecting for next year an increase with minimum of 1% or 2% in our cost of financing.

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

Thank you, [indiscernible]. I think that -- okay, we're happy to close and thank you, everybody. We expect in this quarter positive and we are waiting for you in October -- November.

Ladies and gentleman, thank you for joining the conference. It's now over, you may disconnect your telephones. Thank you.