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 1st half of September 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.

Okay. Thank you, everybody. I am Ambrogio Caccia Dominioni CEO of the company. As usual, I will open this conference here because this morning, the Board of Directors that approved our interim consolidated figures as of September 30. We will disclose how what we have done and where we are. No doubt the third quarter was positive for us, better than the first half of the year. And for this point, at the year-end, the 9-month figures are giving positive improvement both in profitability and net profit. The [indiscernible]. I will pass now the conference to our CFO, Ruggero Gambini, that will disclose to you the key -- the main figures of our revenues and our financial figures. Thank you, everyone.

Thank you, Mr. Caccia. Welcome, everybody. We as usual, circulated a presentation on our website. It is available for download at the Investor Relations sections. So going straight to commenting briefly the P&L and net financial position and making reference to page 15 of the presentation I was mentioning as Mr. Caccia said, also in third quarter, sales growth momentum was positive. And this is a trend that started already a couple of years ago. Total sales grew in the 9 months by around 11.6%. That was 1 percentage point more than the level of sales growth that was finalized during the first part of the year. This growth was, as already commented previously, mainly driven by the Trencher and the Energy business unit. While the business unit Rail grew if compared to the last period of last year, but [indiscernible] a lower pace. And we'll comment this shortly while seeing or EBITDA by a single unit in terms of EBITDA. The total growth in the period was 6% against last year, but most notably, please take a look at the EBITDA margin. If you remember, we closed the first 6 months based on a weak product portfolio, product mix as well as the presence of a couple of million euro of nonrecurring charges. Those affected very much profitability in the first half of the year. We anticipated a rebound started from the month of June and expected to be continued throughout the second part of the year. And actually, the data of the third quarter do confirm such an expectation. As you can see, the gap that was registered in the first part of the year in terms of the EBITDA margin that was around 5 percentage points was narrowed to the level of 0.7%. And as a result of this, we are presenting an EBITDA of EUR 27.5 million, increasing also in absolute terms versus the level of last year. Going down to the other lines of the P&L, you have already noticed this very important variance on negative variance on a decremental basis regarding net financial share. And of course, and this is very important to be noted this narrowing of the gap at the EBITDA level that was recorded at the end of September is derived from the performance that was achieved in terms of EBITDA and EBITDA level during the third quarter. That was characterized by an improved mix as -- as the process initiated in June as well as by the absence of extraordinary charges. So that the 3 months, July to September this year ended up with an EBITDA margin of 18%. 18% is a very important number. This is not our targeted level by this year-end. And I would say also at maturity, considering the level of sales on a quarterly basis is supposed to further grow. We are working on levels that, in my opinion, should be far above the level of 20%. But in any case, along this path of growth and -- well recovery and growth the confirmation that based on a good mix and based on a significant valuable effect from the operating leverage achieved such levels -- such values of EBITDA margin is for sure representing a sound basis also for the prosecution of the year. In terms of financial charges, there is -- there was a negative variations here in the 9 months of this year against the life period of 2022, represented by around EUR 14 million. The precise number is EUR 13.7 million, again, making reference at Page 15. Roughly 1/3 of this variation was represented by an increase in net financial interest paid on our debt. They doubled in the 9 months this year against the last year. This variation is mostly represented by the well-known increase that intervened in terms of prime rates as well as by a higher bulk of inventories that clearly directly influenced the total level of debt on which the financial charges are calculated. The balance to further are instead represented by negative variations in terms of effect from ForEx exchanges and here, we already noticed this while commenting the data relevant to the first half. There was a little rebound in the course of the third quarter. But as a matter of fact, we are currently suffering of more than -- almost EUR 10 million of variance in terms of differences from exchange. Let's keep in mind, and we already stressed this in the past conference calls that most of variations from exchange are unrealized and also in this case, on a rolling basis, are kept then in terms of assets. But as a variance, they are, as a matter of fact, interested in the comparison against the 9 months of last year. At the very end, we closed with a marginal profit. We already saw during the last 2 conference calls, the progression that our P&L has been experiencing this year. We closed the first quarter with a loss. The second quarter performed a breakeven in P&L and we were anticipating actually third quarter and fourth quarter characterized by better mix and that lead in the third Q to positive results, such that the final results ended with the more profits. Clearly, our objective, as I already commented during our early August meeting is not to achieve a breakeven situation. Our objective is to make money. So the fourth quarter, historically one of the most robust of the year will be played to this extent. And for the fourth quarter, I can say that all of our expectations, but then the President will -- we'll go back on this during his final addresses in the conclusions. So for the fourth quarter are currently expected even better than the third Q in terms of EBITDA margin. So this is supposed as per our expectations to drive further ahead the net profit towards a more adequate and satisfactory results by year-end. One comment at last, again, regarding this Page 15 about the net financial position. But let's start from the very basis please take a look at the last 2 lines of this slide, and let's start from the last one. Stocks inventories increased by EUR 20 million against the end of last year. This is a number substantially in line with the one of June. And on a peculiar basis, clearly also the net financial position directly was directly influenced by this increase and as a matter of fact, net financial position, including the effect from IFRS 16 increased at a similar pace. Here, the point, and I would jump to Page 22. Now in order to continue sharing with a couple of brief comments on our net financial position and free cash flows. Here it is, I think, very clear under a financial point of view. If you consider that excluding variations from net working capital, our free cash flow and excluding also positive contribution from IFRS 16 variation was positive for EUR 1.5 million. Clearly, all the balance was represented in terms of negative contribution to the total net financial position by variations of net working capital. Net working capital mostly again represented not by trade receivables in terms of variations, but in this case, mostly by inventory. The level of total inventories, but I will say, total net financial debt is in line at the end of September to the value that we presented in June, but clearly, it is increasing for the reasons that I mentioned against the one of September. One last comment on the debt and on the net financial position. So I would invite you to take a look at Page 21 of our presentation. There are a lot of numbers. But here, I would like to convey to you just a couple of concepts. As we said also at the end of June. And the remark is a very important aspect to understand the depth of Tesmec. First of all the leverage that we have in the short term to reduce this debt is a leverage fully under our control. That means reduced inventory, reduce inventory, both inventories was established back on short-term sales expectations backed on a very robust backlog and that kept itself well above the level of EUR 400 million that was achieved as a record at the end of last year. And in our opinion, and this is our objective in 2024 will further increase. But the key point here is that even taking -- making reference to this peak level of the debt, reflecting a peak in the net working capital of EUR 149 million. Most of this debt, EUR 106 million is represented by net working capital. Then there is another piece for around another EUR 21 million, that is represented by IFRS 16. Also in this case, I already had the chance of sharing my personal position on this. This IFRS 16 is, as you all know, the present value of the leasing to better especially our machines. That are working based on job orders, so these principles obliges us and other companies to treat as financial debt at the present value of the future reimbursement of this leasing best by machines. But at the same time, it does not allow us to accrue to our -- as a sort of compensation of this, all the future margins coming from the relevant job orders. This creates a distortion. As a matter of fact, the final result is that if we just consider the factual number, the real industrial debt of the company is around EUR 25 million. This is the industrial debt. And the key to this -- on this, I can say that as we anticipated already from 2021. We had a very first financial target at that point in time was to have the crossing of the curve -- of the curves between depreciation and CapEx so that the EBIT could represent before variations of net capital, a good approximation of our free cash flows. This happened. This was even confirmed during the 9 months of this year. So once again, the key here is to reduce our inventory backed on our sales. So here, the question is what do we expect and we are very much determined in terms of sales and results and profitability as far as the fourth quarter is concerned. I would stop here and leave the floor to our president, Carlo to the Business Unit Director of the Energy business unit, Mr. Carlo Caccia Dominioni.

Good morning, everybody. So let's have a look at the business side in order to give you some couple of info about what the results have been in terms of figures. Let's start from chart 10, starts from the Trencher. As it was quite evident also from the figures shared by Ruggero. We start from Trencher as also because Trencher was the key driver of the positive performance that the company had in Q3 and for the recovery of the EBITDA of the group. This is also coming from significant improvement in terms of product mix in line with the expectations that we had at the beginning of the year. Looking at the few, let's say, the key facts of the business in the quarter, let's say, there is a significant and important resume of activities in Guinea in Africa. This is very important for us also in terms of perspective because it's -- it's a significant enhancement of the recurring business, both on sales and services for all the mining projects that we are looking at for the next quarters. In terms of new technologies, there is big results coming out from the R&D activities of the last years that is the product development and the completion of a significant -- of an important new technological platform aim at the, let's say, [indiscernible] infrastructure business. And also, let's say, last but not least, there is a, let's say, a significant technological improvement in new technologies that will switch our supply chain in general and also product portfolio on new digital tools for the supply chain. Going to Chart 11 about the Stringing business, Stringing didn't see -- we saw a good performance in terms of volumes, not in terms of profitability in the quarter based on, let's say, what was good in Trench or was not so good in Stringing about the geographical mix. We had a bit of a slow down only for this quarter on U.S.A. market, but we will see there are significant opportunities coming out for the next quarters. Let's say, the main topic I would like to share with you on the Stringing business for this quarter is big R&D activity coming on the development of a new service platform that same as in the trenches side will enhance our recurring business with high-value services added to the sales of our machines and tools. And there is also a continuous improvement in terms of new digital platforms on new machines. Looking at Chart 12 for Energy Automation business, the quarter was in line with expectations, both on volumes and on profitability and probably the most significant news coming in Q3 and also, let's say, part also on the last few weeks of, let's say, the beginning of Q4 was the validation of the 2 projects with the Italian DSO that are the result of almost 50,000 hours of development in the last 4 years that we give a huge boost on the substation automation project and also a big perspective in terms of new development, not only in Italy, but also on foreign markets. And also, let's say, the continuous business development ongoing for bringing automation projects not only with the Italian utilities, but also outside of Italy such as [indiscernible] the French market. Last, the Rail business, there are a few very important news coming from a technological perspective on Q3. There is the final acceptance of the first prototype for the Italian National Railway that we, let's say, announced the ramp-up of mass production. There is a very important achievement on the diagnostic vehicles we received a certification starting from which we will be authorized to work in our [indiscernible] be authorized to perform on active line interim configuration. And last but not least, we received our ETCS level 2 certification that we will be the first working car with interoperability in the whole Europe market. So 3 very important achievements in terms of certification. Of course, we will see the results on the figures of the next coming quarters. So this is, in general, the effects. Going to Chart 17 and having a look at the back revolution, you see there is a continuous growth of our backlog activities, given the fact that the 2 business with the longest perspective in terms of timing that are Rail and Energy with, let's say, with public customers with long current backlog are still participating in both businesses in important tenders that we announced for the future the backlog of the company. So this is, in general, a few topics about the quarter. I leave the floor to our CEO for the conclusion of the presentation.

Thank you, everybody, and again I think that in this not easy external environment because we understand perfectly that the global economy is facing big challenges now. First of all, the financial market are very difficult for high interest rate as an impact on major underground project all around the world. But in a way, the situation was already expected, but -- and I would think that on a long-term basis, the fact it has to be evaluated. As a second point, we know -- everybody know that we are working in Northeast area. One area is in to Europe and East Europe has a huge potential to grow, but finally, the war in Ukraine as Putin said [indiscernible]. And another second step but not easy situation in middle east there is [indiscernible] is putting us in a [indiscernible]. No doubt that [indiscernible] countries where we are working mainly, Saudi Arabia and Qatar are facing the situation in a very quite way. We don't know if it's going to happen, but the projects are going on, and we have a huge possible growing factor in this area. Due to that point and due to a fact as the last point, inflation rate in the euro area is down. And the reason why we updated all our figures is because basically our selling price, we normally are now lower than expected because we are facing now, let's say, stabilized inflation starting from beginning of May. And second point, we are now trying to have a better profitability. For this reason, if we are starting. We are expecting to have last quarter with an EBITDA more than 20%. And this given mix to during the year to have an EBITDA that is lower -- or higher than 60% on the [indiscernible] the year. As a second probably [indiscernible] this can happen probably with the sales volume, but slightly lower than expected. First as a currency question and also for pricing point that we are quoting price lower than the in the first part of the year. As a result of that, we are expecting revenue lower than originally EUR 290 million to EUR 280 million range, probably we are going to fix around EUR 270 million to EUR 280 million, but the priority for us is profitability. So we expected to confirm the profitability be slightly lower volumes. In terms of financial position that as a consequence of the impact of what happened in the fourth quarter, we confirm that we are improving exactly depending also from the year-end situation, but we are improving much lower than what was September, this is what we can confirm as of today. And I think that for us this last quarter is a big channel because if we are winning the last quarter, we expect also next year in a positive way. Thank you very much, everybody. And I think that this is -- was a good period for us. And also, as you can see, the internal situation is not so easy. Thank you very much.

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

Yes. I have 2 questions on profitability. The first one is on the Trencher division. You said that the third quarter had a strong performance, benefiting from a positive sales mix. Do you expect this to continue even the last part of day? Or will this normalize? And the second 1 is similar question on the Energy and Automation business, which had profitability performance lower compared to the first half. Do you see this normalizing the second -- the last part of the year? Or is this some normal level is kind of 13% you have?

Okay. I will transfer to starting from Energy business, Carlo.

For the Energy business, the performance was a bit lower than expected, but thanks to the mix of our revenue for the third quarter, and thanks also to the new business model that we significantly growth after the validation that I just discussed in the presentation, we expect the profitability to grow in line with our budget. So let's say, it was not so positive third quarter, but we do see a growth in the next coming quarters.

About Trenchers, we will transfer to Mr. Paredi.

Good afternoon. In terms of Trencher, our target is to keep this margin because we have all the possibility to grant the 88% in the quarter Q4 and thanks the contribution of Middle East area for sure, as we already explained and thanks the trend of the market in U.S. and also in Australia for sales.

As you have seen in this quarter, we're not talking about a one-off discussion. No doubt that Trencher business some time will have an impact on different projects. But as it was very clearly stated, we are pushing where the market is supposed to be better. The data by segment, there are area that the profitability is better, normally on the big machine market, the profits are better than on the fiber business that in ways more competitive, but hopefully the fiber business in the way fiber and [indiscernible] our traditional business. So in a good mix, we can have a good [indiscernible].

The next question is from Enrico Coco, Intermonte.

I have 2 questions. One is on the outlook. The other one is on the debt position. About the outlook, if I'm correct, even the EUR 77 million sales in the last quarter of the year to achieve the low end of the sales target, EUR 270 million. The question is how much of this EUR 77 million you need for the lower end of the target. I was saying, so how much of this EUR 77 million comes from the backlog conversion. So what kind of vision you see on the target? And the second question is on the EBITDA. So to achieve the target, you need the margin above 20% in the last quarter. And the question is what kind of visibility do you have on this? So how much comes from the conversion of the backlog and so the mix in revenues that is driven by the backdrop. The second question is on the debt position. So assuming you closed the year with an EBITDA between EUR 40 million, EUR 45 million, something like this. And if I look at your net debt position currently is at around EUR 150 million. So could you discuss the covenants you have on the debt and if you have -- what kind of financing needs do you have going forward? And also, what kind of cost of this debt you expect next year?

Let's come back about the first question after for the debt, we transfer to Ruggero. The outlook for the last quarter is around EUR 80 million of revenues of this basically 80%, especially in Rail and Automation are already fully covered by others, there of Strengthen and Trench traditionally year-end, we have already consolidated, but we have already the year-end transaction basically are due to the policy for investment in specific countries like USA and everywhere. So basically, we are still expecting new order incoming, but the stock -- and due to the stock available, we can confer that [indiscernible] reaching world and with the backlog and what is existing already in-house, so we can confirm the figures. About the visibility of profitability that where we are basically Rail and Automation, we know exactly the figures if nothing is going to happen and change. About all our things is based on the mix of countries and the product that we can have. So basically, the 20% profitability is partially due to first level of profit and second, to an operational leverage because basically we don't expect to have increase in cost. And due to the increase of volume, we have a better profitability. The fixed cost based on a target of EUR 60 million, EUR 62 million per quarter. And if we go to 20, there is an operational leverage that is [indiscernible] about the net debt, I will transfer to.

Yes. The answer is yes. Based on our expectations, we are expecting the 2 covenants, just a benefit of knowledge of [indiscernible] are based on the ratio -- on the debt to equity ratio -- on the ratio between net financial position and EBITDA. Both EBITDA and net financial position are contractually adjusted to the main characteristics of typical of Tesmec. So they are netted by the IFRS component. This is also in line with other qualitative considerations that I was mentioning before.

The next question is from Michael Asika of Neuberger Berman..

I just got one quick question regarding the Trencher business. In terms of the operations in Guinea, are these contracts settled in Euros or local currency.

We are basically the Trencher, we are more exposed to dollars. Because basically, traditionally, we are working in export market. Europe is a small market in a way. Our key markets, U.S.A., Africa and Middle East, mainly our -- the selling price are linked totally partial linked to dollar. And we have cost in euro and revenue dollar is 1 of the reason why we have the coverage when we close orders, and basically, our budget was done in a target to have the [EUR 1.10 billion to EUR 1.12 billion]. So now we are in a positive situation on that point of view.

[Operator Instructions] The next question is from Peer Rosenberg of Neuberger Berman.

Just a quick one. If I remember well, there is a certain part of your revenue backlog or project backlog that's located in Saudi Arabia and the kind of Middle Eastern area. Are there any concerns from your side in respect to the current situation there that it has any impact on order and the -- basically the actioning on orders at all.

At all. It's not easy. As of today, we can confirm what is going on. Our main market now is Saudi, and we have diversified in different business areas that basically are normally more connected to long-term trends in the country than to the short term. That means, one is in real estate, the big infrastructure project that, in a way, have a long life, and we don't see any slowdown. And as a second basically due to the new new development in Neom the digital railway line, our infrastructure project that basically in that area we don't see any short term change. We are not fully exposed now in the gas and oil. Gas and oil is a huge market for them in the future, but still not yet so clear, a rapid decision for the new big projects that are not in our backlog now. In Qatar [indiscernible] we are mainly focused on the new real estate project and infrastructure. So basically, this is a project that have a slow period in the world champion FIFA project because from last year in, let's say, June to this year in March our deposits have been derated. For this point, the period in Qatar was not positive, now it's coming back. So basically, the trend is positive on the short term. On the long term, no doubt that nobody understands exactly what can be an impact. But as of today, due to the gas price that is high, the oil price that is high still in there, the economic situation is very [indiscernible].

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

Thank you, everybody. I hope that we can organize the next conference in -- by showing you the results of what we're expecting to have. Thank you.

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