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 Full Year 2023 Results Presentation. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Ambrogio Caccia Dominioni, Chairman of Tesmec. Please go ahead, sir.

Thank you. Thank you, everybody. We are here to present our year-end figures. And I think that this was an important year for our company. No doubt that one can describe the things that were successful things that opposite were not in line with our expectation. But I think that it's important to clarify what is our idea and what our highlights for the year. If you go to slide #8, this is how we classify our milestones, our business progress and what could have been better. Basically, if we can summarize a general point of view, we have increased our global network and our first priority this year was to create in Middle East, a strong organization because we are in full controllable to a local company in Qatar and Saudi. And this formally is for our last year was we were growing in that area, but not as expected. The current year and the future of the year are going to be for policies going to be a key area for us. Second point, especially we were started to organize international operations. And the most important that area was the agreement in transition with Škoda Automation Group in Czech Republic, that was a really important result for the development of our business in Railway. Energy Automation, we have operator completed develop our new products, and it is really important for us to understand that we were coming out from millions now we are on the top of super-high voltage application and this can be described what is the strategy in automation. About the new technology, it's a cost technology now that is going to impact the business of train rail and energy, we have a full range of new application digital in the area of digital twin and their infrastructure on one. The business process now, we are working specifically in energy my business because now energy driver of our business is a cross-application both in area of stringing pension and also railway. Rail Product Development was completed in the current year. We are now starting the deliveries of the new generation vehicle that are energy transition compatible and basically working more than 3 months. That are basically the key point. What was going to be in a better position is what we were starting to have due to the change of our organization to have a better level of inventory. But due to delay in deliveries, we are still with an inventory that has increased and basically, in connection to that, with the net financial position was not in line with our expectations. This was also a result of a Trencher slowdown of shipments in the last year, and this was mainly due to the fact that worldwide in a few clients, I had a problem to give us a correct financial guarantee to pay orders that were already booked. And for the decision, we took a decision to stop and not to deliver. In the same way, in rail, we had not in the right position, what we were expecting to have as a financial position because there was certainly the certification of new prototypes and this was telling us a delay in the cash-in that we were supposed to have. Energy automation, we had one client connection to [ PNR ] that certain order close and deliver and already on delivery after the month of June this year were delayed to '24, and this was getting us a delay in shipment and delay in cash-in. Now we transfer this is a general picture of what is our situation, we transfer to Carlo, that is going to give an idea about the different business and after we go to numbers.

Okay. Good morning, everyone. Let's go to slide 16. We'll start from Trenchers. As we will see in the fees later on, let's say, the growth of Trencher is mainly focused on key areas where the particularly strategic for the group such as Middle East, where there are important activities of business development for strengthening our presence in the area. There was a significant effort in 2023 on new developments and new technologies with new applications for fiber telecom and energy markets. It was also an important moment for the introduction of new platform for the electric and diesel platform for enhancing the switch towards the energy transition. And last but not least, there is a common pattern of each of our business units. There was a strong push on digital technologies for, let's say, enhancing the added value services of our business units. So, not only machines, but also added value services. And this, of course, is reflected on our figures, later on Ruggero will explain. Going to Rail despite the, let's say, more delay we had in 2023 in figures, there were very important results business-wise, both on markets and on new technologies. First, going on the market side, we had a very important award of a tender with RFI of EUR 109 million. And also there are significant opportunities that we have let's say, we do think we have a development in the early stages of 2024 on foreign markets, so not only with RFI, but also outside of retail. Going to the more say, technological side of the business. As we said in Trencher, there is a significant push towards the electric transition, where we had in 2023, an important agreement with Škoda Group from Czech Republic. And there were also some important certification on our vehicles such as the first installation of catenary working vehicle. Last, but not least, we are working on vehicles, of course, but one of the significant changes coming on Tesmec different business units is the development of the different software platforms in particular for rail, the development of diagnostic platform together with Avenade and Microsoft for artificial entering. This is something that has no competitor in this market at the moment. Going to the energy business, the different news also in this case, on the technology side, of course, volumes and EBITDA were in line with the expectations. But I would say, the most important side is the new launch of a new digital ecosystem for the training machines that is bringing to the market and to the table not a lot of new services and totally digitalized job site on the high voltage lines and a big news for us, a new cutting-edge production here in [indiscernible] with a lot of significant improvement in terms of efficiency that we aim to see in the budget of 2024. As for the energy automation, 2023 was very important. As I said before, because of the validation of the more strategic project in the digital substation of [indiscernible] with a very strong ramp-up of production of enough opportunities starting from this year and a significant engagement with new utilities not only, but for the first time also in other European countries that were being interesting opportunities for the next coming years. This is a general overview. Now I will refer to Ruggero that will go more into the details of the figures.

Thank you, Carlo. Welcome, everyone. Again, making reference to the presentation that was made available for download at our Investor Relations section on page 14, so general comments on our 2023 financials. The ending result of water Carlos captured represented was a top line growing by around 3% as compared versus 2022. This is clearly resulting from the 15% growth in energy sector, 2%, 2.5% actually growth in the Trencher business, more than offsetting the 11% decrease in sales revenues from rail. At the operating level, as you can appreciate the water substantial consolidation of the results of last year, so with a 3% negative variation, so roughly EUR 1 million from EUR 35 million to EUR 44 million. But clearly, as you can immediately grab from table 14, the key variations leading to a net result in the year was, by far, represented by this huge increase in the contribution from financial items, both in terms of financial charges on our banking facilities, this is directly linked to the well-known intervened tax increase that as everybody knows, as we all know, actually presented and manifested themselves with a delay of around 6 months to 11 months, starting from the first increases in the tax rate increase especially by European Central Bank. I think now we are in the very middle of the top pie effect from this, plus an additional EUR 6.5 million from mostly unrealized ForEx variations. Clearly, this EUR 14 million of negative contribution on a decremental basis against 2022 led to net of the fiscal effect, this accounting loss of EUR 2.7 million. In terms of financial side, excluding for the first time, at the first instance, the composition represented mostly by the actual value of the ranking office, but most notably leasing operations against a portion of our fleet of machines. The net financial position increased by some EUR 10 million. I anticipate to you that the large part of this was motivated by the increase in net working capital. And as you can see in the line highlighted at slide #14, by and large, by far, such a negative variation is reconductible to the valuation of net inventory. And I come back on this, and I think also Mr. Caccia will come back on this, while commenting the outlook for the current year 2024. Clearly, adding back the IFRS 16, the total accounting net financial position closed at EUR 153 million, that is exactly line with the number that was anticipated a couple of weeks ago with an accounting difference of EUR 25 million against EUR 128 million of last year. Now, this is the general last frame. Now, let's go a bit more in detail in commenting this. I would very quickly draw your attention to slide #25, where you can immediately grab the key variations in terms of EBITDA contribution to the consolidated EBITDA. So, clearly here, we have the slowdown in the rail. Let me just add one very, very brief comment in terms of Trencher because Trencher actually contributed positively by a couple of million here into the EBITDA if compared against 2022. One other important point that was already anticipated, at the end of last year and November and December do represent historically to very important on a seasonal basis, moment for our sales against machines already produced and available at our stocks. Such sales were postponed through 2024. And then there was a positive contribution, as Carlo already anticipated from the Energy business. This is in terms of EBITDA contribution. If we skip to next page, 26, we will better appreciate the variations of our net financial position. We, as usual, isolate the effect from the leasing operations, excluding the IFRS effect from the accounting net financial position. If you focus again, at page 26 to the central part of the slide, you will see the 3 main contributors to our free cash flow of last year 2023. As you can notice, out of the EUR 10 million difference between, we are missing the number here, EUR 104 million of net debt, excluding leasing operations at the end of '22 and EUR 114 million of same figure of same item at the end of '23, out of EUR 10 million, more than EUR 6 million were represented by the increased levels of stocks and net working capital. Out of those EUR 6.2 million, the double of this value is represented by stocks. So as a matter of fact, if we isolate the level of inventory, clearly, 100% of this negative free cash flow is attributable physically to this kind of variations. Then of course, as usual, we report also the operating free cash flows that were positive, excluding again the leasing impact from EUR 2.5 million against a residual portion of the CapEx, again, excluding the investments in a fleet of EUR 16 million. One very quick comment in terms of net working capital, and then I would leave the floor to our President. Page 27, this is something very important under my perspective to represent. Let's keep in mind that our net financial debt, even including the leasing effect of the effect of IFRS 16, I don't want to know you, but as usual, I have to remind that this accounting principle forces us to accrue 100% entirely the future effect of the [indiscernible] I think it is also for our machines, but cannot allow us based on our backlog, the actual value of the relevant incomes from existing trucks and business opportunities. Having said that, if we consider jointly, the proportion of long-term financial debt, together with the EUR 39 million of leasing, you will appreciate that this is more than capping, more than covering the exposition of the long-term duration of our net assets, meaning the net fixed assets and the long-term assets. This is very important in order to conclude my reasoning and now can go back to the net working capital. Net working capital, by and large, is indirectly financed by a portion of our short-term debt with the cash and cash equivalents that were above EUR 50 million at the end of 2023. Now, working capital, if you consider the EUR 9.2 million of increased stocks, excluding work in progress, mainly represented by Railway business division roughly EUR 45 million. And you couple with this, with what our CEO was anticipating, meaning the delay in obtaining some important certifications for our existing technology, Railway Technology, trains. That impacted for some EUR 8 million to EUR 10 million of postponed cash in, we will immediately get that this is the key reason to this. As the stocks excluding the leasing work in progress effect, let's keep in mind, that we started creating an important extra stock, initiating that from the post-pandemic space in 2021, end of 2021 that at that point in time and beginning of 2022 was motivated by the fact of growing out-of-stock situation. We've seen a condition of growing backlog. And then clearly, the rest was based -- our expectations were to consume this as long as the sales growth of movement itself. Our clear position in this is that this extra stock, that is currently amounting to some 160 days against a historical recorded ratio of around 90 days. It is absolutely in our control now in 2024. And we'll be very much focused on this to be reduced. This will generate automatically free cash flow. As far as the other post of the other items for net working capital. Just let me highlight this. We increased not very much our top line, look at the trade receivables. Trade receivables even improved, proving that the solidity of our clients and all the market segments that we have addressed and the cash-in is something under Tesmec is really important. So again, net working capital represented by stocks with the future services, are presented. I will stop here and leave the floor to our CEO, Mr. Caccia.

Thanks, everybody. Maybe that we are a little bit tired, but we want to close this presentation, giving you an idea of what our guideline for the current year. No doubt, that we have closed the 3-year planning. This year is a transit year. And so for this point, due to the big change in the economy, for the year 2024, we are expecting to give you a strong guideline because basically, we have a backlog that is stabilized and the order intake is going on. So we are expecting to have a strong order intake, specifically in the second quarter. But going on, like we are here now, we can confirm you that, on or we considering the 2024, a very against volume, that means we want to get value. And we are looking at the second step on. Anyway, as a turnover, we are expecting a growth of 23% higher than 10%. That means that basically, we are expecting to go in those, different business, but mainly focused on the strong business for profitability -- that in a way Railway and Automation. But basically, we are coming back also to avoid any specific losses. And for this reason, we are expecting EBITDA improving versus 2023 and coming back to our expectation that is in more than 50%. That is for us a medium target, because we are looking at -- this is feasible now, because we are in a strong competitive position. And second point, the increase of cost is going to stabilize. And we can increase partially our prices convention to Net Financial Position. As already told by Ruggero, we are strongly working in our organization. Remember that, we have course one factor here and we are going to have a second step of logistic investment to increase our efficiency. And for this point, we are expecting to have a strong reduction in asset allocation and working capital. And for this point, we think that that we can have a strong improvement in our net financial position. Finally, this is for a commitment for us. We will create also a system of key performance to control all our groups. And what is the target is also to be a little bit more lean. And we have tried to organize our group to have a better efficiency and be very flexible to respond to the market. Today will come back to what are our perspectives we will keep you totally in line. Thank you everybody. I think that we can confirm that, the current year is going to be in line with our expectations, especially as I remember to you our backlog is more than EUR 400 million. Thank you.

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

Yes. Good afternoon everybody and thanks for the presentation and for taking my question. I have 3 questions, if I may. The first one is on profitability. You said you may improve profitability in 2024. Can you give us an idea of which kind of lever you have to improve efficiencies in 2024? The second one is on net working capital. Can you give us an idea on the level you expect of net working capital sales for 2024? And the last one among the things that could have worked better, you mentioned in your presentation the cost of debt. What do you expect from cost of debt 2024? Do you expect it to increase, to be flat? Or any indication will be useful. Thank you.

Let's go. I will give you a plan for profitability, Ruggero talking about you about Net Working Capital and about the cost of debt. Let's say, profitability, what we're expecting, as I told we are working normally more connected to dollar than to as an export market. And we are looking at, generally speaking and then, think of selling price is still, existing, but it's not going for this point. What we are expecting is to try to have better [ bigots ], a better [ bigots ] market. That means that we have a product with high profitability, especially in the area of big surface mining machine or technology, working cash, working vehicles. And as we add in automation, we were the better pieces also to select clients that basically maybe ready to or not big volume, but to recognize the right value of the products. For that point, and second point, especially as a result of our operational organization, we have a target to reduce our operational cost of 3% to 5% that can have an impact on EBITDA profit line of around 2, 3 points, that we are basically our priority target on a presence of a certain increase of volume. But if we're saying we are working with the current executive situation, we can grow 10%, 12%, if any real cost increase. But I pass it to you about Net Working Capital.

As for Net Working Capital, now we are presenting at this stage of the sum between work in progress, which we specifically commented while mentioning the RAIL business and this delayed payment postponed to 2024. So you cannot appreciate the only portion alone of the stocks, meaning the finished products and intermediate, but maybe in the attachment point is the following. And I think this is the best respond to your question, Emanuele. In 2023, we have been working with an average days on 12 months sales of around 160 days in terms of net working capital. Now, the pre-COVID ratio was around 90 days. I'm not saying overnight, we can go back to 90 days. But in my opinion, as a manager or proper managerial action, leading at least from 160 to 120, 130 days, it is something absolutely within our control. So this is my question. This would imply a reduction let me say, a double-digit reduction in our net working capital. As for the cost of debt, yes, we are currently forecasting as an average between 75 basis points and 90 basis points of reduction. This is represented by 2 points. The first, you know that on an annual basis, we renegotiate a portion of the long-term debt that we are removing on a constant and regular basis. And based on the average IRS that we are currently seeing in the market, this will lead in our perspective to a first cap. And of course, we see that embedded in the forward structure of the financial charge of the Financial Prime Rates. It is currently incorporated the Capital. A few weeks ago, it was around 75, 80 basis points, now is my perception is that we are currently talking about 50 basis points accompanied by, in our opinion, also some deleverage in terms of spreads, meaning the portion directly associated to the overall risk on attitude that was activated throughout 2023.

The next question is from Enrico Coco of Intermonte.

Good afternoon. I have 2 questions on the debt position of the group. First question is, I would like to understand in which division you are burning cash. So if I see the group cash flow, the 2 drivers are the increase in leasing. So IFRS 16 debt and this is related to the Trencher business, I guess. And then on the inventories, and this is increasing by around EUR 15 million in the last year in 2023. And then you have an increase in inventories which is the other main driver. And so the question is, for example, the increase in inventories is related to the rate business, which is burning cash or is still for the Trencher business. So this is the first question. So trying to understand how the group cash flow, speaks at the divisional level? The second question is on the Refinancing side. So you have around EUR 100 million of short-term debt and EUR 50 million of cash in hand. And so you will refinance this debt? And also you have around another EUR 100 million of debt expiring after one year. I would like to understand your refinancing strategy, if it's possible, for example, to have new partners entering one of your, business or you just will refinance the bank debt? And at the end, so you were discussing before the cost of debt. But in absolute terms, in 2023, you paid EUR 13 million of financial charges, what level of financial charges you expect for this year, including everything, so the refinancing part? Thank you.

Thank you, Enrico. As you ask difficult question also because as we commented, the financial charges we did actually represent the key variation against and sorry to repeat you, a consolidation of operating results. Now, the answer is first question. As for first question, as for Enrico, the renewal of a portion of our long-term debt, as I was mentioning before, if you consider jointly the portion of IFRS 16 around EUR 39 million plus, the portion of senior debt issued by banking institution around EUR 92 million. You will, and you compare this with the difference between your long-term assets, not covered directly by the equity, you will arrive to a surplus or some EUR 60 million. That is substantially in line with the difference between the net working capital, 50% of the net working capital and the net amount of short-term debt net of liquidity. This is very important because, first of all, let's keep in mind that we have a huge reserve in terms of auto liquidating, self-liquidating lines for the net working capital. As a matter of fact, now we are financing our net working capital by means of senior debt, keeping a very huge reserve of cash even because usually, given the seasonality and the key features of our business cash in usually concentrated at each quarter end. So clearly, the question is there is a huge reserve of cash. Clearly, our objective is to renew a portion of our long-term debt, by means of new debt. We have also to see and so confident in the evolution of net financial charges. Because clearly, when you finalize the senior debt, having a tenor or better to say duration up to 4 years, the moment you compromise yourself 4 years at the peak of prime rate, clearly, this, as you can easily imagine, to require some second part by the manager. We have a significant range of option under the financial point of view, if you can easily see in the numbers in the acts. Second point to your first question, let's keep in mind that as Mr. Caccia as our CEO reiterated many occasions in the past, we sit on a mine, that is represented by the fleet of our machines, generating income, the book value of which is a small portion of their actual per value for the simple reason that on an annual basis, we depreciate them. And this was clearly represented by the huge increase in 2023. Second part of your question, I hope you don't mind, I would reply to that, indirectly. Let's talk about financial charges. Please, let's keep in mind that EUR 6.5 million of negative variations that impacted directly to the pre-tax result of 2023, were represented again, by ForEx variations, largely unrealized because they are based mostly on intercompany debt. So clearly, this is affecting the accounting representation of the net result to a less lower extent that are impacting cash. What impacted cash, for sure, for the EUR 13 million of net financial charges that we had to pay or if you prefer the EUR 8 million difference against the value of EUR 22 million.

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

Thank you everybody. We appreciate the participation. I think that, we are ready to take a commitment that the current year, as we told, is going to be a growing year for everybody. And we are expecting to have quarter-over-quarter, an improvement on the past years. Thank you very much.

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