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 Group First Half 2024 Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Ambrogio Caccia Dominioni, President and CEO of Tesmec. Please go ahead, sir.

Thank you. Good afternoon, everybody. I am Mr. Caccia, CEO of the company. It's a pleasure to me -- for me to be here. No doubt that the current situation is not easy for everybody, but we think that our company has a good strategy to grow. No doubt that I try to summarize what we have done in this period and what are our expectations, I think that I want to present to you the Slide #8 and the highlight of what is the current situation now. Our strategic decision at the beginning of the year was to give a [indiscernible] value against volumes. That means that we have given the reality to try to have cost efficiency and better profitability and not to look into [indiscernible] volume. Our revenue in the first quarter in line with the last year figures in a situation where normally inflation rate in our business is near to 0. The efficiency was performed on the deeper situation has given us a better rational profitability and where we are able to reach a stronger decrease in our cost -- operation cost that after the [indiscernible] have been done. Tesmec Solution in a way are still positive. And we think in a different business, we have a different situation, but the energy business basically is the leading business for us and its transition is a milestone for [indiscernible] leader worldwide, and we are going to expect it to have, on short term and medium term, very good results in this business. After that, we had the second area where we are working very well is in the Middle East there, where we are in control in 2 local companies, Saudi, Qatar, and we expect a stronger increase in the business in the next few years. The [indiscernible] that opposite [indiscernible] difficult for us in the current situation. First of all, net effect that interest rate at the banks high interest rates, keeping certain conditions, the business for our clients and the financial problem is everywhere a milestone for the business, high interest rate USA, Europe and driving all the world. As a consequence, we had a lot of problems to close deals, and we hope for best to give financing to our clients from this situation, we had an increase in amount receivable. And as a result, we had for that reason, a net working capital increase that is due [indiscernible] to that and second [indiscernible] to a difficult logistics. The [ seaside ] transportation are in big mess now in the due to political situation and due to the new economical trends. And for us, this is a big change in our strategy because we are basically inventory in [ transfer ] that is still keeping us in condition that we have to try to find the better local content and to reduce all our long-term transportation. Last point that was not work in the first part of the year and the [ debt ] was mainly in rail and partially in automation. There is a strong delay in the closing of the new tender due to the political situation first, but also due to the European rules and for this reason, the first part of the year, a lot of big tenders have been delayed as a consequence of [indiscernible] problem and delay in performing all the procedure to open the standards. We are expecting a strong increase in the second part of the year. For this reason, we're expecting a strong increase also in our backlog. After that, we had basically 2 [indiscernible] that are giving us problems. First one is USA, where we have low volume, but good profitability stake on this France, due to the current situation in France, our local entity had a better result in the first quarter of the year. I think that I summarize what is going on now we'll transfer to Mr. Gambini that will go to numbers and is our CFO can disclose all the numbers.

Thank you, Mr. Caccia. Welcome, everyone. As usual, we made available our presentation on our website at our Investor Relations section. So returning to that presentation starting to -- from Page 11, so profit and loss account. As Mr. Caccia clearly explained the numbers are reflecting the rationale on which the first half was based, so value over volumes is clearly represented, first of all, starting from the top line. In terms of revenues, revenues were substantially in line with the level in the first 6 months of this year, substantially in line with the level reached in same period of 2023. So EUR 124 million against EUR 125 million, it means an 0.8% [ volumes ]. At volumes being equal, such stability of volumes, [indiscernible] and contributions [indiscernible] EBITDA, because if you look at the earnings at the gross operating result, it reached EUR 19 million against the roughly EUR 16 million last [indiscernible] year, but marking an increase in both relevant terms and absolute terms. In absolute terms, there was an increase of around 20%. And while in terms of relevant terms, the EBITDA margin passed from something more than 12.5% to around 15.5%. So there was a 2.6% increase in profitability. This profitability, this achievement is exactly the derivative of what our President just explained. So same volumes keeping better mix, keeping the gross marginality while leveraging in a very decisive way on our fixed cost structure, so better to say, operating cost structures with a significant reduced -- decrease of both, by means of precise managerial actions on which we already expressed our comments in occasion of the presentation of the first quarter results. The point that we stressed at that point in time is that such a managerial initiatives were put in place starting from the last quarter of 2023 and the first couple of months of this year. We anticipated at that point in time, most of this efficiency, the quality of efficiency will become visible starting from the second quarter of this year. This is what happened. So as a matter of fact, it is important to cover in terms of gross operating results is motivated by that. At the same time, while depreciation, so non-monetary but also monetary cost for the portion related to IFRS 16 accounting principle remained substantially stable. There was a little increase less than proportional than increase at EBITDA level that led to an EBIT result, marking an increased growth versus the like period of last year by around 60%. So this is 57.8%, that you can notice at Page 11. At the same time, as Mr. Caccia was anticipating, the financial reference picture changed in the last 12 months. And as a result of that, the impact of net financial charges was particularly visible at P&L. As you can see, there was an increase of around 49%, to a certain extent, mitigated by a higher contribution in this case from ForEx valuations. On an annual basis that both ForEx variations are largely unrealized. They can fluctuate and clearly, they can mitigate or increase the total value of net financial charges. Final results of this is that the advantage at EBITDA level then was reflected at the pretax result such that the earnings before taxation [ grew tax ] from a loss of EUR 3.5 million roughly last year to roughly EUR 0.5 million this year. So very, very close to [indiscernible]. Clearly, as we already commented, commented that our objective is not to achieve breakeven, and then we will have a chance to address this when talking about the outlook for the rest of the year. In terms of net income, this is clearly reflecting the -- very, very differentiated and differential mix in terms of fiscal contribution, company-by-company, and we closed the numbers that are reported at Page 11. So a couple of million loss in the period. As far as net financial provision is concerned, as usual, we represent here the net financial position, including and excluding the accounting effect on financial liabilities linked to IFRS 16. I would invite you to jump to Page 20, where we combine a representation of our net financial position, together with the incremental and decremental financial flows that drop to those numbers. As usual, we exclude at the first stance, the incremental contribution from IFRS 16. I don't want to know you, but we are all aware about the fact that this accounting principle is particularly penalizing the companies investing in fleet. But by the way, incidentally, let's remember that in the case of Tesmec, it is largely already depreciated, so included in our assets at book value at the original cost, less cumulative depreciation, so market values that are definitely far away from the current -- their current relevant market values such that on one side, we have to accrue the net present value of the future financial outflows, particularly linked to the operational leasing of our trenching machines, while on the other side, we are not allowed to accrue as sort of financial credit relevant margins deriving from the expectation of such machines, which is a fact. Excluding -- and as you can notice, this value passed from EUR 39 million to EUR 51 million, plus also creating a higher coherence between the duration of the assets represented by the fleet and the duration of the outstanding and the relevant [indiscernible]. In terms of cash flow, again, making reference to Page 20. As you can notice, the increase in our net financial position is exclusively linked to increase in net working capital and mainly for 90% of this value by trade receivables. So credit towards our clients, mainly big companies corporation. And this is the direct, while I will spend just 20 seconds to comment this in 1 minute, Let me first underline that excluding the financial variations linked to the increase of IFRS 16, which I already explained on one side and excluding increase in accounts receivable and net working capital as a whole, the company actually generated an operating free cash flow positive, meaning more than capable of covering [indiscernible] the capital expenditures on the period. And this is enlighted at Page 20 in the second and third block, operating free cash flow and CapEx. Now as I was saying, one last comment of trade receivables. We are all aware about the important changes at the worldwide level regarding the international logistics. For instance, in our case now in order to dispatch materials, we need to send them not from any Italian ports, but we need first transport and wait for availability of shipment and then finally finalize the freight and the dispatch of the goods to our products. Clearly, this led to a concentration of sales specifically in the month of June, and this is causing this increase in accounts receivables. Accounts receivables, again -- against the primary clients, but anticipating a reasonable movement, reasonable expectations of cashing in these gross values in the second part of the year. Again, if we look at the total value of our net financial position which is EUR 183 million, let's keep in mind that this is largely, largely backing our net working capital. The portion of net industrial debt, meaning the portion of our net assets not directly covered by our equity is around -- is between -- from period to period, EUR 25 million and EUR 30 million. This is the real industrial debt of the company. I would stop here and leave the floor to our Business Unit Director for Energy Stringing and Energy Automation divisions, Mr. Carlo Caccia Dominioni.

Thank you, Ruggero. Let's move to -- on to Chart 13, so that we can have a look at the key facts and figures for each of the business lines for the first half. Let's start from Trenchers. Overall this Trencher is so generally stable revenues compared to last year, the same period of the year, but with a significant increase in EBITDA. This is coming from, let's say, the improvement in margins are coming from two main topics. The first one is better mix in terms of products and in terms of markets and a significant reduction of operative costs, especially in some specific countries. So this is -- this generates overall improvement in EBITDA of almost 50%. As of the key facts in term of business, I would like to, let's say, to underline some, let's say, frozen [indiscernible], let's say, positive business performance in these areas with also some good perspective for the second half with a new -- launch of a new machine for pipeline projects with, by the way, a good, let's say, added value in terms of margins. While on the other side, slow down of a couple of key areas of our markets such as U.S. and France. In those markets, let's say, the key reaction of the company was a strong plan for reorganization for the governance of both countries with a strong focus on new business development. Going to Slide 14 for going to the Railway business. The Railway business was impacted in the first half from a slowdown of our main customer [indiscernible] customer that brought some, let's say, dry decrease in terms of both revenues and EBITDA. With, in any cases, a perspective of recovery for second half also coming from the strong push on diversification led by the business unit, diversification, both in terms of customers and especially in terms of international markets. Out of the key effects in the first half, a significant -- the first commissioning of the project in Bulgaria that was, let's say -- that received a very positive feedback from our customer. And this is, for sure, a very important step in the direction of new markets and new opportunities. Last but not least, the Energy business. Energy business, so positive performance was in terms of volumes and in terms of margins for the first half. Chart 15. And this is coming both from the segment of Stringing and Energy Automation, especially for let's say, in both topics for heavy investment coming on the [indiscernible] that is very -- a part of -- few part of the strategy of most of our main markets, such as, in particular, Australia, U.K. and in generally speaking, Western Europe. On the other side, on the Energy Automation, there is -- there was -- the first half was important because there was a first semester -- let's say, the first key installation of the substation automation systems that are our main development in the last few years. So it's a translation of the investment in the results. Before closing the presentation, I would like to give you also overview of the main business guideline for the second half for each business. Let's move to Chart 24. Let's start still from the Trencher. As said, many important projects going on in the, let's say, Middle East area, Saudi, Qatar and some also South Africa on the pipeline industry that will bring big volumes, but also an increase in margins, thanks to the better mix of products for the second half and a strong launch of our business activities in France, also with our main focus on, let's say, most profitable markets such as Fiber Optic and Energy in general. As said, there will be a continuation of our reorganization and development of the of our U.S. branch, both in terms of, let's say, governance, in terms of market presence. Railway, as said a stronger, let's say, the strong focus in the development of new markets, we see an important date in September for -- an important target, move to Chart 25, significant event that is our main event every 2 years in [ Berlin ] with a strong focus in the message of the electrification and digitization of our products. The development going on for -- and the participation is important in the refurbishment of electrical lines, not all in any type of pressure, especially also outside of Italy. And the push, the strong push on the new technologies coming for the [indiscernible] management and diagnostic in another of the railway infrastructure. Last, but not least, for the energy business, let's say, the key topics and the key priorities for the future, almost in line with what I just said for the other business units. So strong focus on innovation with, let's say, IoT platform, let's say, a strong focus on Data Management for the job site in terms of streaming. And of course, our target are the premium countries that are the ones that are better recognizing and evaluating our innovation and strong focus, both for Stringing and Energy Automation on the [ carbon ] footprint with investment in order to gain better efficiency on product and on margins. Last for Energy Automation, let's say, significant development in combining our product and technologies with requirements coming on the energy infrastructure of the [indiscernible] of our technologies that will be a major change for the last -- for the next future. So these are the key business guidelines for the future. I guess the presentation is ended. I will leave the floor to our CEO for general conclusion and then for the Q&A question.

Okay. I am back. I am [ Ambrogio ], the CEO. I want to go to Slide #23, just to summarize the presentation. [indiscernible] day, the volatility in the market is big, and we are not able to see if there are consequence in this new situation. But in the current forecast that we have done, due to long discussion with our team, we can confirm 3 basic figures; revenue, we are expecting to do much better in the second half of the year than the first quarter of the year. So we are expecting that the final figures in the year are going to be around EUR 270 million. Mainly the first quarter will be probably the last quarter because the [ fourth ] quarter is still impacted by economy situation in Europe, basically due to August vacation and due to maybe Olympics changes, and I think the fourth quarter is going to be over a little bit lower than what were our original expectation, but the last quarter is going to be totally in line. EBITDA, we are expecting strong improvement in both figures, EBITDA and EBIT. Basically, this is due because we are making our [indiscernible] to give basically very plus volume [indiscernible], we are working in different area where the profitability can be better than the first quarter of the year, mainly due to the fact that [indiscernible], we are on the way to centralizing [indiscernible] our production to increase efficiency. About the net financial position, as the first quarter year was not positive due to the description we have done on the working capital situation, we have to basically priority first now to keep control on our efficiency and profitability. So we expect to have also good profitability which is going to generate free cash flow we are keeping under control our investments. We have seen -- we have also reduced our CapEx in the first part of the year and the second part of the year, we follow that procedure to optimize investments. And for that point, our net financial position is going to come lower than the beginning of the last year, December [indiscernible]. We're -- during the year to generate cash and very good report between what are our expectations with our results. No doubt that still the problem of logistics is existing and as we told we have now -- to centralize production and to reduce average shipment expenses and to keep control that we are again to be in a better position for year-end. Thank you, everybody. If -- we are here to give clarification because I think that can be important, your opinion.

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

Yes. I have 3 questions. First, on the top line. So the question is, you have a target of EUR 270 million, is plus 7% year-on-year. However, in the last quarter, sales decreased by minus 4%. And if I look at the backlog, I see that the backlog is down around EUR 20 million compared to the end of March this year. So the backlog is not significant, it's not giving visibility for coming quarters. So the question is, what kind of visibility do you have to achieve the target of EUR 270 million of sales this year? Second question is on net debt. It's a similar question, is about the visibility you have in achieving the target of net debt by year-end lower than last year. Last year was EUR 154 million, you are at EUR 184 million at the end of June. So you need to decrease the net debt by around EUR 30 million in the second half of the year. What kind of visibility do you have to achieve this kind of target because it is a significant deleverage? And then the last question is about the actions you put in place to reduce your cost base so that in the first half, operating expenses were around EUR 4 million lower compared to last year. So the question is if you could quantify this kind of cost efficiencies you already achieved and what kind of cost reduction we could expect run rate?

I will give a reply on the top line, and that Mr. Gambini will give the second reply. Top line EUR 270 million, you are right, 7% plus. The reason why and you though that in the second quarter we had a decrease, the second quarter decrease was because we had a huge impact in the decrease of, as we thought, in our U.S. entity and basically in France. Basically, we were in the first half year, EUR 12 million lower than our expectation in these 2 situation. We are basically expressing in the second part of the year that we come back normal. And basically, we are expecting a strong decrease compared to the first half of the year. And in France, we had a good July month, and we are [indiscernible] our local entity to be better performing. In the same way, we have also, as we told in Railway business, a difficult period of the first part of the year due to the delay -- tactical delay we're expecting. And this is, I believe, also connected to backlog or the big utility Italian clients that, in a way, for us are in the energy business and in a good business had strong decrease of activity in the first part of the year, mainly in energy for the reason of improving the financial position. They have basically, of course, the new backlog issuance. And basically, you expect that they will come back a little bit normal, but we are expecting a huge increase in the area of high-voltage lines because there are a lot of tendering that are going to be completed. So the backlog are going to be end of the year better than the year before. At this point, we expect a level of 50% better than the limits. Also this revenue business, especially in Stringing business, that our manufacturing capability, we were reorganizing, but we have increased our budget figures due to asset that we -- the fact that we are reorganizing our business, we produce everything in 1 factory will have a huge impact in the second quarter yet to increase our volumes. So on a point of view of backlog and the revenue level, we see that what -- the 7% is really achievable for us. No doubt that this is mainly distributed in Energy, Trencher, and is coming back in a normal way of value. About visibility for financial points, I will transfer to Mr. Gambini that he can clarify what is our strategy.

Thank you, Mr. Caccia. Enrico, there are a couple -- let's start from question #2, so net financial position, some visibility in terms of drivers on which we are going to leverage in order to reduce our net financial position. As we commented, when -- as you can imagine, why -- when EUR 26 million of increase on a half year basis represented by net working capital. And that proposed EUR 26 million, down EUR 25 million, are represented only by accounts receivables, again originated by late dispatch to our clients. It is clear that this amount is going to be cashed in by the end of the year. Now the connected question to this is what is going to happen to the EUR 140 million that we are going to generate as incremental sales during half 2. The point is that in such a case, the areas of key development for the second part of the year are one side, the energy, which have a very, very short monetary cycle. So this is not creating the incremental account receivables or no net working capital, well on the contrary we are supposed to consume a portion of our inventory. And as far as branches are concerned, in such a case, we are expecting to experience a rebound, first of all, in the U.S. market. In U.S. market, payment terms are around 30 days. This is exactly what went wrong last year. If you remember, when in March, we were connecting last year our full year results, we exacerbated this aspect. Now clearly, it is supposed to work the other way around. On a parallel basis, we believe very much in the Middle East market, especially Saudi Arabia and Qatar. In both markets, payment terms are definitely different from other countries. So also start, in both cases, anticipated payments and short-term payments are part of the ordinary nature of the business. At the same time, one of the most important positive driver that benefited our P&L during the first half of the year, as we commented, was Africa. In Africa, by the same token, the payment terms are different from the historical ones. So also in this case, we believe that the incremental trade receivables would be definitely lower than the cash-in of the trade receivables that were approved at the end of June. This is the first part. The second part is clearly linked to inventory. Here, I have to say during, on one side, late dispatching. But let's talk about the work in progress or [indiscernible] linked to a client that was mentioned for the rail. We are finalizing important cash-in, which have already started incidentally during the month of July, but were not unfortunately accrued to the numbers at the end of June. And this will be visible in the financials at the end of September. Third point is represented by stocks. We already reiterated that the level of our stocks are definitely overwhelming the current level of sales. We accumulated the safety stocks on one side for historical reason, following the recovery, the cost recovery pandemic and the tightening of the logistic international chain over the last 15 months on the other side. Clearly, given the level of sales that we are projecting, it will be a direct consequence of that reduced in our stocks. Then your third question is as far as net financial position is concerned. Then finally, operating costs. Then finally, as operating cost, you were asking us to quantify, to give some more color and visibility to the reduction. I can anticipate to you that there was a reduction in the house of 8% in relevant terms. And let me say, this is the quantification. And yes, sorry, for the second part of your third question, the situation by -- as for the year-end is more articulated as for the first half having, let me say, a more fixed nature such as G&A, engineering and selling, we definitely do confirm the prosecution of this trend even because, as we commented before, this was initiated substantially between the end of Q1 and the beginning of Q2. And while as for the part of operating costs more linked to business development, there will be a service of this EUR 140 million plus we are expecting in terms of sales during the second part of the year. And consequently there, there could be some upgrade. But more than less the proportion clearly to the incremental margins that we are going to generate such as the final effects on operating free cash flows will be definitely positive.

The next question is from Emanuele Negri, Mediobanca.

The first one is on profitability by business unit. In the second quarter, we saw a positive performance of profitability of the Trencher division while Railway was softer. What do you expect from this division for the second half in terms of EBITDA margin? And the second one is on the order intake. Which regions do you expect to be the most promising for order intake in the second half?

For the second part of the question, I would lead the answer to our CEO. As for the quantitative part of your question, I would say that in line with what we already communicated in the past, our achieve, we believe that with the level of sales in the tenor that was communicated, that we always share with the market our objective of an EBITDA margin in the house of 70%. So for the -- this is confirmed and this is in line. This is the reply to the quantitative part.

Anyway, about order intake, let's say, generally speaking, what we're expecting is to have a, especially in the first quarter looking to what is going to happen, a huge increase in issuance new tendering, especially in Italy from RFI, from Terna, and basically also in addition for us for the automation part. That means that basically, we are expected to have in Europe, a strong increase in these, let's say, big key clients that have taken long commitments in the issue. As we told, Railway, we also, as a strategy, try to balance our backlog, and we are expecting also to have very good acceptance in several new projects that are coming out in Europe and Mediterranean area. So we have a strong offer that are good to finalize in Railway. For Trencher, opposite the key area for our growing business is Middle East with a big project in the area of infrastructure and there also mining. For that point, I think that we are going to have a good balance everywhere, but the key strategic area for us, in a way, Italy for this -- Italy and Europe for big tendering, Middle East and generally speaking, the area of new developed countries. No doubt that what is going to happen in the area of Middle East as of today has no impact on our key market that are, as of today, Qatar and Saudi.

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

Yes. I have a follow-up question on profitability, so on EBITDA margin on Trencher. I saw in the second quarter is 17%. The question is if this is a sales mix or it's more a geographical mix. So the fact that margins in Middle East and Africa are much higher than Europe or France, let's say, and U.S. And then, if I may, another one is on minorities. In the first half of this year, minority interest had around EUR 500,000 of net profit. So there is a company within the group where you have minority, which is -- minorities, which is generating a good profit. Can you say what kind -- which company is this or which market is this where you have this kind of minority interest?

I start on the second one. The company that is profitable is our Saudi business that we have. It's up today, 65% of control. But in a way, we are on the way to finalize full control. That means that in the second part of the year, the minority -- this minority is going to be totally on our advantage. Because basically, the agreement we have already clarified with the client -- with this partner that we are on the way to keep control. And in Saudi, due to the big projects that we are on the way to, we have closed as a supplier in the big project of Trencher manufacturing, in big machine, in pipeline. We are waiting now to find also a lot of financial support with one of the key big players in the area. Aramco has a huge pipeline business develop. There are also big European groups that are there. And the key technologies chosen is our Trencher technology because the pipe installation, pipe 68 inches wide and the [ cate ] is 2. 20 meter wide. The second part about Trencher profitability is a mix between type of machine. In the big machine, especially in the surface mining technology, we have a very good profit. And the balance is now this year going from a small machine, the same one for telecom business to this big infrastructure and mining machine. And we are expecting for that reason, if the mix is going on like that, to have also in the second quarter of the year a very good profit. This was also keeping balance that we were not profitable in past the first part of the year that can be -- so basically, so we are going to give the solution, the final result is going to be better than the first part of the year.

[Operator Instructions] Mr. Caccia Dominioni, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.

Thank you. Hopefully, we're here. We -- it's August. We are pleased with the chance to be with all the team here. We'll give you a guarantee that we -- our full team is committed to improve our results and to reach the final year results. I think that this is good and we have a global team of more than [indiscernible] people that are fully committed to reach this result. Thank you, everybody.

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