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 2024 Results 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. We are really happy to be here in this -- to have the chance to describe the result of the year -- full year '24. This year was a year that, for us the beginning, the first 9 months, we had several problems to be successful in the area of cash generation results. Last quarter, opposite. Basically, there is a big change in our business model, and we were able to close the year in a positive way. No doubt the impact of the figures of the year-end are basically due to a strong increase in profitability in our traditional -- in our current business. And as the result, commercial was also -- we opened a strategic partnership in France for the rental business, and we took a decision to enter in a JV and the figures of the rental business in France are now no more consolidated because the management of the company is driven by our partner, and we are 50% in the company. No doubt, France is our key market for the future. And we, hopefully, in the current year, we will develop again the business in France by manufacturing locally both trenching and railway equipment. No doubt that our focus was to have a cost efficiency in the year. And for this reason, we confirm that the things in that area were really positive. And if you go to Slide 9, what was going -- what is -- frankly due to our business, we have created stronger added-value business in the trenching business, trenching with decreased volume, but we had a strong increase in the volumes. And we have also a new business model coming out of high technology equipment. And for this point, we are expecting a growing business also in the future. In Energy, we had the good chance to reorganize our Stringing business. And Stringing is as, of today, really pushing on the medium term because we have a new range of products and worldwide the energy transportation business is growing. And the second point, we had a strong increase in the area of automation with a huge order intake last year. And the current year, things are going on and we are expecting to promote in order to grow the business. In Railway, as we clarify already, we had not an easy year, but we are ready now for having a global business and to have -- no more involvement with only one client, but I think that this was working very well. As what we can do better, no doubt that the net result was impacted by the fact that we were obliged to make accounting of our the consolidated activities, but next year are not going to have an impact. And we -- finally, our last line out of this business is positive this year. And we are still already important for us to have a real good profit before taxes. We had a good result also in profitability because we were able to reduce cost and to increase the asset value. No doubt that the external situation we will discuss in the outlook is not easy for everybody. But looking to the fact that we are confident that at both locations euro and in U.S. dollar, we think that we can be in a strong position for next year. I will pass now to Carlo Caccia that is talking about the business and talking about the single entity, try to understand a better way what was going on and what are our target. Thank you very much.

Good morning, everyone. Let me first start with we go to Chart 15. We start from Trenchers in order to analyze the key facts of 2024. Let's say, generally speaking, Ruggero, our CFO, will go more into the details. Let's say, I would say that the key highlight for the year was the JV for Groupe Marais for the rental business that we had an impact on the year, and it's going to be strategic for our future in the French market. Looking at the figures, as you can see from the chart, there is -- despite slowdown in revenues, there's a very strong recovery in EBITDA. This is coming from two main actions: the significant decrease in fixed cost on the U.S. structure; and on the other side, a significant increase in margins coming from a better mix in sales. Looking at the market, there is a very strong performance of some of the main areas such as Middle East with a stronger increase in volumes and Africa, especially on mining projects. And this is also bringing a positive cash generation for the company. Switching towards Chart 16, looking at the key facts and figures for Rail. The year was overall positive both in revenues and margin and EBITDA. And the main task and the main topics of the organization on Rail was maybe a strong push towards the internationalization of our market. And these process saw a big boost coming from significant awards in both France and Switzerland and a major focus also on the Italian market for diagnostic projects and diagnostic technologies in general for the infrastructure that are bringing to Tesmec, let's say, more robust -- let's say, a better product mix and a better margins also in perspective. Last but not least, Energy, where 2024 was a positive year both for the -- for both divisions, both in Stringing and Energy Automation. I would say that key highlight is a significant increase in the figures of backlog coming from -- coming through in the significant awards in the Energy Automation business, that we see also in the coming months a good perspective for new projects and new customers in Italy, but not only in Italy. Looking -- going back to the volumes, there is a significant growth, both in Stringing and Energy Automation that are also benefiting from very strong investments in both transmission and distribution segments coming from, let's say, the impact of new renewable energies. There is a significant boost both in Europe and also, in perspective, in the U.S. market. So generally speaking, these are the main highlights from the business perspective, I leave the floor to our CFO, Ruggero Gambini, that will go more into the details about the numbers.

Thank you, Carlo. Welcome, everyone. Both our President and CEO and Carlo Caccia made references to the usual documentation that we made available at our website -- on our website at the Investor Relations section. So I would make a reference to that presentation to get document. I would drive your attention to Slide #12. But in our opinion, it gives -- provides the very meaning of all the managerial and strategic actions that we put in place starting from the end of 2023 and with a more and growing decision in over 2024, which -- from which we expect further harvesting also in -- throughout this current year 2025. Because if we look at the number, the progressions against 2023 are really impressive. And if we keep in mind also the results, as Mr. Caccia was anticipated while opening this conference call, if we bring in mind especially the actual numbers for the first 9-month period of this year, the differences are even more impressive. And this corroborates very, very much our vision also through the coming period. Let's comment now the 2024 actual. Here, we compare -- we start from the 2023 results that we presented in March last year. And we compare them with 2024 at same perimeter, meaning including and still consolidating Groupe Marais among the continuing operations. And then in the third column, we report the 2024 actual, which was prepared according to accounting principle IFRS 5 thus isolating the results line by line relevant to the Groupe Marais rental division, the business unit -- cash-generating unit within one line at the very bottom called results from assets held for sale. [Technical Difficulty] Okay. Sorry, we had a bit of technical problem here. Okay. So now going into the numbers. At same perimeter, the actual data until EBITDA are definitely in line with the outlook that we anticipated at the beginning of November and with a huge increase in terms of profitability at same volumes. That was the -- our pay off at the very beginning of the year when we presented our outlook, which can be summarized into value over volumes. And if we skip to the actual, you can see that actually, the Groupe Marais contributed for some EUR 12 million while granting a negative EBITDA because the total EBITDA passes from the EUR 41 million of same perimeter to the EUR 41.1 million of the actual. Let's look also at the profitability index because the EBITDA margin, so the ratio between EBITDA and revenues jumped from 13% from 2023 to 17% of last year. This increase can also be appreciated also in the same perimeter 2024, while the EBIT and the improvement at EBIT level is even more remarkable because it doubled from 4% to 8%. If we go down to the other lines of the P&L, we can see the impact of the higher net financial charges, which is -- which were, as we commented in November while presenting the 9-month data, a direct consequence of the full year effect of the interest rate increase occurred in the last couple of years. Starting from 2025, we will observe also a decrease in net financial charges following the decrease in financial -- in interest rates. So let's keep in mind, as we specified during the last couple of Q&A sessions. But we usually block and fix by means of swap contracts interest rates on our mid-long-term debt. And so from time to time, we are reimbursing back our mid-to-long-term debt. Clearly, there will be a benefit coming at our P&L in terms of lower financial charges. So this -- we are also expecting to add lower interest rates on the reduction of our net financial position. As a final result of all these, our income before tax is passed from a loss of EUR 4.5 million of 2023 actual or, if you prefer, of more than EUR 1 million loss in 2022 -- sorry, EUR 1 million at same perimeter, including Groupe Marais. And as you can see with the new perimeter, so making reference now to the third column, 2024 actual, to a profit before taxes slightly below EUR 4 million, a huge improvement before taxes, EUR 8.5 million. Out of the total net result, a EUR 4.8 million negative this year, as Mr. Caccia anticipated, EUR 5 billion was afforded by the business held for dismissal, so the French business unit linked to rental activities, while the continuing operations passed from a loss of 2023 to slight income after taxes already from 2024, which is very important -- which is very important because, as I was mentioning, at the very beginning, we harvested during the fourth quarter all the initiatives put in place from the end of 2023. We already commented throughout the year the first impact in terms of marginality recovery from our cost efficiency and mix improvement. But really, the progression, particularly notable at an EBITDA level and the operating result level really corroborates all such actions and our forecast throughout the year. We were talking at the beginning of 2024 about the valuable volumes and the mix improvement, done. We were talking at the beginning of the year about a huge actions for cost containment, done. We were talking about redefining our manufacturing setup. This was finalized, as commented -- as already commented, while presenting the data for the first half and 9-month period. And we anticipated our intention of finalizing strategic operations, not extraordinary operations, strategic operations, starting from the acknowledgment that our embedded value within our assets were far higher than the current value incorporated in our economic and financial flows. We did this by means of strategic alliances, starting from the French operations and the relevant -- the results from which are already notable within the 2024 actual data. All these things were done. Final effect, strong increase of profit EBITDA and profitability, a strong turnaround of our economic results excluding the ones, the incomes, the losses from the assets under dismissal. And most important, at the very end, we anticipated in September when we presented ourselves with peak -- a high peak in our net financial position, net financial debt of EUR 176 million, we were anticipating at that time our forecast for reduction of our net financial position. This was done. EUR 147 million is our net financial debt. At the end of 2024, was marking a reduction of EUR 30 million, 3-0 against last September and even a reduction against 2023. So since results are the best, let me say, starting point for talking -- for reasoning about the value of the company, and let me see the next steps. I would share just a few comments at Page 13. Because, clearly, due to the IFRS accounting principles rules, we will be producing by the end -- and publishing by the end of March, our annual report comparing the 2024 actual with the pro forma 2023 as far as P&L is concerned and with 2023 actual balance sheet, again, following what is set forth by the IFRS 5 accounting principle. Also, in this case, as you can see, again, on Page 13, we can make the same comments as done for Page 12. Last few words at Page 21. Page 21, free cash flows. In this case, considering the huge discontinuity represented by this first, and I would remark this first strategic operation, we found it appropriate to help the reader of the numbers to isolate the contribution to our net financial position reduction from the strategic operations and the ordinary running business managerial actions. So we start from the EUR 133 million of 2023 actual, we reduced by EUR 9.5 million the net financial position of 2023 of the discontinued operations which, by the way, increased to EUR 15.5 million at the end of 2024. And so the difference to EUR 147 million was represented by a decrease in negative free cash flow generated by the ongoing operation by EUR 3 million. But let's see at the composition of this. Because if we look at the scheme reporting the net working capital on the bottom right of Slide 21, you will -- can appreciate the fact that we increased our net working capital by EUR 13 million. The most important voice, as you can see is the last one, which is represented for a huge amount by VAT credits being recovered. And this is a very good news, I think, both for us and for investors during the first quarter of 2025. So this is really a rolling figure with a bounce back in -- at the beginning of this current year. But the huge increase was represented by trade receivables, which is lower than the one that we experienced throughout the year. If you remember, there was a delay in starts in the sales with concentration at the end of each period, and now we recovered a significant amount of such a level. Now since the net working capital increased by EUR 13 million and we absorbed throughout the year, excluding the activities under dismissal, EUR 3 million, it means that EUR 10 million were actually generated as a positive free cash flow from the operation. And I think that this is really a very, very important signal from the actual results. So I would stop here, and I leave the floor to our CEO.

Good afternoon. We are positive about outlook for the year. As our decision of our management in this circumstance, is not to give specific numbers about what can happen during the year -- what would happen during the year and what we expect it to be. Because basically, we are thinking that we have a lot of strong points. One point is our management quality, management organization that is in a way, in these circumstances, giving us a chance to have new development in the 3 areas. Second point, we have a range of product that, in a way, are competitive, and we are positioned in a market that is positive all around the world. Last but not least, as we told we are both Mag and Mega because we produce in U.S.A., we produce in Europe in the same way. That means that this situation gives us a lot of flexibility specifically coming off of what is currently the political situation between Europe and U.S.A. But after that, what we expect really is that we are expecting all the business to grow. The range of growing can change a little bit about what are going to be the rules for trading. But we think that this can help us probably. Second point, we are expecting to create cash. That means that we are to continue in the trend of keeping costs under control, and we are expecting to have cost efficiency and to have on the same level of pricing and mix, a good increase in profitability. And last but not least, we are expected to have a strong cash generation because coming out of the business model that we have assets all around the world. And what we have done in France can be repeated during the year. We think that we need to work to find, especially from countries that are not here from Europe, a local partner that can support us to grow the business. And in fact, in the first part of first quarter, we are expecting to have a fast-growing business for rental, not in France, but in export business because we are better organized with our new partners. That is, in a way, our philosophy. We have to grow. We have to make investment on technology, and we have to create cash globally. In the local business, locally we want to have strong partners. As we told, we are spread in our export business from Australia up to Canada. And I think that the opportunity in this situation for our business is good. And due to our competitiveness, we're expecting to have a very good '25. As we told '24 was a year that was the year of the change, and we are coming out really motivated with a new energy to be successful in the current year. Thank you very much.

[Operator Instructions] First question is from Emmanuele Negri Mediobanca.

The first one is on the U.S. What kind of opportunity do you see in terms of new businesses, also considering the industrial development of the U.S. market and the new administration? And the second one is an update on Saudi, please.

So I will give -- I will start with U.S.A. No doubt that [indiscernible] of Trump normally for political point, it is not so well appreciated in Europe. Obviously in the States, especially in the business of infrastructure there is a strong push to grow. We had a new order intake, specifically now on certain projects that are mainly in the area of utility and infrastructure. That means that basically, the business that was traditionally not in line with Biden philosophy are now pushing. What we expect on a medium term is a huge push on the new big pipes like gas pipelines that are supposed to be done. Because originally with the last administration, the gas and oil business with especially connection to shale gas and shale oil were not well developed. And the second step now the long-distances communication that are, in a way, growing. What is also coming out but nothing to do with this, that due to the last climate changes, there is also a huge, huge push in the energy transmission business in U.S.A. Because basically, the big, big line now is obsolete and most of the distribution are obsolete. So there is a new push for overhead line and underground line to be newly developed. About Saudi, as we told, Saudi is a land of opportunity. So we are still standalone because basically we are trying to find partners, but we are fully in control of our business. The first part of the year was not so positive. The last part was better due to the fact that we are able to start mainly with the new big Aramco project, and we are expecting to have long-term commitment both in the area of wind, solar and in the area of also the new gas distribution systems that are going to be stored in Saudi. Saudi in a way, is a huge country, the business is very good. The only real point we have some time with the local people, they have no idea about planning and no idea about timing. And so we have signed a few orders that for different reasons have been delayed. But I think that on a long-term basis, what is going on is positive. Where we are now to be reorganized in the short period, we are going to be transformed with, let's say, companies with local content because now in new rules for big tendering that you have a local Saudi content or if not, you can -- you are not authorized to participate to state-owned company tendering. We are completing procedure, and we are expecting to have good success in this, let's say, the governmental tendering that now the new business opportunity for us. Especially after the Aramco project, we're expecting to have a fast-growing business for very big machines, for pipes and infrastructure machine.

Next question is from Enrico Coco, Intermonte.

Congratulations for the performance of the last quarter of last year. If I start with two financial questions. The first is on financial charges. You said that you expect for this year a decrease compared to the EUR 17 million number of 2024. So the question is, if you could guide us on this number of expected interest charges for this year. And then I have another question still on the P&L. So on a pro forma basis basically, you reported a profit before tax of around EUR 5 million. And the question is, if I consider your outlook, your guidance, basically you expect an EBITDA in absolute value this year, let's say, higher than EUR 41 million of last year. And then the question is, based on this, do you think that next year you will report a positive bottom line? And also, if you could tell the level of minorities that you will have after the transaction in France. So these are the first two questions, please.

Thank you, Enrico, for the two questions. Let's start from the second one. Clearly, as we already commented, I would say, throughout the last 3 meetings, our target is not to finalize, to reach the breakeven point because we needed to adequately remunerate the invested capital of the shareholders. Or, by the way, by doubling the return on investments from 2013 to 20 -- sorry, 2023 to 2024 from 4% to 8%, Clearly, the return on equity is still very, very equal to 0. So our objective for sure is to generate profit. This is what we are working for. As for a precise number linked to the outlook, as you noticed, I think Mr. Caccia was very clear in his exposition. We transmitted and shared a qualitative indication. But then in order to complete the answer, I would now pass to the first question, which is about the EBITDA -- which is about financial charges. It is -- well, I would say, you started with EBITDA and then financial charges. Again, as for EBITDA, in the outlook, we transmitted a clear qualitative, positive message. We all read the papers and we know that the external scenario changed. And the final point, the final arrival point so far is not known. But please, let's keep in mind what Mr. Caccia said, we are well positioned in order to -- he said Mega and Mag in order to grab opportunities in one direction or in one other. We are working for a growing EBITDA. This I can confirm. Now financial charges. We expect following the last FOMC meetings and the last declarations in the latest meeting of ECB, we are expecting a cut of at least 1 -- as for our primary cost embedded in our debt, at least of 100 basis points as an average throughout the whole 2025, which is due once again to the fact that since we block at the very beginning of each mid-long term alone that we finalize the relevant financial interest rate. The moment we complete the reimbursement and we partially, on a rolling basis, switch on new ones, clearly we have, starting from that moment, the updated lower interest rate. If you apply EUR 1 million to a gross debt of around EUR 180 million, you will arrive to an estimated benefit between EUR 1.5 million and EUR 2 million, at parity of net financial position. Clearly, the lower the net financial position, the bigger, the further effect in terms of financial charges decrease. .

Very clear. And then I have another one on the outlook for the net financial position. So you focus on -- the guide -- the outlook I read on the presentation is that you basically focus on prioritizing debt reduction. But you also mentioned initiatives leading to asset valorization. So my question is, do you expect to, let's say, maintain more or less the net debt position at around EUR 150 million assumption? And then we might see some transaction as the one you did in France last year that will lead to a reduction in the net debt of the group. Is that correct understanding of your outlook?

A little bit better, that's the way. What we expected from the current business is that we have reduced our capitalization in research and development. So we are thinking that we can create much more cash from our, let's say, current business. We want to keep under control working capital and the CapEx are going to be optimized. At this point, with a better profitability with lower capitalization, we are expecting to create more cash next year -- in the current year than last year. About the asset valorization, no doubt that we consider this is a strategical point because looking where we are, we are basically standalone in Middle East, in Far East and also in Australia. We think that to have -- to be able to fit the growing business, we need to have this type of joint venture to basically -- or if we keep the majority, we are going to have minority interest. If we go and lose the majority, we are making the consolidation of the point. As of today, the priority to go faster in certain areas as minority shareholder and to increase the business with a new cash in the business. The value of our external companies is worth much more than the accounting figures disclosed. That means that the brand Tesmec is very well reputated both Middle East and in Australia specifically. Because after years, this technology, especially in Australia is well known, especially in the area of energy business. And the Australian market is one of the best now. So for that point, our outlook is positive for all these factors.

Okay. And one final question, if I may. Can you share some thoughts on -- about the platform that you have now in France? And I think you have a strategy about the international expansion of the Automation business. So if you could share some comments on this strategy and...

One second, Mr. Carlo is coming. No doubt this was a fantastic result for us. It's the first entry point and it's going to be multiyear, Carlos?

Yes. Just to share a few thoughts about the development of Energy Automation. Let's say, the path that was like in the last few years was, first of all, to develop the local utilities, so especially Terna where we have many big opportunities and then to grow internationally on different type of international tenders. We awarded that project for France, that was -- we made a communication, but it was a 4-year activity in order to get qualified. And we are the first, the sole non-French player and the first -- we awarded the first lot of very big tender for French utility. But let's say, the same business model -- we are following the same business model in other utilities also in Italy, but not only in Italy, with the goal of more than how we make it international is more, is making it more diversified. So different customers, different projects and different applications. So of course, the market is very big. The market is growing faster. And so the opportunities can be big. Of course, we have to -- we are following up with the key priority on making the right choices and the right selections because, of course, it's -- the developments are significant. But let's say, the opportunities are many. And I would say, the diversification then is also more opportunities and less dependency from the customer.

One good point, generally speaking, is in a lot of countries is that the fact that we are an Italian company, in a way, is politically good. Because in a way, Italy is well accepted. We have a new opportunity, for example, in North Africa, that basically Algeria is one of the country that in a way is fully connected to Italy. And in effect, the fact that the Western countries in a way are now in a different political situation is not going to have an impact on this one-to-one relationship. Italy, in a way for new technology, in a way for new business, especially utility has a good know-how. And we are well accepted both in Middle East and North Africa and all Africa generally speaking.

[Operator Instructions] Next question is from Emanuele Negri, Mediobanca.

Sorry, just one quick follow-up on investments. Can you give us an indication of the amount of CapEx you had in 2024 and where they were focused, please?

I will transfer to Mr. Gambini that has all the figures.

Thank you. Yes. I'm talking about investments in intangible assets and tangible assets clearly. So here, the comparison is made between the pro forma between the 2024 actual and the 2023 pro forma. So in terms of intangible assets, we are talking about EUR 11.5 million. This is a perfectly comparable number against the 2023 of EUR 15 million. Why this reduction? Because we reduced the capitalized, as Mr. Caccia was mentioning, the capitalized portion of our R&D costs. We passed from around EUR 13 million last year to EUR 10 million this year rounded out figures. And then we invested -- we had a positive element in terms of -- positive contributions to our CapEx as for tangible assets. Because actually there was on '24 actual against '23 actual stock -- beginning stocks, 1.7 positive. This was represented by clearly the consolidation of the assets relevant to Groupe Marais considering that in Groupe Marais, let me say, as for the rental business unit, the total amount of net tangible assets that were deconsolidated was around EUR 4.8 million. It means that on a comparable basis, we finalized throughout the year around EUR 3 million of net debt investments in tangible assets. A small portion of this was finalized in the United States, most of the rest were concentrated in our plants in Grassobbio and Monopoli as well as in automation. Because as we mentioned, we finalized a very important recognition of our manufacturing setup, if you remember my opening remarks, in the long list of managerial actions that we put in place throughout 2024 and led to the positive results, it compares against 2023. I was -- I also mentioned a redefinition of our manufacturing setup. So we closed one manufacturing plant located in Endine Gaiano close to Grassobbio. And we concentrated all the activities for Stringing business units here in our Grassobbio plant, plus originating an international hub for our global business of manufacturing of stringing equipment. And clearly, we had to finalize an investment. You see the CapEx in terms of cash out. You still don't see the contribution to recovery of efficiency in terms of contribution margin or, if you prefer, in productivity mix. This, in our -- this latter one, in our opinion, will be growingly visible from 2025.

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

Thank you very much. Thank you, everybody. If we have a pleasure to close, we are available for any clarification. As we told, we are expecting to have a strong '25 due to the fact that '24 for us was interim year because the first part of the year was difficult and the second part was better. But looking to what is going to happen is dependent on the political situation, it seems that things are going better and better than last year. Thank you.

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