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 Quarter 2025 Results Conference Call. [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 have the pleasure to make a presentation of our financial results of the first quarter of '25. As already included in our press release, our results are a little bit better than our expectation. No doubt we think that this is a good entry point for the year. One of the most important points for us is that following our shareholder meeting, we have now the new Board of Directors, and we have the pleasure to announce today that we are in a strategy realization of our transition of the governance. And it is for us a really important event because in this period that -- this a challenging period, but also for our company can be a very good opportunity to have a fast-growing business. We have taken a decision to -- as a family to be involved -- fully involved in the company, Caterina Caccia Dominioni and Carlo are going from today being full operation with the power to manage the company. So at this point, I think that can be interesting for you to have a short presentation from the 2 new directors that I introduced, they are already working with the company, but now they are with a new push trying to develop the business. I give now the -- transfer the communication to Caterina that is the first one that can introduce.

Good afternoon. I'm Caterina Caccia. I would like to thank you, our Chairman, for this opportunity. And I'm very excited to start with this new event with Carlo. After being in Tesmec since 2009 and working as General Counsel since 2022, I will now focus first on sound governance to ensure sustainable value for Tesmec. I believe that Carlo and I, we have complementary skill that could help the group to growing up. Carlo, I leave it to you.

Thank you, Caterina. And good morning, everyone. I fully agree with what Caterina said, and I'm very grateful for this opportunity too. Just a few words to introduce myself. I personally joined the company, Tesmec in 2013. And my first focus was to develop the start-up of Energy Automation that at that time was a newly born business unit in a very technological and growing business. Since 2020, I took charge of streaming business too with the goal of creating an integrated value proposition for the energy world, both for lines overhead, and underground and substation. Of course, my goal for the next future is to support the company in reaching and obtaining the results that our people and our technologies deserve. And I would say, we will try to do it through structure, organization and processes as keywords. Of course, I'm more than available then to meet anybody who will be interested in the future. I leave now the floor to Ruggero that will go into more details about the financials. Thanks.

Thank you, Carlo. Welcome, everyone. As usual, we made available on our website at the IR section the presentation. So I'm referring to this presentation. But before going to the numbers, let me quickly express my congratulations to both Caterina Caccia and Carlo Caccia for this very important appointment. And let me also express the appreciation to the whole Caccia family for the confirmation of their long-term commitment to the success of this industrial project of an Italian excellence, servicing the very important and strategic energy sector on a global basis. Now going to numbers, making reference to Page 11 of the presentation I was mentioning before. So our KPIs for profit and loss and net financial position. As Mr. Caccia, as our President anticipated, we had a very positive start of the year and with a level of sales that reached EUR [60.1] million, marking a growth of 10% is compared to the EUR 55.8 million of the period of 2024. With -- I would say, driven by all the business units, although at different bases, especially stringing business and rail business gave a more remarkable contribution with some differentiations and more articulated figures in terms of EBITDA. EBITDA that grew at a lower pace than the 10% we experienced at the top line level, but reaching the EUR 9.5 million you can see in our documentation against the EUR 9.1 million that we reached in the first quarter of last year. This differentiated growth rate of EBITDA is compared to the top one -- the top line one is motivated by 2 group of factors. On one side, we experienced a quite a different mix in the first 3-month period of this year if compared to 2024. For instance, incorporating important actions of destocking, clearly yielding in terms of industrial margin, a level of marginality lower than the average on one side accompanied also by some higher weight of expense R&D and P&L or if you prefer the other way around lower capitalization, more than offset on the other side by the effects from the continuation of the recovery of efficiency actions that we initiated at the end of 2023 and that led important result. As you might remember, during last year that continued, as I was mentioning in the first part of 2025, and that led to a further recovery of efficiency of our operating cost structure against the -- compared to the level of sales as well as a higher growing contribution from our U.S. 50-50 JV Condux operating in the stringing business. The overall result of this led to the numbers that I quoted before. Going down along the other lines of our P&L, as you can notice, we experienced a level of interest -- passive interest and commissions substantially in line with the one of last year. But 2024 -- March of 2024 was affected by a negative contribution for around EUR 1 million in terms of ForEx variations. This is clearly due to the recent devaluation of the USD specifically, against the Euro. I have also to say that, as usual, in the intra-year results, most of these variations are still unrealized. So very much will depend on the future evolution of the gross rates throughout the year. Finally, the net result from the continuing operations reached a marginal profit EUR 0.1 million, which was in line with the one of 2024. It is remarkable, in my opinion -- in our opinion, to underline that if adjusted by the 2 elements of discontinuation that we already mentioned -- the first 3 months of the year, namely lower capitalizations and ForEx variations, clearly, we would have ended with a remarkably higher results from the continuing operations. Then added the net results from the activities under dismissal discontinued activities that was equal to EUR 1.5 million, we closed nominally the year with finally net result negative for EUR 1.4 million. So I would say the P&L clearly represents the prosecution of all the actions of aiming at enhancing our profitability that will further increase throughout the year for the progressive normalization, particularly of the mix during the next quarter. And our commitment in continuing these recovery actions in terms of efficiency, meaning lower operating costs in terms of sales, I can assure you the full team is very much dedicated and focused and committed in going on in this activity. Finally, in terms of net financial position, net financial position at the end of March was equal to EUR 133 million. So with a EUR 5.5 million increase against the end of December. Let's all keep in mind, this is a typical intra-year increase mostly driven by net working capital then in this case, also by the indirect effect of transitional adjustment and clearly, the nominal result of the year. Let's keep in mind that if we compare the number of March this year against December to the numbers of March and last year against December 2023, the increase was much higher. So all the initiatives that were put in place throughout -- from the end of 2023, but with the first tangible material effect last year are really now also transferring in terms of cash flow. And this, in our opinion, is a very important message looking at the execution of the year. In terms of number, I would stop here and leave the floor to our Managing Director, Carlo Caccia Dominioni, for the business overview. Thank you.

Thank you, Ruggero. So let's go to have a quick look at each of the business units. Before starting, let me say one thing because I'm doing this conference call today from U.S.A., where I'm visiting our JV of Condux Tesmec. Looking also -- every time you look at the, let's say, the world, you can see that the market is changing and the world in general is changing. But all the technological innovations that are coming, all have one thing in common, that is a strong need of new and better infrastructures. So this is the reason why I do think that the outlook for all our business units is strong and looks stronger for the future. Let's go and see the details starting from Chart 14 and starting from the French business unit, the biggest business unit. A few points about the numbers. First of all, we saw a strong rebound of U.S. market after a tough 2024. And let's say, growth in strategic markets such as West Africa, especially for mining products and Latin America. On the other side, let's say, there is a slight delay of the Middle East market, but still with a positive outlook for the second half of the year. Looking at the margins, EBITDA is growing despite the de-stocking activity that we performed in Q1, also thanks to, let's say, to good margins and significant reduction in cost. And there was, for sure, a strong decrease of the net working capital, also thanks to the introduction of the new platform for selling the used machines. Looking at, let's say, outlook more than backlog, we keep a positive view for, let's say, especially for U.S.A., Africa and Middle East market. Now let's switch to Chart 15. Let's talk about the rail. First quarter was better than last year in terms of revenues, while it was a bit in a slowdown for the EBITDA. Let's say, let's start from the key fact of the business. The Q1 was the one that saw the full speed of the agreement with RFI for -- by modern maintenance vehicles. This agreement is important because it will be related to a lower number of vehicles, but with higher margins and faster deliveries. Looking at -- as we said in the previous quarters, looking at the job we're doing in order to diversify also the business outside of Italy, there was a significant agreement in Q1 with Alstom, where we have been chosen as a selected supplier for catenary and diagnostic. And this is, of course, very strategic for the future perspective. And we saw the Q1 some interesting contracts for international markets such as Israel as an example. As said before, the lower margin of this quarter is coming first -- primarily from lower margins from -- let's say, from a lower capitalization and also a worse mix. But the good part is that even in this case, we expect a recovery starting already from Q2. Last but not least, let's go to Chart 16, that is the energy one. Energy saw a good quarter for volumes that is coming mainly from growth in strategic countries such as India and Middle East, India and Saudi especially. This is mainly related to the streaming business. While on the other side, on Energy Automation, there was a consolidation of the framework agreement for protection and remote control solution for France -- for the French DSO with the deployment for the next -- over the next 5 years. In terms of other KPIs of the business unit, there is -- I want to underline a strong backlog with -- let's say, with further new opportunities to grow in the very, very future. And let's say, while looking at the margins, EBITDA is around -- revenue grew compared to Q1 last year, while EBITDA is in line with a good performance of streaming growing compared to last year, also thanks to some a good mix -- geographical good mix. While on the other side, for the Energy Automation, we still need to, let's say, to perform at full potential starting from Q2 in terms of margins. So I guess I gave a quick picture of each business unit. So I leave the floor to our Chairman for the outlook. Thanks.

I hope that our presentation was interesting. Now I want to summarize where we are and where we expect to be. No doubt that we are in a not easy environment. But basically, we are -- we don't think that we are going to have a big impact on our future figures because of this several question points. Page #20, we have evaluated our outlook for year-end. Our company, as you know, is working on the global markets. And finally, we are going to expect an impact on last point connection to the import duty U.S.A. that can have an impact, generally speaking, more on our competitor than on us because we have a good advantage because we have a flexibility. We are manufacturing in the area of dollar. We are manufacturing in the area of Euro. And our export business to U.S.A. that will be impacted probably -- possibly on a yearly basis by the new, totally yearly basis around EUR 20 million. In effect, what is going on is that already in the U.S. market, the local prices have been modified because basically all the global competitors are waiting to have an increase of prices between 10% to 15%. So for this reason, we don't expect to have an impact on profitability, but we are only expecting to have probably an increase of our revenue figures. But it is not our figures as of today, what we are expecting in our basic budget is we don't compute these figures. We are expecting for that reason to increase our business to have a better profitability and to have much better financial situation due to the policy that -- together all the team here and with the new Managing Director, we are starting now making efficiencies, keeping control on OpEx and keeping control on CapEx. For this reason, we are expecting a good year. We are expecting to come back to profitability and -- to have at this point. We don't give the exact figures because the environment is a little bit volatile. We are expecting for end of June to give our final forecast for the year because we are reviewing in June our forecast. I think anyway that for Tesmec this is an opportunity, as Mr. Gambini told we have -- this change will help us to grow very fast and to take the opportunity on the market. The vision we have in U.S.A. that things have to change, but for energy, for infrastructure [indiscernible] opportunity. Thank you, everybody.

[Operator Instructions] The first question is from Alessandro Tortora, Mediobanca.

Yes, I have 3 questions, before this question, let me congratulate Carlo and Caterina and also to the Chairman, I would say, for this change. So the first question is related to the railway business. I understood the comment, okay, you made, Carlo, on this, but can you elaborate a little bit more on which kind of improvement we should expect on profitability for the full year for the railway because clearly, the profitability of the first quarter was impacted by several factors. So if you can give us an idea of, let's say, the year-end, a rough indication of year-end profitability for the railway. So this is the first question. I don't know if you want to go one by one, I will tell all the questions I have one by one...

It would be advisable to list all the questions, please.

Okay. So the second question is on the Energy segment. Also in this case, on top of the Stringing the Energy Automation sales were basically stable, okay, in the quarter. Can you give us an idea of why we are not observing an acceleration in sales here? Clearly, the backlog is pretty high, but can you give us the reason why we don't see this translation of this order into the sales? Is it a matter of a framework agreement and the client has whole -- how can I say, the full decision to pull the order? So just to understand from your side, when we will see this acceleration in Energy Automation sales? And let's say -- let's keep a little bit in short term, if we have to look at 2, 3 years, considering the more than EUR 100 million backlog, okay, you have, what's your view on the Energy Automation? I don't know, a EUR 50 million sales business segment with a sort of profitability. So please, some color on this. And the last question is related to the last comment the Chairman made on duty impact and tariff impact. So basically, we have this EUR 20 million products and all flows from Europe to the U.S. If I understood well, basically, you are not assuming any major impact here. So just a confirmation that you believe that the current production footprint, okay, even in the U.S. is able, let's say, to accommodate your production?

Thank you. Carlo, you can start -- on the question number 2, maybe probably after that.

Let me first start quickly on the number one, and then I will switch to number 2. So looking at the rail, you know that we had 2024 that was pretty difficult in the relationship with our main customer, the Italian main customer. But the -- let's say, so as also said, we had a new agreement -- we made a new agreement on an existing contract that will have -- that will bring new, let's say, lower number of vehicles, but with higher margins and with, let's say, faster delivery dates. On the other side, the reason why we said that we see a good outlook for the next coming future is that we do expect the recovery to come from new contracts that we are achieving that are mainly related to diagnostic vehicles, as you know very well, have a better margin. On automation, I understand, I get your point. Keep into consideration that all the contracts that we are achieving are multiyear contracts. For example, the one of France that I mentioned that is EUR 48 million contract with the French DSO is requiring this -- you don't see a single sales up to the end of next year. So in 2025 and 2026, we'll see the development of the solution and then it will become -- it's not only a framework agreement, but with granted volumes every year of EUR 7 million to EUR 8 million every year starting from 2027. The rest -- for the rest is mainly the same. So all the contracts -- the main contracts of automation are divided in either 3 or 5 years depending on the end user -- end customer. The -- let's say, what I can tell you is that you don't see in -- you have not seen in the first quarter a bit growth. Yes, it's correct. But on the other side, there is -- there has been a strong diversification in terms of customers that made us possible to overcome some difficulties, especially with one Italian DSO that slowed down a bit in the design that slowed down a bit the orders in the last years. So let's say, we are much more independent, and we have many different opportunities. Of course, the growth will be significant, but will be, let's say, on double digit year-by-year, but there is some -- let's say, there is some timing that we need to, let's say, to get organized, to sustain this growth also from an organizational perspective.

Okay. Carlos. Sorry, just to follow up on this. So if I understood well, okay, also considering the technicality from, let's say, the French contracts, let's say, starting from 2027, we are going to now see this additional incremental sales to the current, let's say, baseline. That's your comment.

Exactly, Alessandro, about tariff and the situation of the U.S. market, we are in a very strange situation. Especially for French, we have American competitors. These companies are in a tough condition now because especially for export market, no one is willing to buy American products because we're ready to -- especially in Asia to pay huge cost import duty, no one is taking responsibility. The fact that in a way, we are an Italian company, we are an American company, both sides is giving us a much better flexibility. For this point, we are looking that there is a situation in the U.S. market that the prices are going up because typical American market is dependent from import and the capability to produce is not so high. On the opposite, on final machine, we are looking at a much better competitiveness, especially in South America or in Australia, where basically the final buyers are really afraid to buy American products because they don't know really the rate that they have to pay. And for this reason, in theory, our real problem is that we are short of production. And for this point, we are on the way to evaluate what to do because no doubt that we cannot think that the situation is going on like that in a way for American company is a dramatic decision, the decision taken by [Trump] puts America out of the market. And in a way, it is especially Saudi, Middle East and everywhere that probably they have to find a solution because it's not -- our competitiveness is going to go. For this point, we are neutral because we are waiting for -- our real problem that now we are pushing is try to transfer our inventory in final products because we have tried to increase our production capability now.

Okay. Okay. And sorry, if I may, I forgot, let's say, one question. It was related, let's say, to the net financial charges considering, let's say, the current environment, with lower interest rates in Europe. Can you give us, let's say, a kind of indication of, let's say, your full year net financial charges that you expect?

Okay. Let's say, I will transfer you to Mr. Gambini that you know that theoretically, the interest rates are going down quite a bit.

Yes. Now the refinancing interest rate of Fed is around 2.4 -- sorry, 4.5, 2.4 with European Union. Currently, we are working around values plus the ordinary spread. We already mentioned. I suppose your question derives from the simple comparison between the EUR 167 million net financial position we reported for March last year against the EUR 153 million of March this year, while financial charges remained stable. Clearly, this is due to the mechanism of building up of pro forma as we already commented, IFRS 5 obliges us to re-expose the P&L, while keeping for obvious reasons, the net financial position. But clearly, the basis is different.

On total figure in the year, we are expecting to have a decrease because we are expecting to have the medium net financial position during the year, much lower than last year.

Okay, the question was related to the last one. Okay.

The next question is from Enrico Coco, Intermonte.

Can you hear me?

Yes, Mr. Coco.

Congratulations to Caterina and Carlo also by myself. I have 4 questions. First is, I missed your comments on the agreement with Alstom. So if you could please repeat the comments and expected benefits from this agreement in France. The second question is about the outlook. Your top line grew 10% in the first quarter. So for sure, you had a very good start to the year, both on the volume side, but also on the net financial position side. So on the volume, my question is, do you believe this, let's say, high single digit or 10% growth sustainable for the year despite the uncertainty on the macro side. And on the net financial position point of view, usually, in the first quarter, you have an increase in net debt is a quarterly -- usually absorbing material cash. Instead, this time, you had just a small increase in net debt in the first quarter. So the question is what kind of trend we could expect for the second and third quarter if you still expect to increase a little bit the net debt and then have a reduction in the last quarter of the year. So this was the second question about the guidance on top line and net debt. And then I have 2 small questions about numbers of the quarter. First is in the first quarter, the net result from discontinuing operations was EUR 1.5 million. And the question is if we should expect a similar figure, so [EUR 1.5 million] of net result from discontinuing operation also for coming quarters. And then I have another one. Nothing -- I'm okay with this one for the time being.

I take the -- drive myself about Alstom. Also it is important for a couple of -- first of all, due to our reorganization in France, one of the reasons that we -- due to the fact that the main national carrier are by local, we have identified our target in the next couple of years to become a French company in the area of rail because there are huge opportunity. And this is the first entry with Alstom globally, but there is a very good pipeline of possible orders. We have closed already with Alstom 2 orders to this new French configuration, let's say. One is in Africa and the second one is in Israel that are in full operation. But this is an entry point due to the fact that in this area, the competition in the area of railway business is between a few companies and the better performing in a way we think can be -- we are in a very good condition in Italy because we have a mix between market, technology and capability to produce, we think that this is a huge opportunity for us. In connection to that, coming out, you talk about the losses of -- the last question is related to [JV]. This transaction is going to be -- we are in the process. We have already sold 30% of the company. In the next 3, 4 months, this company is going to be out of the perimeter. So these losses are not going to have an impact in the future. Opposite, we have a [push] value that is already in process to be generated by this transaction that is not included in our ForEx because finally, we think it is a one-off deal. And for this reason, we think that this one-off are not in our current configuration, but we expect to have a very good markup about that. So the impact is no doubt the company is basically breakeven. The French market is not good, but we are expecting in the second part of the year to have a huge improvement also in the result of this company because of the fact that we have closed a deal in the South corridor is the big project in Germany for super high voltage line underground and the winner is our [indiscernible] in Germany. That is the first deal we have made in Germany in the last years. Now I pass it to you about volumes to Mr. Gambini, who can explain you why we are positive and especially -- and also net financial position, why we are expecting to be much better than last year.

Starting from volumes. Thank you Mr. Caccia, starting from volumes, all the indications we are receiving from the market, I have to say, at this point in time, everything they have is definitely positive. And this is, by the way, also represented by the level of our backlog that further grew against the EUR 350 million that we presented at the end of last year up to EUR 358 million, even in absence as Mr. Caccia was -- and also Carlo Caccia were mentioning of important -- acquisition of important tender in terms of dimension of size so far in the business. So this is definitely a real proof substantiating that. As for the quarterly, let me say, manifestation of this put in place of the backlog, clearly, it is depending a lot on number of factors, but our objective is to go on throughout the year. The team is working with this proposal to give continuity to delivery of growing results. Clearly, again, as you mentioned, we are living in a definitely uncertain scenario, but at least our reference market are growing. And based on the backlog and on the considerations I just mentioned, I could provide you with this qualitative, albeit nonquantitative indication. As for net financial position, thank you for noticing finally that all the initiatives that we started in the last, I would say -- that we have been putting in place in the last, I would say, 18 months -- 16, 18 months are also transferring their effect finally in terms of intra-year net financial debt. Also, in this case, our objective is to give continuity to the delivery of this progressive improvement. Clearly, we live on sales based on backlog if -- having a backlog, you cannot run any risk of going out of stock. This includes having the availability of important level of stocks that started decreasing, excluding the work in progress part. This also continued in the first three months of this year, by the way, so excluding the work in progress related to railway businesses. So -- but for sure, so also in this case, a clear albeit qualitative indications. But for sure, by year-end, the final result of this must be a significant reduction, tangible material reduction of our net financial position.

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

Thank you, everybody. Close. Thank you.

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