Tesmec S.p.A. ($TES)

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Tesmec Group Full Year 2025 Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Carlo Caccia Dominioni, CEO. Please go ahead, sir.

Thank you, and good morning, everyone, and thank you for joining the Tesmec conference call. We are presenting today the figures of 2025. That was a year of continuation along the path that we took in 2024 despite, we have to say, a complex macroeconomic environment. Before starting going into the details of the figures, I would like to give you a quick overview of the situation of Tesmec Group in 2025 for whom -- for those where our presentation is Chart 9, the one-off highlights. I would like to, first of all, focus my attention on 3 key pillars that made -- that characterize our 2025. First of all, we have to say the first pillar is the industrial strengthening of the group that came -- they came after -- thanks to the growth of 2 business, energy and rail, the 2 business segments. And also, we have to say that gave us also a better mix in terms of product portfolio and a solid and much more diversified compared to the past backlog of orders. Second pillar of Tesmec 2025 was the financial strengthening of the group that came, I would say, thanks to 2 main direction, 2 main aspects. The first of all, the strong discipline that the managers of the group gave to the improvement of the net financial position. Our CFO later on will go more into the details, but you see quarter-by-quarter a good improvement in this aspect. And on the other side, you probably may have noticed during the year, we completed the debt refinancing of the group that gave us much more flexibility from a financial perspective. Third pillar for our year was, for sure, the strategic execution of the JV in France in the French market that gave us a much better focus in terms of perimeter, also in terms of target and goal for our business. On the other side, we have to say we have to notice that there are some -- still some areas of improvement that we consider as key for our future. First of all, for sure, there is the need of recovery in terms of profitability for some specific markets and for some specific business and also, let's say, to close some gaps compared to our planning. And the continuation of the path that we undertook in 2025 with margin recovery and sorry to repeat, but again, on financial discipline. Of course, taking into account that the focus of our group will be to keep on a strong monitoring of the market conditions that you may see in these days have been quite dynamic, let me say. Now I leave the floor to our CFO for a deep down in the financials, and I'll come back later with the dynamics of the different business. Thank you.

Thank you, Carlo. Welcome, everyone. So I'm making reference to Page 11 of the document that we circulated earlier today following the communication of our results. It is available for download at our website at the Investor Relations section. And so starting from revenues. Revenues grew by 7.5% in '25 compared to 2024, same consolidation perimeter. This is the combined result of on one side, a structural very important growth by the energy business that grew by 25% against 2024. Rail grew at a lower pace, around 6%. All these more than offset a slowdown in the Trencher division by around 4% in terms of revenues. If we go down to the EBITDA, we will see that in absolute terms, it remained substantially stable against the light figure of 2024, EUR 40.5 million against EUR 41.1 million. EBITDA margin decreased by 1.5 percentage points. Here, we can see 2 effects. On one side, the structural growth of energy and again, at a lower pace rail, which, again, structural growth, both in terms of margins and most important, in terms of marginality. This will be commented later during this call. This increase is structural and most important, being consolidated, so subject to further increase following the trajectory in our reference markets. One thing on this regards, I would like to point out is that as far as the rail business is concerned, a couple of days ago, we communicated a very important press release in terms of acquisition of new tenders. This is a tendency that will be -- we intend to follow throughout this 2026. The effect of this clearly bottom down is that the numbers of 2025 are still not capturing this very important upside in terms of finalization at P&L and cash flows of those new tenders. All these offset a negative performance by the French division motivated by 2 aspects that were already commented during the results throughout the year. On one side, during the first part of 2025, there was a decrease in the manufacturing volumes aiming at pursuing operation of destocking as far as the trenchers are concerned. Clearly, destocking on one side is yielding lower margins. On the other side is allowing an optimization of net working capital. This commenced -- started in Q1. And if you look at the evolution of the results on a quarterly basis, you will see the optimization in terms of net working capital as for the trenchers really improved. On the other side, a negative performance on some selected markets especially concentrated in the second part of the year. In our perspective, and this is the important aspect under my point of view, is that while the growth in energy, again, is structural and will be further consolidated. The first growth in rail still has to capture the potential of the acquisition of new tenders. On the other way around, the negative performance of the Trencher is really characterized by contingent nature and in our perspective, will be progressively recovered throughout 2026. The combined effect of those led to a result before the ForEx variations that in our case, are, as usual, mostly are realized to and before taxes, substantially in line with the result of 2024 and equal to EUR 3.2 million, so very, very close to the EUR 3.5 million of 2024. Then going down along the other lines of the P&L, you will notice what we already commented during the last 3 earnings calls about the negative contribution from the net foreign exchanges on a decremental basis around EUR 4 million, EUR 3.7 million negative. Out of those -- out of the EUR 3.4 million relevant to the 12 months 2025, EUR 3 million again are realized. That means clearly that should the dollar, should the euro go on at the upward trajectory, we closed at $1.1751. We would expect a certain rebound, a partial rebound of this throughout 2026. We will see. In terms of results from the deconsolidation from the important operation of strategic alliance on the French market that in 2024, as you might remember, led to more than EUR 5 million loss at P&L. This year, we already anticipated throughout -- at the end of 2024, but I would say throughout 2025 that there will have been an important rebound at year-end. This actually materialized. You will see a net positive net contribution of EUR 4.5 million, leading to an incremental better result at P&L of EUR 9.6 million. All these combined led from -- led to a net result in profit of EUR 2.1 million against the loss of EUR 4.8 million of last year. So a very important improvement in terms of P&L, Carlo already commented throughout the difficult years. Let's remind what happened in 2025, the prosecution of the war in Ukraine, the war in the Middle East, first in, let me say, especially Israel and the neighbors, then the first situation in Iran in mid-2025. And last but not least, the tariff policy finalized by the U.S. administration in spite -- so these results, which we just commented materialized within such a reference frame. Net financial position, net financial position, we already anticipated an expectation at the end of September -- well, when we met at the beginning of November of a further reduction by last year-end, by 2025 end. And this materialized as well. We closed 2025 with a net financial position of EUR 130 million, EUR 130.4 million, marking a total reduction against the EUR 147 million of December 2024 of EUR 16.5 million. Very important -- it is very important also to highlight, and I would invite you to take a look at Page 12 of the document about let me say the reasons why to this reduction. So our CEO already mentioned the strong efforts we dedicated to our net working capital improvement, translated financial discipline. This was already seeable at the end of 2024. We anticipated a further reduction in 2025. It is clear that the postponement of the purchasing cycle as for the Trenchers on one side and the higher contribution from the stringing business on the other side, stringing business working with a negative net working capital, as we already commented during the last couple of earnings calls, led to an important improvement of net working capital. This was largely expected. We already commented at the moment we reached the peak in our net working capital. If you look at the first column at Page 12, you will see third line from the very bottom, net financial position. We presented ourselves in June 2024 with a net financial position close to EUR 184 million. We already explained at that point in time that, that was the result of the managerial decision of increasing the stocks in order to accompany and safeguard the increase in the backlog. Our CEO will comment as for the backlog later. And we anticipated in the last -- over the last 16 months that was intended to decrease over time. If you look at the number, it is clearly proven by that first line at Page 12. EUR 112 million net working capital mid-2024, EUR 100 million -- EUR 99.8 million at end of 2024, EUR 93 million mid-'25, EUR 72 million at end of 2025. We intend as a managerial team to go on following this strict financial discipline. In terms of debt composition, I would comment the following. You will find it in the detailed annexes to the presentation. Out of the total net financial position, EUR 80 million are represented by mid- long-term debt. This means if you consider that we have EUR 72 million of net working capital, another EUR 27 million of IFRS 16. That means that the portion of our net fixed assets not covered by the debt at the mid, long term are covered by equity and that around EUR 50 million to EUR 55 million of net working capital are currently covered by mid- long-term debt, proving a very, a very important strengthening of the financial structure in terms of composition of debt and this and thus giving us a very high level of financial flexibility in terms of cash and liquidity, but it is very quite important, I would say, considering the moments we are living. Last comment in terms of net financial position evolution, Page 13. If you see here, as usual, a breakdown of the composition, the variation of the net financial position, meaning the generation of free cash flow. exception made for EUR 6 million of translational adjustments that are reported in this slide as equity adjustment. This is represented mostly by the translational effect in terms of at the consolidated level by the variation of the foreign exchange rates, you will see that we generated a gross operating cash flow of around EUR 13 million, strengthened by the EUR 28 million of optimization in net working capital, which more than covered both of the CapEx of EUR 20 million and the increase in fleet of EUR 4.7 million, which intervened towards the last part of the year because as we commented during the first part of the year, we aimed at the destocking, and we replenished the fleet at the end of the year. So all in all, I would say, in spite of this contingent negative performance of the Trencher business, contingent, very, very, very important signal of strength by the higher -- by the high added value segments of our group, which really entered a very important path of structural growth. I will stop here and leave the floor to our CEO.

Thank you, Ruggero. Now let's go into the dynamics of the single business. Let's move to Chart 14 to the results from Trenchers. 2025 was quite a complex year for Trenchers business unit. If we look at the revenues, we can consider almost stable revenues due to some heterogeneous market dynamics. For sure, we had some markets that are good performance in 2025, such as U.S.A. and West Africa. On the opposite, as also Ruggero mentioned, there are other countries that didn't perform well, such as Saudi and Australia. For the first one, we see there is -- there was a, I would say, a delay on some giga projects that we foresee to recover this year. For Australia was much more related to a specific project that didn't -- was not performing. On the other side, the figure that we are not happy about is, of course, we have to see the slowdown in EBITDA of Trencher that is coming due to some different reasons. First of all, I would say, the effect of the destocking activities that we have performed in order to decrease the working capital, as I said. Second, for sure, the market mix that was not favorable during the -- throughout the whole year. And as I said before, the negative impact of the Australia region in Q4. On the other side, as I said, one of the key facts for sure, for the year was the finalization of Marais joint venture that on one side, allow the company to optimize its own invested capital, but also to accede to some commercial synergies for the local market that without having a local partner would be impossible. In terms of backlog, the figures are growing compared to last year to the end of 2024. And by the way, we will see also during the beginning of this year, the outlook and the perspective also in terms of new orders and new projects are positive. Let's now move to Chart 15 and so energy. Energy, we have to say, in general, the energy market, as you probably are much more aware than us, is in very good shape. This bring to Tesmec positive results in both market segments, both Stringing and Energy Automation with growth of both sales and EBITDA. If we want to do a breakdown between these 2 different segments on Stringing, there is a very positive, probably also better-than-expected impact of the growth in volumes. And we have to say also a much better EBITDA that is coming from different actions took from the business people, both in terms of cost attention and let's say, and to some design to cost activities on the product range. In terms of more -- a couple of additional points. First of all, in terms of product mix and also for the perspective of the future, there is a significant increase in the development of the underground transmission range that gives strong also diversification also in terms of perspective for the business. And of course, we have to say a much better visibility. You are probably aware that the duration of the backlog of both Stringing and Trencher is lower than 1 year. So usually, the figures are not as big as the one of Rail and Energy Automation. But we have to say for Stringing at end of the year 2025, the backlog was almost 3x more than the same period in 2024. Energy Automation, of course, the key financial, I would like to underline for Energy Automation is the backlog. We have communicated in 2025, many new tender, many new contracts awarded by Tesmec in the Energy Automation. And this brings a very strong visibility for the future. Of course, this brings also the, let's say, the confirmation from our side of the path that the company has undertaken in terms of diversification. Diversification that comes from the product. 2025 was the first year with -- of the first digital substation live in the Terna infrastructure. And at the same time, diversification in terms of markets from a geographical perspective, we see there is -- one of the key contracts awarded by Tesmec last year was the one for Enedis in France that gives a much stronger, let's say, visibility also in international markets for Tesmec. One last point I would like to underline for -- coming from the automation business is a strong cash generation in 2025 for the business segment that is a very positive news also in terms of perspective for the future. Last but not least, let's move to Chart 16, that is the one of Rail. 2025 was positive year for rail with a growth in volumes and with a stable at a significant level of EBITDA. For rail, there are 2 main pillars for 2025, but also for the future that are much more -- that are very current with our long-term strategy. The first of all, the deployment of the diagnostic technology, keeping into consideration that as for the Energy Automation, where I discussed about the first digital substation in rail, there was a delivery of the first type vehicle for RFI, the Italian Railway Authority that is a very historical milestone in terms of the diagnostic platform of Tesmec, not only for the Italian market, but also for the international because it gives a very strong reference for this market. Second of all, the internationalization of the business with awards in different countries such as Switzerland, such as, of course, it's not yet in our figures, but you have probably seen, as Ruggero mentioned before, the award in Slovenia that is very positive for sure in terms of margin and product mix, but also in terms of diversification of markets for Tesmec. Among the internationalization process, I have to mention that are very important, 2 projects of 2025, the first one with the Egyptian authorities for catenary maintenance installation and the agreement we have done with Alstom that is not very significant still yet in terms of figures for 2025, but it's very strategic for international markets and for the future development of Tesmec in the railway business. Okay. So this is it. I would like to -- before closing our presentation, I would like to go to Chart 21. That is basically the closing of our presentation. I would say, of course, the current geopolitical environment with logistical and tariff pressures with -- gives us a lot of, let's say, points that we will have to look at for the next future in terms of market visibility. For this reason, we want to keep a very prudent approach also in terms of, let's say, monitoring the conditions and at the same time, go on with the path undertaken in terms of financial discipline. But let me say, despite all the challenges that we see, that we are seeing, we are looking at in the market, I have to say, from our perspective, the expectation for 2026 for Tesmec are positive. That's the reason why, let's say, we want to communicate today, let's say, our goal that is to keep on growing in volumes. So we do foresee a growth in volume for 2026 that is also coming through a much stronger visibility in terms of market opportunities and backlog. And please keep on following our backlog figures in the next coming quarters. We foresee an improvement in EBITDA compared to 2025. And as I said before, we are all committed in going on with the reduction of the net financial position versus the end of -- versus the figures of December 2025. So I guess this is it. I thank you for the participation to the call, and we're now available for any questions.

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

I have a couple. The first one is on the Trencher division. As you mentioned in the presentation, it was kind of a negative performance for many different reasons during 2025, also for some strategic reason. Do you think that Trencher will return into positive territory in terms of sales growth in 2026? And in this case, which kind of profitability should we expect the Trencher division to achieve in the next few years? And the second one is on your guidance, which includes an improvement of the net financial position in 2026, which are the moving parts of this positive trend? Should we expect further generation from net working capital? Or should we expect net working capital to remain overall unchanged in absolute terms in 2026?

Thank you, Emanuele. I will start with the first question that is about the Trencher division. yes, we expect a better 2026 for the French business unit. Probably it's something coming with a better development in -- especially from the second part of the year, but we see overall at the end of the year 2026, a better performance, both in terms of sales and in terms of profitability. I have to say the profitability that was not so positive in -- that was not positive, let's be honest. That was not positive in 2025 is also coming from a strong destocking activity and from, let's say, the one that we first previously defined as financial discipline that was coming also with a lower production volumes during -- throughout 2025. As of today, we have a better visibility. We have the visibility of some markets that is much stronger than before. So we are pretty positive. Of course, we want to keep -- we want to maintain to be prudent to keep the same approach on every business. But let me say, we expect to be better. In terms of profitability, I can say the reasonable profitability for the business is, for sure, better than 2025. Of course, it's -- I will not go more into the details, but we see with a better product mix, with a better geographical mix that we see now, the profitability is expected to be for sure, better. In terms of the guidance, I defer to Ruggero.

As far as the generation of free cash flow is concerned, Emanuele, optimization of further optimization of net working capital are always possible. So I cannot exclude this. Let's focus on, in my opinion, at this stage on a better cash conversion of our P&L, most important indicator, that is EBITDA or if you prefer the operating result. Why? Because from -- in 2026, following our guidance, we are expecting an improvement on an incremental basis. Considering that our level of CapEx are substantially in line with the level of depreciation, it is clear with decreasing net financial charges, this will lead to an incremental contribution in terms of generation of free cash flow at parity of net working capital. This is the answer. Then clearly, we will, as said, we will go on working based on our strict principles of financial discipline when increase the top line even at parity with a lower increase in terms of incremental net working capital, this will, in any case, as you can easily appreciate, increase the overall efficiency of net working capital.

The next question is from Enrico Coco of Intermonte.

I have 2 questions. One on the geopolitical environment and another one is on numbers. So about the geopolitical situation in Middle East. My question is how this kind of situation, of course, it's just a few days, but I would like to understand how this kind of situation is impacting Tesmec -- impacting, for example, your Saudi business and if there are other issues that we should consider like, I don't know, energy costs, transportation costs, the fact that ships don't get to ports and so on. And then the second question is about numbers is on the guidance on net debt for this year. I would like to understand what kind of budget do you have on CapEx. In 2025, you spent EUR 20 million as CapEx and also EUR 5 million for the fleet, so EUR 25 million. I would like to understand the budget for 2026. And if my understanding from your previous answer is that assuming stable net working capital is reasonable for this year. This is the second question.

Thank you, Enrico. So I will start with the geopolitical environment. As said, it's been a couple of weeks quite intense in monitoring the new events. Honestly speaking, as of today, we are keeping on monitoring the situation, even if, of course, we have not such a clear idea of how much it will impact the projects and in general, our year in the area. As of today, we have made an analysis that for 2025, the impact of the Middle East area on Tesmec revenues was around 14% and the same area in terms of perspective and in terms of backlog is accounting the 5% of the total backlog of the group. So it's for sure, an important area. For sure, it's a strategic area also for our next future. But of course, it's pretty well perimeter-ed. We will see -- as of today, we didn't have yet any kind of impact. There are impacts, as you mentioned, in terms of energy cost. We had some impact in logistics for sure, because of the -- all the Saudi ports, Saudi and Qatari ports where we are delivering our machines. But as of today, there are some changes in terms of tariffs and so on. But let's say, as of today, our job sites were not yet impacted. The project of our customers are moving on. We will say -- we will -- as said, we want to be very careful. We want to maintain, let's say, a strong monitoring, and we will see in the next coming weeks how the situation will evolve.

As far as the other 2 quantitative questions are concerned, Enrico, I will say, let's start from CapEx. CapEx will be again in 2026, in line with the total depreciation. Total depreciation are a bit increasing against 2025. Total CapEx will be in line with that number. We're investing mostly in improving our manufacturing plants as well as we would like to give a much important boost in terms of digitalization of our internal processes from which we expect further contributions in terms of general efficiency. Let's consider that in 2025, we succeeded in spite of growing revenues in keeping our fixed cost in line in absolute terms, fixed costs, so excluding the variable cost versus 2024. We believe that by further investments in digitalization, this trend could be reinforced. Clearly, we know there are scenarios in which we have to invest. And the second point, net working capital. I guess we already gave a sort of answer to the previous question. We -- as I said, -- further reductions are always possible. And of course, we are working with this target. At this stage, at parity of other conditions, I would like mostly to stress the objective of increasing the efficiency, meaning the number of average days against the total sales revenues. Just to provide you with a practical example, if you look at the numbers of 2024 and you compare our net working capital against the total level of sales, you will notice that we worked with around 150 days of inventory against the total top line. In 2025, this number plummeted to 102 days, meaning an increase more of around 33%. It is clear that even if you increase a bit your net working capital, but your top line increases at a higher pace, the total efficiency, as you can appreciate, could increase. Let's start from this. Then reduction in absolute terms against are always possible, but let's stay focused on this first objective.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Thank you very much. Thank you for everybody who participated to this call. We'll keep you posted on the next developments and nothing else. Let's move on. Thank you very much.

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