Webuild S.p.A. (WBD) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Webuild Full Year 2021 Financial Results Conference Call. Our call today is hosted by Pietro Salini, Chief Executive Officer; together with Massimo Ferrari, General Manager, Corporate and Finance. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Pietro Salini. Please go ahead, sir.

Thank you. Thank you. Good morning, everyone, and welcome to our conference call dedicated to Webuild 2021 results. I'm Pietro Salini, Chief Executive of the group, and I will give a few words about our performance during the year and perspective before letting Massimo Ferrari, our General Manager, go into further details. Let's start to say that we are here after a long 2-year period of COVID activities. We had the impact in our lives, in the way we run our business, in the way we travel, in the way we live. With impact too in our turnover and EBITDA in the way we organize, in the way we run and control operations. But after 2 years, we can say we are experiencing how resilience we are. All included, including extraordinary items, even the one that we are examining in this conference call, we can say that our business has produced a sustainable growth. Our net equity and even the net equity per share has increased, all included, including the extraordinary items that affected our net result this year. We grow in obtaining the best net financial position ever. We have EUR 450 million net cash. We reduced our gross debt by almost EUR 1 billion. With growth in size, we increased our turnover. We increased our organization. We are now 80,000 people working together. And we are working to better the future of our world. More than 87 million people use our infrastructure, the one we built. And in the future, we are also growing. We are targeting notwithstanding all that, a sustainable growth. We look into future with a backlog, which has been hit by a record order intake this year. And in the first month of 2022, we are adding another almost 4 billion of new order intake for the one we already obtained, making the future very busy. More than 92% of the total turnover for the next 3 years will be coming from the actual backlog and the one we -- and the orders we received in 2022. We continue to grow, I say, to give opportunity to the youngs and to the people that are coming with us. And I want to thank all the people of Webuild for the extraordinary efforts they have done these 2 years and particularly in 2021 and up to now for what they are doing in these difficult times and in the difficult times of COVID. I go back now to the highlights of the year on Slide 3. In 2021, we saw a strong rebound of operations. Revenues grew by 40% and our EBITDA jumped by 95%. And this is despite the fact that the pandemic and its effects are still with us. We had an extraordinary year in terms of financials, registering the best financial position since ever. We closed 2021 with EUR 467 million of net cash. Gross debt went down by more than EUR 900 million. We also have a lot of liquidity with EUR 2.4 billion of cash on hands. We are fully on track to deliver our cost efficiency plan, which aims to create benefits for EUR 120 million by 2023. Thanks to the action put in place in 2021, we have already reduced our overheads for about EUR 30 million. We had a record intake in new orders totaling EUR 11.3 billion, were distributed in low-risk geographies. This led to our construction order backlog also reaching a record, totaling more than EUR 37 billion. The market in general is an upswing. Countries are increasing their investment in infrastructure, especially those which we consider core to our business for the low-risk profile, countries like Italy, United States, Australia and Northern Europe. In Italy, the number of contracts that were gone to tender have increased a lot since 2016. That is one of the main reason we are now refocusing our activities in the country and more has to come. Given the fact that we are the largest player in our domestic margin by far, we have a central role in the implementation of the national recovery plan, known as PNRR. We expect EUR 24 billion to go to tenders in the next coming months in Italy. We continue to deliver our derisking strategy. Our exposure to low-risk country come up to an approximately 75% of our construction order backlog and more than 80% of our revenues. We have drastically changed our approach to bidding, being year by year more selective based on a true dedicated and risk management analysis. Another important element of the risking policy is the active management of contracts. We have been able to change the quality of our assets, resulting contract amendments in countries that have been riskier. One example is Ethiopia where we sold a claim for EUR 450 million, totally cashed in. We completed the acquisition of Astaldi and have integrated its activities in our own. We are now focusing on extracting synergies at every level. Within Progetto Italia, we also concluded the integration of Cossi Costruzioni and Seli Overseas. We are now focusing on a noncaptive markets and could help the group to enter into the maintenance business. For Progetto Italia, we have grown in size, expanding our expertise and increasing people at our disposal and capacity to invest in asset safety. Lastly, in terms of sustainability, we have achieved great results. 92% of our contracts contribute to the achievement of sustainable development goals. Our revenues are quite totally aligned with the new taxonomy published by the European Union. Slide 4 has our financial highlights. Our book-to-bill surpassed by far our target for the year of onetime arriving at 1.8x. Revenues were in line with our guidance at EUR 6.7 billion. EBITDA margin widened to 6.7% as expected. As Massimo will explain later, in 2021, we experienced some extraordinary cost for about EUR 31 million. If we exclude this, the recurring EBITDA margin stands at 7.2%. Then you have to take into consideration the impact of the pandemic and projects still not working at full speed. As I said earlier, we have a positive net financial position of more than EUR 460 million, some EUR 860 million better than the guidance we gave to the market, a remarkable result, the best since the creation of Salini Impregilo, the predecessor to Webuild. Total equity stands at EUR 1.9 billion, constantly growing versus 2019 level. Our global workforce continue to grow, reaching approximately 80,000 directly and indirectly employed. We expect this number to grow along with our business. Following this strong result, we are proposing to the shareholders meeting a dividend of EUR 0.055 per share. Slide 5 gives you a breakdown of our record order intake, which stands at EUR 11.3 billion. This is an incredible jump from 2020 when the amount was only EUR 2.6 billion from 2019 where it stood at EUR 8.1 billion. If we include the Texas high-speed railway project, new orders with total EUR 25 billion. You will see from the map how Italy is a booming market at EUR 5.6 billion. The value of order year for FAST just passed that of any other markets that we are present. Then you have Australia for EUR 2.2 billion and Europe for EUR 2 billion. In the first few months of 2022, we registered EUR 4 billion worth of new orders. Our commercial pipeline remains strong, standing at more than EUR 31 billion. The figure includes contracts for which we are awaiting an outcome for approximately EUR 10 billion. Slide 6 illustrates the positive rebound of the sector in Italy as the government is investing in public work with you found through the PNRR. The increase in volume of the infrastructure contracts assigned is notable. In 2016, it was EUR 7.4 billion. In the first 10 months of 2021, the number doubled, reaching EUR 16 billion of contracts assigned. Since we are the largest builder in the country, and we have to scale, to invest in health and safety, innovation and sustainability, we are developing more than 70% of the infrastructure projects financed by the PNRR so far. Just to mention some of these projects, we are working on high-speed railways between Milan and Genoa and between Verona and Padua. And the project worth combined EUR 24 billion that will go to tender in this year. The EUR 24 billion comes from the funds earmarked by the government as well as the PNRR. So you can imagine the potential that this market has for our group. Slide 7 gives you a better idea of our backlog that represents one of the reasons for the robustness of the group. Total backlog reached EUR 45.4 billion, of which EUR 36.8 billion is a construction backlog. The construction backlog is up 10% on the year. 75% of our backlog comes from low-risk countries. This shows how successfully we have been in shifting our focus to countries where there is stability and visibility. True to our commitment to sustainable development, nearly all of our backlog is dedicated to United Nations' goals. If we look at just the construction order in the backlog, Italy represents 44% of them. There is an increase from the 37% in 2020. Australia also grow in importance, making up 15% against 10% in 2020 and it's growing. It is very important to emphasize that the company has achieved remarkable results, not only from an economic and financial point of view, but also from the industrial one. In fact, we have delivered in the last 3 years, 16 large infrastructure from big American highways and important bridges such as the Gerald Desmond Bridge, subways, dams and water and wastewater treatment plants for an overall amount of EUR 13 billion. On Slide 8, we want to illustrate our commitment to environmental, social and governance, commonly known as ESG. The product that we are developing now, whether they be for water, energy and transport will benefit nearly 90 million people across the globe when they are completed. They will provide the infrastructure that will improve their lives. They will also help avoid the emission of up to 24 million tonnes of CO2 every year. Climate transition is a fundamental part of our strategy. Nearly all of our revenues and how they were generated are aligned to EU taxonomy, a new classification system for sustainable corporate activities. Our commitment rank us among the best-in-class for different ESG rating agencies. On Slide 9, we want to show you how we were performing in terms of our ESG targets. We recorded progress on all targets set by the ESG plan. The injury rate recorded a reduction of 31% compared to the 2017 baseline with a target of minus 40% in 2022. This is a very important KPI for our sector as safety to our people is at the first place of our priorities. Emission intensity rate recorded a reduction of 50% compared to the 2017 baseline. It is not worthy to take into consideration. The 2021 level reflects the completion of some large projects and the start of recently acquired projects, the ramp-up of which will be reflected in emission in the next few years. The share of women included in a succession plan of key positions stood at 20%, reaching the expected target in advance. This gives us the opportunity to raise the bar to 25% by 2023. Additional investment in innovative projects amounted to approximately EUR 8 million with a target of EUR 30 million by 2023, reaching the record over EUR 111 million of investment in innovation made in the last 5 years. Finally, by the end of 2021, we formally submitted a science-based target initiative, new targets to reduce greenhouse gas emissions by 2030. Meanwhile, the group continued to reduce its overall emission, which in 2021 registered a minus 7% compared to 2020. On Slide 10, let me give you the strategic drivers we are continuing to purchase, execute a large backlog, which covers more than 89% -- 92% sorry, of the revenues for the next 3 years with strict control over costs and contract management; continue to expand our presence in the home market that we expect to account for 44% of our revenue in 2024; our greater scale that will allow us to manage better fixed costs; continue to focus on low-risk countries; complete the cost control program; focus on strong cash flow generation; new business opportunities, that's maintenance in Italy and financial closure of Texas and origination in other countries. Moving to Slide 11. We have our 2022 targets and the trajectory of the business for 2024. At a constant exchange rate between the euro and U.S. dollar and assuming no worsening of the COVID-19 situation and no negative impact resulting from the military conflict in Ukraine, we foresee an average book-to-bill of more than 1x; sustainable revenue growth ranging between EUR 7 billion and EUR 7.5 billion in 2022 and up to between EUR 8.2 billion and EUR 8.5 billion in 2024; an improving margin up to more than 8% by 2024, thanks to rigorous project management and cost efficiency; stable cash generation, which could allow us to maintain a net cash position. Those figures do not include the impact of Texas and the strategic option I explained earlier, and Massimo will go into further details. I'll now let Massimo take you through the details of our financial results for 2021 and some other highlights of the outlook for the coming years. Thank you.

Thank you, Pietro, and good morning, everybody. Before I go through the numbers, let me remind you that as it's customary, we are presenting adjusting -- adjusted figures in order to represent the recurring performance of the business. You can find details of the adjustments we made in the appendix. We can start on Slide 13 that shows how both revenues and margins are back to pre-pandemic levels, even higher. Revenues amounted to EUR 6.7 billion against EUR 4.8 billion for 2020 and EUR 5.3 billion for 2019, an increase of 40% year-on-year. This increase is due to the resumption of activity on construction sites as well as the Astaldi acquisition. As explained earlier by Pietro, activities are still impacted by some inefficiency on construction sites due to the pandemic. If we exclude any impacts on our business, we would have reached the EUR 7.4 billion. Just to make you an example, Australia has been impacted by limitation on personal and material circulation limiting our activities in the continent. Recurrent EBITDA which excludes some one-off items for EUR 32 million related to -- mainly to Astaldi integration jumped to EUR 483 million with recurrent EBITDA margin of 7.2%, fully in line with the original guidance targets. Recurrent EBIT was about EUR 230 million. The increase of margins is remarkable, also thanks to the efficiency plan we will discuss later. Let me just add now that we have room to extract more value from savings and efficiency. In Slide 14, you can see the geographical breakdown of our revenues. In light of the major investments being made by the Italian government, our home market has surpassed North America as our primary market to represent 32% of total revenues. What is important to note here is, how much Italy's contribution to total revenues has increased in recent years? In 2018, it represented only 10%. And as said by Pietro earlier, we expect it to increase by up to 44% in 2024. Regarding the conflicts in Ukraine, let me tell you that we do not have any exposure to that market. We do not have any operational activity in Ukraine. The only thing we have is credit after having won a legal dispute at [ ICC ] in Paris over an old highway contract. That credit is worth a little more than EUR 60 million, and it will be impaired starting from first half 2022. In terms of projects contribution, the main one are the high-speed railways between Milan and Genoa and between Verona and Padua in North of Italy. The hydroelectric project, Snowy 2.0, and various projects being developed by our strategic subsidiary, Lane Construction. Our 10 biggest projects are responsible for 41% of revenues, almost in line with 2020 results. On Slide 15, we have the P&L below EBIT line. Financial expenses were at EUR 190 million against EUR 156 million in 2020. This includes some nonmonetary cost for EUR 55 million, mainly related to devaluation of financial assets and expenses for inflation adjustments. Taxes amounted to EUR 111 million compared to EUR 60 million in 2020. When it comes to net income, the reported figures include some extraordinary items, such as EUR 71 million for the amortization of the positive bargain we registered in 2020 following the PPA allocation process; EUR 77 million of taxes on the positive resolution of the claim in Ethiopia, mentioned by Pietro before; and as explained during our first half results call, the Clean recognizes to Webuild some EUR 450 million in extra cost resolving all the disputes on the matter known thus far. In any case, these taxes based on current legislation could be potentially deductible in the coming year for taxes to be paid in Italy. EUR 140 million for the resolution of long-standing legal disputes on the high-speed railway between Milan and Turin, which we inherited from Impregilo, works on the line were terminated in 2008 or -- and 2009. Net of taxes, the impact is EUR 100 million. These do not have impact at the cash flow level as we have reached an agreement with the client, RFI. On the next slide, we have reported cash flow figures, and we will see the positive results registered in terms of net and gross debt. We beat all the expectations from the market. And let me say our own expectations as well. Our operating free cash flow is around EUR 1 billion. In addition to the operational results, we greatly succeeded in extracting cash from our working capital, cashing in important contract amendments with clients and collecting EUR 1.4 billion of net advance payments on new contracts and projects in backlog. Let me clarify one important point. The advanced payments that we have received will be gradually, of course, returned during the life cycle of the project, while in 2022, 2023, we expect to obtain other advances from new orders. It's also important to notice that advanced payments represent a structural part of our business. All this comes to a positive net cash of EUR 467 million, an improvement of more than EUR 900 million versus the previous year 2020. Looking at gross debt, we reduced it by more than EUR 900 million to EUR 2.7 billion. In addition, we want to underline our strong liquidity position that is much better than the one in 2020. We have around EUR 700 million cash held at headquarters after the bond issue done in January 2022, which we will explain in a few minutes. We have been able to negotiate a new revolving credit facility that bring total undrawn facilities to EUR 900 million. In Slide 17, we illustrate some highlights on our corporate debt. In January 2022, we successfully issued a bond for EUR 400 million. This was the first issue of a sustainability-linked bond for us, and it demonstrates our commitment to fully integrate sustainability in our business including our financial strategy. Let me thank all the banks that helped us to successfully issue the bond and, of course, all the investors that trusted us. Following the successful completion of this bond issue, we do not have any major maturities until 2024. The pro forma debt after the bond issue show also we have more than 85% of our long-term debt at fixed rates. If we look at the cost of bonds issued since December 2020, we immediately see a great reduction by 200 basis points. The success of the sustainability-linked bond placement confirms the significant appreciation for the strategies that we built has [ pushed ] in recent years and the confidence in Italy and its ability to achieve PNRR goals for infrastructure. On Slide 18, you can see how the targets Pietro shows you earlier are developed over time. Revenues and margins are supported by all the strategic actions that we have put in place in recent years. The current backlog cover 100% of our planned 2022 revenues and more than 89 -- close to 90% of combined '22-'24 revenues. The remaining part will be developed, thanks to the order intake we forecast to get in the future. More than 80% of '22-'24 revenues will come from low-risk countries, out of which 40% from our domestic one, in line with our main international peers. Our derisking policy will continue to be at the core of our commercial activity. At the end of 2024, more than 80% of our construction backlog is expected to be in low-risk countries. This selective commercial strategy, coupled with our cost efficiency program that I'll explain more detail in the next slide, will support also our margin. So going to Slide 19. As we announced in 2020, we are pursuing an ambitious cost savings plan for about EUR 120 million. This entails improving efficiencies within the group as well as capturing synergies that are coming from the acquisition of Astaldi. Thanks to the action put in place, we have been able to achieve EUR 30 million of efficiency. In the case of our corporate and branch offices, we have already put in place some other actions to achieve a further EUR 15 million in efficiency for the year 2022. This is mainly thanks to the reorganization of staff according to spans and layer methodology and branches rationalization. As for indirect cost on our construction site, we are standardizing processes and procedures to optimize costs. We are automating the back office with the creation of a hub to centralized services such as administration, procurement, legal and HR. This is expected to lead to savings of about EUR 30 million already in 2022. We expect total additional savings for EUR 45 million in 2022, including direct and indirect cost. On Slide 20, we want to focus on some potential upside to our target. Cossi, one of the Italian companies we acquired under Progetto Italia has helped us enter a new business line by recently winning contracts to repair and maintain several stretches of highway in Italy. We are now in discussion with Italy's main sector operators to eventually operate as general contractor for larger loans. According to our estimates, we can add about EUR 1.5 billion in revenues with a high single-digit margin in the coming years. We continue to invest in innovation and green solution. It is important to understand that being green is not just a question of following the latest trend, it directly impacts on our business. Solution that provides energy savings such as green TBMs or that help customers improve the infrastructure monitoring such as the robot is sold on the general bridge make it possible to create efficiencies for the construction company and for the community in general. In 2022, we also want to help the Texas Central achieve financial closing on the Houston-Dallas high-speed rail project. We plan to do so, thanks to our experience in high-speed rail projects and with the support of selected infrastructure funds. We are in discussion with some of them to form strategic partnerships and identify interesting projects from an economic and financial point of view for both parties. Finally, we are working with clients and governments in order to develop projects currently not included in our commercial pipeline by offering our expertise in planning and engineering. These have represented in the past a strong source of business for us. We have a few initiatives that we are following, which we hope we can soon unveil. I thank you for your attention. And now we leave open the floor for your questions. Thank you very much.

[Operator Instructions] The first question is from Matteo Bonizzoni of Kepler Cheuvreux.

I have some questions. The first one is on the improvement of your net cash position of your financial -- net financial position, which was around EUR 900 million. Analyzing your balance sheet, this primarily came from a EUR 1.2 billion increase of your contract liabilities. So basically, advances. Can you just split Italy versus not Italy? And what are overall the key drivers including the application of the decree to 207 of 2020, which increased the advanced payment in Italy from 10% to 30% on a selective basis? This is the first question. The second question is, as regards to this more than EUR 100 million, let's call it, one-off related to the high-speed Milan-Turin that you inherited from the former Impregilo, I guess, should be -- if not cash, you said, I guess it should be as such, a write-off of a claim. And on claims, I would like to know the amount of claims which you've had in the balance sheet at the end of 2021? And if you could divest, if you are assessing the possibility to divest some of your claims to specialized financial operator involved in nonperforming loans? Then if you can also provide an update on Texas because there is clearly some delay compared to what we were expecting. We have read in the newspaper -- local newspaper that there are also some hurdle. But overall, also, we have not achieved the financial closing. We understand that you are helping your customers to get the financial closing. Do you have any expectation about the evolution on this Texas contract? And then the last one, guidance 2022 with a margin of 7% to 7.5%. So both are -- what is -- can you comment broadly on your external environment with regard to cost inflation, which is clearly a key topic? And what are the expectation to pass -- we should have to pass, including progress in Italy coming from the recent decree?

Thank you, Matteo. It's Massimo speaking. Probably we missed some question, but I start from the first that you mentioned, regarding the advances that we got. Around 80% come from Italy and 20% from abroad. And EUR 900 million of that comes from -- no, less than -- I'm just asking to -- the degree that increased to 30% amounted to EUR 900 million without -- we made the calculation without the decree. We should have get the guidance that we gave in terms of net financial position that was around EUR 300 million -- EUR 400 million net debt for 2021. Then the second question regarding the [indiscernible] claims, you are right. It's not a financial -- doesn't have a financial effect right now, but it will have in the coming year, net of the positive cash-in that we can get from the litigation and the agreement on [indiscernible] that we made with RFI. Regarding Texas, first update, then I leave the floor to Pietro. We didn't include Texas in the 2022 project target and also in the trajectory for 2024, just to make Texas as a full potential upside. We are working on that with some very large infrastructural funds. We are following very strictly the plan on the traffic in order to calculate the total return that, in our opinion, can be very attractive both for equity and bond investor. I don't know, Pietro, if you have any other update on Texas.

On Texas, of course, this is not taking into account into the estimate for the future. If Texas was there, of course, it has a transformational effect on our U.S. franchise and could have an impact of around EUR 2 billion -- EUR 3 billion of turnover per year. So it is something that changes a lot, either the value of the company in U.S., either the dimension of the company in U.S., so this is very important. We are working hard on getting this financial closure. We hope for the end of the year to achieve this and to conclude it. Of course, we did not factor in that because it's so large that it would have an impact to make [ nonsense ] the figures without. The other important thing we were imagining, Matteo, I think you remember, where -- when we did the merger with Astaldi, we increased significantly the size of our net equity. As a matter of that, you remember that we were saying that due to the size of the net equity, which is not necessarily needed fully for the business at the actual level of turnover, we could envisage also some equity dynamics in terms of looking at our, let's say, long rotation credit or claims to say if we could improve our cash position by making some settlement. And we are looking at that as exactly U.S. market. So of course, we did that, for example, in claim in Ethiopia obtaining prompt payments. The claim has been completely paid through some discounts we made to the clients. And the tax that you see there are an additional result. But of course, there's been an impact also into the P&L that -- notwithstanding that achieved a substantial number, meeting the guidance that we gave to the market. Apart from that, there are some recurrent items of EUR 30 million that were included into the figures. So I think that's all, Matteo, if you have any other questions or if I missed something.

No, we have transferred to the inflation raw materials and then energy prices...

This is an important matter because it relates to everybody and especially to what is then -- let's say, the outcome for all the industrial company in -- around the world in Italy, in particular, and the impact of the war and the impact of the COVID and on logistics on those materials. Of course, we are working with the government because this new, let's say, war situation is something that goes beyond the capacity of any company to handle. And this is something that the government has already taken in consideration in 2 decrees, partially covering these sharp prices. But it's also now working to a new decree that will, of course, take care of the new rises into the cost of energy, especially in the cost of some raw materials, in the cost of steel, in the effect of the missing activity of trade with Ukraine and Russia, which is now one of the outcome of this war; and transportation costs that are affecting, of course, all the raw materials coming in Italy through the different routing that we are using, Russia or Ukraine or their sky or their land to pass-through. So there are a lot of impact that the government is actually taking care. We think that a new formula for revision of price will be decided by the government in the next coming days in order to take care of this rise. So far, we've been covered by the decree that have been given by the government. But of course, the new scenario for the future has to be taken into consideration.

And of course, this regards to Italy because most of the portfolio or the foreign contracts is already hedged by the clauses that are in the FIDIC, International Federation of Consulting Engineers standards. And we are very confident that also Italy will align to the international standards on that very important issue. So there are other questions from Matteo that we missed?

No, I think we are fine.

The next question is from Alessandro Tortora of Mediobanca.

The first one is -- sorry, it's a clarification on the previous question on the level of advances coming from the, let's say, in Italy, coming from the implementation of the decree, allowing for up to 30% of the advances. If I understood well, what you are telling us is that in a situation where we would have considered the old condition, basically the company would have collected an amount of advances that would have been lower by EUR 300 million, EUR 400 million. Just a confirmation that this is the reasoning, okay, you made before. And the question is, do you have visibility for, let's say, how long it will stay in place, this new rule, if this is something you think is, I don't know, a new standard? Or will come back at a certain point to, let's say, a normalized level of advances also for Italy?

No, it will remain for 2022.

Okay. So beyond 2022, we should still come out...

To the standards that are on average in Italy around 20%.

Okay. Okay. Okay. And sorry, Massimo, and on the first question, the calculation you were making before, would mean like now EUR 300 million, EUR 400 million [indiscernible] advances, thanks to this new decree, is it correct?

Yes, it's correct.

Okay. The second question was on the comment you made initially on the start of the year with a strong, let's say, order intake. You have the EUR 4 billion project. Honestly, I didn't, let's say, collect -- yes, please.

You missed something because we just announced more than EUR 1 billion, if I not remember wrong, but we have the best offer in 2 main jobs, and we are just awaiting for the authorization from the client to announce it, and they come outside Italy.

Okay. Okay. So it was like, let's say...

It's already around EUR 4 billion.