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 First Half 2022 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, Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and welcome to our conference call dedicated to Webuild results for the first half of 2022. I'm Pietro Salini, Chief Executive of the group, and I will give you a few words about our performance so far this year before letting Massimo, our General Manager, to get into further details on the results. Please excuse me for my voice, it is due to a cold for air conditioning in this late part of the summer. Let's start with the highlights on Slide 3. There is no doubt that the market environment is complicated. Combination of geopolitical and macroeconomic forces is having an impact on the global economy. Inflation is rising caused by events that are beyond our control, such as the lasting effects of the pandemic and the war in Ukraine. But we've been able to navigate these difficult waters, proving once again our resiliency, thanks to our risk management culture, the quality of our order backlog and our operational capabilities. By June 30, '22, our total order backlog stood at EUR 47.2 billion. Of this total, EUR 38.5 billion are construction projects. That is a very reassuring amount because it's over 95% of our target revenues for the '22-'24 period. At the operational level, the group registered a robust performance, closing the first half of the year with higher results. Revenues grew by 24% to EUR 3.9 billion, while EBITDA rose by 33% to EUR 251 million. Net debt improved also by EUR 143 million versus first half 2021. So our group remains resilient, and its business is still growing. One factor in our favor has been the more collaborative partnership that we have developed with our clients and suppliers. One example is the work we have done with the government in Italy to find other great compensation from the rise in raw material prices. We also have focused our efforts on improving the efficiency of our management of both contracts and the supply chain. We kept up on our cost savings plan. All of these initiatives have helped us to deal with the latest inflationary pressures. This year, we completed the integration of Astaldi into our group. When something like this is done, there are many challenging issues to manage. They are the people, the operating systems, the corporate culture, but we succeeded in doing it. And I want to reiterate how satisfied we are with how well the integration of Astaldi and the companies we acquire has progressed. The overall market is strong, as can be seen by our strong commercial performance so far this year. New orders received during the first half of the year, including contracts for which we have been identified as best bidders totaled EUR 8.1 billion, surpassing the target for the whole year. All these new contracts, they came from outside Italy. Italy, meanwhile, we expect new projects financed by PNRR for approximately EUR 13 billion to be tendered in the second half of the year. Of this amount, project worth more than EUR 2.7 billion have already been put up for tender. They should be awarded by year-end. I want to emphasize that the national plan for recovery and resilience, known in Italy as the PNRR, is a unique opportunity for Italy. Every political party recognize it's important. So we will continue to work with state entities like the Rete Ferroviaria Italia that is responsible for the country's railway network as well as the current and future government to implement the development plan set out under the PNRR. All of this activity in Italy should not take away from the fact that most of our business is still done outside of Italy. The bulk of our business is still overseas, with 70% of our revenues coming from outside Italy, mainly in areas such as North America, Australia as well as other European countries. Our strong platform has allowed us to explore expansions into a new business area, such as road maintenance. We also have a new plan for desalination in Italy in light of the water crisis. We will explain the plan in more detail later in the call. I want to give you a quick recap about our commitment to achieving a series of ESG targets. Health and safety are obvious priorities for us. Our group managed to reduce the rate by 1.7 injuries per million hours worked between 2017 and the end of the first half of 2022. We also implemented ways to reduce the amount of CO2 emissions caused by our products. Since '19, the amount of CO2 directly and indirectly has dropped by approximately 400 kilotonnes, reached 1,900 kilotonnes at the end of 2021. That said, I'm pleased with our overall performance. We can confirm our business strategy despite a difficult environment, and we remain committed to our targets as we advance our efforts to creating value for our stakeholders. And I want to thank our people, thanks to their work, skill and passion that we have achieved such strong results. As we keep expanding, we are focused on creating jobs, recruiting talents and training and retaining the best people in the industry. Our workforce on average has increased by about 8,000 units in the first half of 2022. Our drive to hire young people has also produced a remarkable result, 45% of the Director employees are under the age of 35. Diversity is important to us. At the corporate level, 36% of employees are women. The so-called next-gen plan continues after being launched in 2021. It is dedicated to young talents in Italy and everywhere else in the world where we have operations. It has very young people for a career in civil engineering, offering them training and employment. In Italy, we have set up a trade school called Scuola dei Mestieri to teach workers the skill we need on the construction site. Going to Slide 5. We have another view of our commercial performance. The order intake stands at EUR 8.1 billion. It includes EUR 1.8 billion for variation orders and EUR 2.7 billion of contracts for which we have been identified as preferred bidder. It is important to notice that we have already surpassed the target for order intake for all of 2022. All of these new contracts that we build as on year-to-date come from outside Italy, 80% of which in Europe, Australia and North America. It will be the second half that we expect to win some new contracts in our domestic market. Our commercial pipeline has reached EUR 49 billion. Of this total, EUR 16 billion are for contracts for which we have presented already a bid and are awaiting an outcome. Like I had mentioned earlier, our focus remain on countries that we consider to be low risk. They include Australia, France, Canada and the United States and of course, Italy. This country represent 80% of our commercial pipeline. In the United States, one of the biggest markets, we have already been awarded EUR 1.4 billion in the first half and more is to come following the implementation of the infrastructure bill. There is also some positive news concerning the project to build a high-speed railway between Dallas and Houston, the Texas Supreme Court has ruled in favor of Texas Central client, affirming it tried to acquire the tracks of land that he needs to build the railway. This contract worth $16 billion will be added to Webuild's order book following financial closure. In Australia, where we are building Snowy 2.0, a North East Link and have been -- become preferred bidders for a section of the Inland Rail. We have recently presented a bid for a further iconic project. France, remains a high potential market, even if competition is created there. It is the home country of many of our peers, a number of opportunities are still on offer, thanks to the huge investment being made on the metro systems in Paris and on the high-speed railway between Turin and Lyon. Slide 6 shows how the order backlog is solid. It reached EUR 47 billion, of which EUR 38.5 billion for construction projects. It covers 95% of the revenues expected for the '22-'24 period. It is well distributed over different geographic areas, granting our resiliency to temporary shocks that could affect 1 country. Approximately 74% of this construction backlog comes from a low-risk markets such as Italy, Central and Northern Europe and the United States and Australia. The project not only guarantees as our future revenues but also promise a good profit margin. That is because we have become more selective in what we choose to bid for. Slide 7 looks at Italy in more detail. Since we build the biggest player after the completion of Progetto Italia. We are in excellent position to make the most of the opportunities offered by the PNRR. Today, we have the scale, the resources and the expertise to develop the project being financed by the PNRR, especially when it comes to the strict timing schedule for their completion. That makes the Italian market full of opportunity for us. We are looking at nearly EUR 40 billion worth of project that interest us, mainly planned by Rete Ferroviaria Italia and coming to tender this year and the next. Out of that amount, EUR 16 billion are receiving financing from the PNRR. Project under the PNRR have been to be tendered soon in order to meet strict deadlines. There are already EUR 2.7 billion worth of project financed under PNRR that entered the bidding phase, we were awarding of contracts expected by year-end. They include 2 lots for the high-capacity rail line between Palermo and Messina, the Venice Airport Link and the sea barrier for the port in Genoa. More projects are expected to go to tender before the end of the year, amounting to some EUR 13 billion. We are confident that the PNRR will go ahead despite the latest political turbulence. It is a unique opportunity for Italy, a once-in-a-lifetime chance that nobody wants to let pass. Turning to Slide 8, we explain our work to expand into new business areas that will have to diversify our operation. In light of the water crisis in Italy, Webuild started promoting a product called Acqua per la Vita, water for life, to build in a short-term desalination plant for the production of portable water from seawater. In Italy portable water produced by desalination plants represents only 4% of the total volume of the water consumed in the country. If you look at Spain, it is a very small amount. In that country, 56% of the total volume of water consumed comes from desalination plants. So we bid a subsidiary Fisia Italimpianti and looking at offering know-how for the supply and management of water resources in Italy. The cost of building 24 plants to guarantee water even during the summer months would cost a little more of EUR 2.5 billion. The construction would create 11,000 jobs, the steady investment fund, Cassa Depositi e Prestiti could be a potential partner to develop and finance these plants. In order to do it, the price of water per cubic meters need to raise the level seen as it were in Europe. Another business area is road maintenance. We are making progress on the general contractor model. We are in talks with one of the Italy's biggest constructions operator to put together a few major lots, a series of work to be done in a number of regions. Meanwhile, we are working on additional business model to offer road maintenance services. The model will have the concession operator pay the contract on a regular basis to have responsibility for these services. Another area of interest is the construction of data centers. Demand is growing for the service offered by these centers, partly due to the more stringent view regarding data collection in Europe. The market is forecast to grow by more than 10% on a compound annual growth rate until 2025. We have already started in Switzerland. We have a subsidiary CSC construction by winning EUR 295 million of contracts. But there are several more markets where we are looking to enter such as Italy, Germany, Austria and France. Lastly on Slide 9, let me remind you once again the drivers behind our strategy for the '22-'24 period. As we grow our business, we will continue to deploy our backlog. We have very close attention to the way we manage risk. What is paramount is margin preservation and cash generation. This is coming from the efficient management of our ongoing projects, extracting cash from all the engineering and litigation as well as the rising cash conversions of margins in new business areas where we are developing. We will continue with our strategy of being selective in the project to acquire, whether it be in Italy or abroad. Cost efficiency activities continue along various line of actions. I will now let Massimo take you through the details of our financial results for the first half of 2022.

Thank you, Pietro, and good morning, everybody. Before I go through the results, let me remind you that, as is customary, we are presenting adjusted figures in order to represent the recurring performance of the business. You can find details of the adjustments we made in the appendix of the presentation. We can start on Slide 11. As Pietro mentioned, our financial performance show how resilient we have been in this complex environment of high inflation, rising raw materials cost and higher interest rates. Both revenues and margins have continued to grow during the first half of the year. Revenues reached EUR 3.9 billion against EUR 3.1 billion in the first half of '21 and an increase of 24% year-on-year basis. EBITDA and the EBIT grew even more, a 33% increase to EUR 251 million and EUR 37 million to EUR 124 million, respectively. The factors that are supporting our resilience and growth include the quality of the orders in backlog with over 80% of revenues coming from low-risk countries, more collaborative partnership that we have developed with clients and suppliers, such as the compensation formula for covering the increase in raw materials cost mentioned by Pietro just before. A third factor is the efficient management of the supply chain as well as the ongoing cost saving plan. Let me give you a quick update on the work streams we are currently working on to cut costs. We are creating a centralized shared service center and the back office automation for all projects. Furthermore, we are working on reducing guarantees and insurance costs as well as on procurement synergies and policy standardization. On Slide 12, you can see the geographical breakdown of our revenues. Italy came to represent 28% of total revenues in the first 6 months of the year. Revenues in Italy increased by some 10% versus the first half '21. The main contributors to this increase were the high-speed, high-capacity railway projects between Milano and Genoa and Verona and Padua. As Pietro underlined earlier, we generate more than 70% of our revenues outside Italy. North America, where we operate through our subsidiary, Lane, generated 21% of revenues, in line with the same period last year. Our presence in Australia is steadily growing, generating 14% of our revenues, mainly thanks to the major hydroelectric project. Our 10 biggest projects are responsible for 42% of revenues, almost in line with 2021 results. These projects are mostly in the hydro power sector and sustainable mobility, in particular, metro and high-speed rail projects. As regards to the war in Ukraine, we want to remind you that we do not have any exposure to that market. The only credits that we have related to works executed between 2013 and 2016 have been impaired for EUR 52 million. On Slide 13, we represent the last developments on compensations for price increases. Most of the foreign contracts are drawn up in compliance with the international standards set by the International Federation of Consulting Engineers, which provides for risk mitigation clauses, including those relating to variations in the cost of the work in the event of an increase in commodity prices. In Italy, with the publication of the Aid decree, the government has made a decisive change to the issue in order to ensure public works keep being built and new tenders continue to be opened for bidding. The government has introduced measures to compensate for the increasing the cost of materials, coal and energy, it has allocated more than EUR 10 billion to this increase and potential increase for the coming year. For existing contracts in Italy, the compensation covered 2022 and 2023, while automatic price adjustment mechanism will be granted at the contract level for the new projects under the PNRR to be put in tender up to 2026. Also, the delegated law published in June of this year that leads down the fundamental principles for the reform of the public contracts code, known as Codice degli Appalti, foresee that the new set of rules to be introduced should include the obligation of a price revision mechanism for public contracts. Compensation has already been requested for the first half of the year, and we have already cashed in a part of them. On Slide 14, we have the P&L below the EBIT line. On the total, we registered the net financial income for EUR [indiscernible] million, an improvement of more than EUR 100 million in respect of first half 2021. Financial expenses were at EUR 89 million, a reduction versus EUR 102 million in the first half of the previous year, thanks mainly to a lower level of RCF drawdown. The profit from exchange rates at EUR 72 million, mainly refers to the trend in U.S. and Canadian dollars, the Ethiopian BIRR and the Qatar currency as well as the Colombian pesos. Taxes amounted to EUR 71 million compared to EUR 74 million in the first half of 2021. Finally, net income is positive at EUR 64 million. On the slide, you can also see a bridge net profit before noncontrolling interest, adjusted and reported. The adjustment refers very simple to accounting nonmonetary items, such as EUR 28 million for the amortization of the positive gain we registered in 2020 following the PPA process related to Astaldi acquisition. EUR 41 million net of taxes related to the impairment of the works carried out in Ukraine following the significant deterioration of credit worthiness due to the ongoing war. On the Slide 15, we have reported our results in terms of net and gross debt. We are in line with our expectation for the first half of 2022, this make us confident and probably much more confident than at the beginning of the year, reaching the full year target of a net cash position. Net financial position improved by more than EUR 140 million versus the first half of 2021, showing a positive trend in cash flow generation in the last 12 months. The variation versus year-end and 2021 figures reflects working capital variation of EUR 800 million, as a result of usual seasonality of working capital in the first half of the year of some EUR 350 million, EUR 400 million. Increased level of production, which in some cases have been certified by the client. In other, the billing time is longer, for example, in some contracts in Italy, the billing of working milestone is 120 days. On domestic project, part of the raw material compensation for the first half of 2022, as foreseen by the decree published in May, has been postponed in the second half, leading to an increasing work in progress. There is also positive news on the FIBE litigation. Finally, we cashed in on a long dispute lasting years for EUR 22 million in the first half of the year and further EUR 47 million have been collected in July for a total of EUR 67 million. In recent months, we registered a cash out on taxes accounted in 2021. It was related to an Ethiopian claim settlement for some EUR 93 million. Net CapEx, including disposal amounted to EUR 110 million and cash out for dividends and buyback equaled EUR 82 million. There are a number of drivers that will help us reach our net cash targets and possibly repeat the fantastic results we had in 2021. They are the cash that occurred in July 3, for an overall amount of EUR 150 million related to Diriyah's project advance payment for EUR 100 million and FIBE positive resolution already mentioned. The reversal of working capital seasonality that occurred in the first half of the year, the acceleration of tenders in Italy, as explained earlier by Pietro, almost EUR 3 billion of tenders have already been put out, and we are preparing for the last -- latest meetings. Those projects are eligible to benefit from advanced payment such -- up to 30%. The complete payment of the compensation for the increase in raw material costs. Looking at the gross debt, we managed the maintained -- to maintain it almost in line with end -- the end of 2021 at EUR 2.8 billion. Let me emphasize the deleveraging trend we have achieved in the last year. Slide 16, we illustrate some highlights of our corporate debt. We are well positioned to face the macroeconomic scenario of rising rates. More than 85% of our long-term debt has been settled at fixed rates. In January 2022, we successfully issued a bond for EUR 400 million. This was -- we built a first issue of a sustainability-linked bond. It demonstrated our commitment to fully integrating the principle of sustainability into our business, including our financial strategy. Following the bond issue, we do not have any major maturities until 2024. In addition, we want to underline our very strong liquidity position. We have around EUR 500 million in cash held at headquarters, plus more than EUR 900 million of undrawn revolving credit facilities. Turning to Slide 17, before I leave it to Pietro for a quick recap and some comments on the outlook for 2022. Let me quickly give you an update on our ESG target. The integration of the ESG principles into our business is well established. They permeate in our strategy, organization and operational processes. This is confirmed among other things by the numerous ESG ratings assigned to the group by leading international agencies. Just to mention a few, we are ranked prime by ISS ESG and rated A by MSCI, and we are included in European Climate Leaders 2022 ranking made by Statista and the Financial Times. Improving safety condition on construction sites remain at the heart of the group strategies. For us, in ESG means on the first instance, safety. In fact, the incident frequency index decreased by more than 35% in the first half of the year compared to the 2017 baseline. That is in line with the minus 40% target set for the year-end. And these important indicators are the result of the steady investment in programs dedicated to developing a culture of safety in all our workplace. They include the safety builder programs, which in the first half of 2022, involved more than 10,000 people on construction side. Please, Pietro, I leave the floor for some comments -- final comments and other conclusions.

Thank you, Massimo. Turning to Slide 19. I would like to give you some final takeaways from our presentation. Our strong first half results show that our group remains resilient in face of this difficult market conditions. We are still growing, and our balance sheet has improved over time. Inflationary pressures being well managed bank price revision mechanism in our contracts and recent government measures in Italy. The global infrastructure market remains strong, thanks to massive investment being done by many countries. We are involved in major projects in these countries, including Australia, United States and Europe. In Italy, investments in infrastructure financed by PNRR are expected to accelerate in the second half of this year. And as a leader of the domestic market, we expect to benefit from this unique opportunity. And that is why we confirm our targets for the year. I thank you for your attention. We're now ready to take your questions. So as not to slow things down too much during the call, Massimo and the Investor Relations team are available after the call to answer any specific questions you may have on one thing or another in a table or some technicalities mentioned in the presentation. Please go ahead.

[Operator Instructions] The first question is from Emanuele Gallazzi with Equita.

A couple of questions from my side. The first one is on the guidance and generally speaking about the current inflationary environment. So looking at your results, it seems that for revenues, the upper part of the guidance is achievable. While I would like to understand your view on the profitability side, given the inflationary environment? And my second one is on the Italian market. In the first semester, we have seen delays on tenders, as you said, mainly related to extra cost, I would like to have your view on the second semester and to the first semester of 2023, if you see still risk of further delays? Or are you confident on, let's say, fast resumption of tenders?

Okay. Thank you, Emanuele. Regarding the high range of the target for the revenues, we are confident that we can achieve it. And we expect to have an improvement in marginality mainly due to the factors that we have the overhead cost that we remain stable with an increase in production, so we can have more efficiency at EBITDA level. Regarding the Italian market for the second part of the year, we do not see major risk of further delay also because the main clients, the main the main company like RFI or ANAS have to launch the bids because they are committed the government that is committed with the European Union to achieve the target of the recovery plan.

Okay. And if I may, a very quick, one about the infrastructure maintenance, just to understand when do you expect to have visibility on this project?

We are working on this program with the major clients, which are the concessionary of course, in ANAS, and this is something that is on discussion, and we are reaching a settlement for this to the mutual benefit. So I would say that this will come in second part of the year.

With the main focus being the Italian market, right?

Starting from Italian market, right.

The next question is from Matteo Bonizzoni with Kepler.

I have 2 questions. The first one is with regard to the situation in Italy. So in the first half of the year -- last year, you took a lot of order, now in the roughly speaking EUR 11 million order. There were a lot coming from Italy, particularly with railways. But not only -- in the first half of this year basically 0. For the second half, we have a situation in which you seem to be very confident on the award of additional jobs. Now you mentioned EUR 2.7 billion in public tender, EUR 13 billion of jobs funded by the PNRR schedule for tender in the second half. My question is with regard to the political situation, so basically, it is that, if my understanding is correct, that you not expect a potential negative impact on this pipeline coming from the evolution of the political situation, so the fact that Italy, for example, needs to fulfill all the deadlines against constraints to receive additional money and so on. In general, can you comment about that potential risk? The second question is with regard to the net working capital evolution, which has been extraordinarily good last year, particularly, I would say, in the second half because last year you generated all in all EUR 0.9 billion of cash flow, which was really good. In the first half, we have had some reabsorption of that. Looking at your working capital, it's clear that on the advanced payment, you absorb something and there were also other movements. It seems that you are quite confident to achieve another round of deleverage, at least EUR 0.4 billion in the second half. Can you comment on that you have already commented? In the reality my point is also to understand the cash cycle of the extra cost recognition in Italy. So is it reasonable to assume that in the first half you put in the P&L, there is fund to cover the extra cost, but you are not yet fully cashed in these refunds, and maybe can you provide some detail on that?

Okay. So let's start from the political situation, I think that for this year, the political situation, we practically have no change because, of course, it's the time for the election, the government is still on the spot with a very large program of things to be done and everything which is linked to the goals of reaching the PNRR target and milestone is confirmed in the hands of Mr. Draghi. So I think until the end of the year, when the new government will take place, there will be no change. And of course, we have a very strict path in Europe with the debt to manage and the other constraints that were put on us with -- that will not make possible to anyone to have a significant difference in the action to be taken for the country. So I am very confident that, more or less, nothing will change. So this is for the access. For the number of contracts that we have in the future, it means that these 3 months, in reality, we have already EUR 2.7 billion of tenders, which have been just launched and just tendered for in the past 15 days with the Italian railway, but the Italian railway just confirmed that the program is to launch EUR 14 billion tenders worth of contracts before the end of the year. So this plan has been confirmed, and we are confident that a significant part of it, of course, due to our role and our dimension will be part of our next order intake. So even if we faced certain postponement of tenders due to the lengthy procedure linked to the price revision introduction in Italy, this is something which is good because, of course, they have changed not only the law which now allows and oblige all clients to put a formula of revision of price, which covers any difference into the future but also made a significant update of the prices for the contract that were ongoing. So this delay, I can say that from one side is a problem that make some differences, but from the other side, much more it is a very significant positive issue. So I would say that slight delays into the tenders at the end of the year will have, more or less, the same amount of tenders floated as for the original program and schedule. It is very much offset by the fact of these tenders each being much more safe and updated into the price as for the current price of raw materials. So this is my comment. For the cash, of course, this will give a boost in the second part of the year because as you know, the Italian contracts are linked with a significant portion of it given as advances, and this will be a help from the liquidity point of view. And of course, in the next 3 months, we are working to pursue this opportunity for boosting our liquidity position and our net financial position.

The next question is from Enrico Coco with Intermonte.

Actually, I would like to touch 3 points. The first is on the cash flow for the second half. So I'm trying to understand if my best case, which is repeating, let's say, a net cash position similar to last year, so above EUR 400 million is a reasonable base case or your base case is just having a slightly positive net cash? I'm asking this because you said that around EUR 13 billion of projects will be tendered in the second half, but you have visibility on the fact that around EUR 3 billion will be awarded. So if I take your success rate around 60%, 70%, this should translate in around -- in prepayments above, let's say, EUR 500 million for you. Then you have the reversal of the first half working capital is between EUR 300 million and EUR 400 million. Of course, I don't know if this year will be the same. And then you have the compensation from raw materials, which I estimate would be hundreds of million. So I'm trying to understand your view on the cash flow for the second half if it's reasonable to maintain the net cash of last year or this is too aggressive? This is the first question.

Okay. Thank you. We...

For the guidance -- Massimo, for the guidance, we'll stick to the guidance, which is...

Yes. We do not comment your assumption. I believe they are not far from the reality, but we are stick to the guidance, and we prefer to overperform than to overpromise.

Okay. Second point is on the guidance. So before -- you said that you expect the profitability of the second half to improve because you will have stable over cost with an increase in production. So if the production of the first half was EUR 3.9 billion, why you're not increasing the guidance on the revenue side to, let's say, around EUR 8 billion?