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

Welcome, and thank you for joining the Webuild 2022 results and Roadmap to 2025 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. Good afternoon, everyone, and welcome to our conference call dedicated to Webuild 2022 results and to the Roadmap to 2025. I'm Pietro Salini, Chief Executive of the group, and with me there is Massimo Ferrari, our General Manager. Today is an important day for 3 reasons. We celebrate a decade as a group, we published our 2022 results, and thirdly, we present a roadmap for the next 3 years. The results and the roadmap to 2025 we are going to show you today come from a very clear strategy we have executed in a 10-year long journey. We created a group that has begun not only a national champion, but a global company, a group providing clients with a solution they need to face today's and tomorrow challenges. It began with Salini Costruttori, taking control of Impregilo in the first shareholder proxy fight in Italy, a business case that has since become a subject of study. In the years that followed, we grew both internally and externally. We acquired Lane in the United States. We took over Astaldi as well as Seli and Cossi as part of Progetto Italia with the support of Italy's financial and public institutions. In the meantime, we completed 2 capital increases for a cumulative EUR 765 million, and we distributed EUR 930 million dividend to our shareholders at the same time. We then acquired Clough in Australia, which has become our second biggest market. So we significantly gained scale. We more than tripled our size since we began the journey, starting with Impregilo at EUR 2 billion in annual revenues to arrive today at over EUR 8 billion. Scale is important in this industry. You can better manage risks and leverage on economies of scale. You can negotiate from a position of strength. You can invest in innovation and even safety. Our backlog has increased from EUR 17 billion to EUR 53 billion. We also work to improve the quality of the backlog, shifting our focus towards market that are low risk, meaning developed economies with clear rules and political stability. Our backlog is now well balanced in countries such Italy, Australia, North America and Europe. Italy is our domestic market, and it's very important to us, but out of the EUR 16 billion of new orders, Italy accounts only for EUR 1.6 billion. While we went through this journey of change, this past decade has seen us deliver more than 270 strategic infrastructure. I have said this in the past and we'll keep saying it. It is thanks to our people that we have achieved so much. 83,000 women and men daily teaming up in over 50 countries. The title of this presentation will easily summarize what we want you to remember at the end. The future -- our future is now, and we have already resources to deliver it. I now leave the floor to Massimo to go into details of the 2022 results. Please, Massimo.

Thank you, Pietro, and good afternoon, everybody. Let's start from Slide 6. The overall market in 2022 has confirmed its strength. We successfully got more than EUR 16 billion in 2022, exceeding the target. If you combine the orders received in 2021 with those of 2022 and the first month of 2023, we are looking at more than EUR 30 billion of new orders already signed. This is an extraordinary result, confirming our ability to offer what clients need. Most of our orders still come from abroad, as Pietro mentioned before. We are talking about 75% of 2022 year-to-date order intake coming from abroad, mainly from core Europe, Australia and North America. North America was responsible for EUR 2.7 billion. In Australia, we were awarded the contract for the Western Sydney Airport Metro project for a pro quarter value of EUR 2.4 billion. In the state of Queensland, we are the preferred bidder for a section of inland rail project for a total value of EUR 2.2 billion, including Clough's stake. The financial closing is upcoming. In Italy, we were awarded for EUR 1.7 billion in 2022 worth of contracts for strategic projects that will support the economic development of cities and communities. I'm referring mainly to Sicily where we are heavily involved in the modernization of the railway network. In late 2022, we won a contract for another section of the rail line between Palermo and Catania. We also have the Breakwater that will be built for the port of Genoa. It will allow the port to receive bigger ships. Slide 7 shows our results for 2022. Webuild proved a very strong resilience, notwithstanding the difficult scenario. As we told in the past, Webuild proved to be anticyclical, able to manage price increases for energy and raw materials, thanks to law changes or contractual provisions. At operational level, the group booked a very strong performance closing the year with both revenues and EBITDA growing more than -- by more than 20%. Revenues overcome EUR 8 billion overperforming the guidance of EUR 7 billion to EUR 7.5 billion of revenues and EBITDA come up at EUR 572 million. In terms of marginality, we achieved our guidance at the low touch point. Let me mention here that this result is affected by the accounting for revenues at 0 margin related to the compensation of raw material cost increases. Without this impact, the marginality would be much higher. EBIT rose more by 63% to reach EUR 321 million. On Slide 8, we have the P&L below EBIT line. We booked the net financial income for EUR 118 million, improving by a loss of EUR 56 million in 2021. Financial expenses were at EUR 213 million, an increase of EUR 22 million versus 2021, mainly due to higher bond charges. Tax amounted to EUR 109 million, in line with 2021. On the slide, you can also see a bridge net profit adjusted and the reported. These adjustments refer to accounting nonmonetary items such as EUR 53 million for the amortization of the positive bargain we got in 2020 related to the Astaldi acquisition and EUR 55 million related to the impairment on the works completed in Ukraine in 2016 as we already discussed during our half year call. On the next slide, the 9, one, we showed our balance sheet by the end of the year. We achieved our guidance in terms of net cash, notwithstanding a 22% increase in revenues, better than expectations. We landed with EUR 265 million of net cash position. It is the second year we successfully managed to end the year with a net cash position, and we reduced the gross debt by EUR 35 million. We managed to increase our net equity that stands now at EUR 1.9 billion. Let me just make a last comment on working capital. We successfully managed to keep it negative with an improvement of EUR 560 million versus the first half of the year. This is in line with what we gave as commitment during our last call in July. Slide 10, we show main highlights of our corporate debt. In January 2022, we issued a bond for EUR 400 million. It was our first sustainability-linked bond. The issue let us get ahead of the increase in interest rates. The next relevant maturity will be after mid-2024. 86% of our corporate debt is at fixed rate and we have limited debt maturities until late 2024. In addition, we want to underline our strong liquidity position. We have around EUR 1.9 billion of cash, of which EUR 565 million held at quarter's level, plus more than EUR 900 million of undrawn revolving credit facilities. I will now let Pietro show you how we shape our business to become the group that we are today.

All of these examples of our scale shows our group ability to manage the risks involved in building projects as large and complex as this and complete them according to the requirement of our clients. We also have become a well-recognized player in the world. We are a global leader in the water sector and among the top 10 in highways and rails for Genoa, the most respectful publication in the sector. It is undeniable that we are the first Italian contractor, but we are a global player. We are recognized also in the top 10 international players in U.S. and Australia, and we are ranked among the top 10 European players. Our order backlog of EUR 53 billion is large enough to cover nearly all our revenues throughout 2025, including EBITDA and EBIT in this period. These sites gives us 6 years of visibility, enabling us to plan in a more structured way how we will deploy our resources. This slide shows also how our successful derisking strategy has produced a backlog with an 80% exposure to the markets with developed economies. Italy takes the biggest share of 44%, followed by Australia with 14%. But taking on the backlog of the companies that we acquired meant we have 2 Finnish projects like the second Panama Canal kick-start those that had been blocked for years like the high-speed railway between Verona and Padova, and Milan and Genoa and write off others in Venezuela. When it comes to the use of technology, construction is a sector that has been not obviously slow to change, not anymore. We are deploying hundreds of people and investing millions to offer our clients the best solution for the project they need. This slide shows a few examples. Robots that cleans and monitor the bridge we built in Genoa. Ground freezing to enable the excavation of tunnels under a river in the Italian side of the Brenner Base tunnel, energy-efficient tunnel boring machine and a remote control robot that operates in tunnels where conditions can be hazardous to humans. Today, winning contract has less to do with the offering the lowest bid. It has more to do with the amount of innovation you offer. That is where we believe we also have a competitive edge. Turning to Slide 15. We started with a company of 11,000 workers and become 1 with more than 83,000 direct and indirect. We have become more multinational and multiculture, representing more than 100 nationalities. With these people came skills, expertise and experience that make us more competitive. We have made a concerted effort to improve the diversity of our workforce. Today, nearly half of our workers are under the age of 35. The growth of our workforce by 70,000 being accompanied by initiatives that are undertaken like recruitment drives, training programs, scholarship and university courses. We have even set up an internal trade school in Italy. The average number of hours we provide for training is 400,000 a year. Let us now have a look at the market where we operate, starting from Slide 17. In the last few years, we have seen a paradigm shift into the sector. All stakeholders, including clients, contractors and suppliers are becoming more and more aligned for 1 goal, to deliver the projects that are needed for the well-being of communities. Many megatrends are affecting the choice of government and by extension, our clients. These are trends that cannot be ignored, from climate change to the scarcity of essential resources, especially water. All stakeholders realize it is better to work together rather than against each other to face these needs. Nothing gets accomplished otherwise. So we are witnessing a more collaborative environment to get projects done on time, safely and sustainably. Clients prefer more and more to share the risk of construction instead of challenging the contractor on each penny paid. Our construction of the Genoa Bridge set the tone in Italy, so much that the collaborative model came out of it known as Genoa model is now being applied on other projects in the country. We are experiencing the same in Australia with an increasing number of share paying gain contracts, alliances contracts. Turning on Slide 18, we show you how the size of our core market. We can start by looking at Europe. Between 2023 and 2024, Italy will continue to grow, driven by the recovery plan funded mainly by the Next Generation EU with infrastructure market value accounting to more than EUR 113 billion. Also in Northern Europe, including U.K. and Nordics, spending is seen accelerating for the next years. North America and Australia will remain a promising market. On this last market, I will go more in detail later. On Slide 19, we show our own market, Italy. Our consolidation of the construction sector under Progetto Italia allowed us to create a group big enough to help the timely development of the projects under the National Recovery and Resilience Plan with the best standard of health and safety and innovation. The plan provided up of now 80% of funds to finance Progetto that were already in execution. We are working on many of them. Around EUR 9 billion of our backlog in Italy is related to projects included in the PNRR. We are obviously not developing them alone. We are joined by around 10,000 businesses in the supply chain. We expect more than EUR 13 billion worth of projects included in PNRR going to tender in the next 3 years. But the Italian construction sector is much higher than the one we address. We cover only 1 -- 1.5% of the overall sector. On the bottom left of the slide, you can see an important detail. Before Progetto Italia, we had 37% of our backlog in Italy, but only 10% of the revenues came from -- out from the country. Important contract, strategic for the country were blocked and we're not producing much revenue. The Milan-Genoa and Verona-Padova high-speed railway to name but true. The last aspect I want to emphasize here is how it's changed in terms of criteria selection for tenders. As I mentioned before, price is no longer the main factor considered. The technical aspect of a bid have become much more important. 80% of the offer is based on it. So the competition among bidders for a contract that has more to do with expertise, experience, innovation and sustainability. Turning to Slide 20. We want to give you a deep dive on our second biggest market, Australia. We are currently in the country EUR 12 billion of backlog including a project for which the group has been recognized as best bidder, including backlog that comes out from Clough. Most of these projects are strategic infrastructure for the country. Strong growth in major project investment is expected to continue over the next 2 years with the infrastructure market value estimated at EUR 135 billion in 2023 and '24. Public sector baked megaprojects, largely roads and rail, will be a key driver in the near term, while major hospital investment is also rising rapidly. With Clough, you see an acquisition of EUR 23 million. For us, it is an acquisition of more than EUR 4 billion of backlog and more than 1,000 people who have experience and expertise we can leverage. Clough will be our platform in the Australian market. Clough will also allow us to explore promising segment on the energy sector. Changing government policy is likely to boost the electricity pipeline supporting investment in major renewable energy, transmission and storage projects. There is also the Urea and Ammonia market. This chemical product are important not only for fertilizer, but they could potentially be used as fuel. Green ammonia for instance could be used for green fuel production, thanks to the use of renewable resources. Just a reminder, Clough is not included in the 2022 results since the process of acquisition has been completed in the first month of 2023. Slide 21 shows some additional potential markets where we see great margin of opportunity. The water market is forecast to expand rapidly due to the population growth and water scarcity. We are beginning to see it in Italy. In March, we have already warning about right rivers and water basins. Our subsidiary, Fisia Italimpianti, specialize in the construction of water treatment and desalination plant. It has been responsible for some of the biggest projects in the Middle East, and we want to bring that expertise to new markets. The last 2 sectors where we see strong potential growth are data centers and hospitals. Our subsidiaries, CSC in Switzerland and NBI in Italy have strong competencies in these markets and could face a market of more than EUR 40 billion in the next 2 years. Let's turn to Slide 22. As you can see, by 2025, will be a group with EUR 57 billion of backlog distributed for over 85% in low-risk countries. More than EUR 10 billion of revenues with growth at an hour rate of 10%. EUR 1 billion of EBITDA with improved marginality, leveraging the efficiency plan and the recently acquired high-quality projects, a net cash position. In the next 3 years, we aim to generate cash and further deleverage in a range of EUR 200 million to EUR 250 million distributed to our shareholders, EUR 160 million to EUR 170 million of dividend in the 3-year period. How can we achieve it is all in our hands. As described before, in this long journey, we have structured our company as a global company with the organization, people and know-how order backlog necessary for what is ahead of us. Last thing I want to point out is that this target do not include the potential upside coming from the great strategic projects such as the Texas high-speed railway for which discussions are ongoing for the financial closure and the Messina Bridge, which has returned to the news these days. Massimo will go now into further details of our strategy.

Thank you, Pietro. Let us discuss the first drivers of our Roadmap to 2025 business evolution on Page 23. One, leveraging our high-quality EUR 53 billion backlog, which covers 100% of our revenues and EBITDA targets for 2023 and 90% of 2025 forecasts, making us confident in achieving our expectations. Two, addressing specific challenges faced by clients, reinforcing our position to be a strategic partner for clients to support them in climate and energy transition. We are leaders in sustainable mobility, building metro lines and high-speed railways throughout the world as part of this shift towards more public transport. And we are a leader also in the construction of hydropower projects, which, of course, produce clean, renewable energy. With the acquisition of Clough, we are expanding our offer transmission lines and renewable energy sources, as Pietro said earlier. Resilient agriculture is a new area for us. It comes with our acquisition of Clough, 1 of the projects for which our new subsidiary is a preferred bidder, is a Urea plant that will produce fertilizer, a product much in demand following supply disruptions caused by the war in Ukraine. Three, enhance our presence in core markets, mainly in Australia, core Europe and of course, in our domestic market, Italy. Four, valorization of some company of the group in order to size new market opportunities also through the reorganization. Water scarcity, as described by Pietro, is a growing issue because of climate change. We are proposing our subsidiary, Fisia Italimpianti that is a world leader in the desalination industry to help countries face these scarcities. Then there will be what we call Webuild Concessions, bringing together all our concessions into 1 subsidiary to make it easier to create partnerships with investors for the development of greenfield projects. We will also be looking at divesting some of these assets. The 2 companies were recently acquired, Seli Overseas and Cossi Costruzioni currently active in the construction of the main T TransEuropean corridors will come under a single business unit called Webuild Tunneling & Maintenance in order to develop a single offer ranging from tunneling to road maintenance. Webuild Real Estate, Webuild New Vehicle for development and enhancement of the group's real estate assets and capabilities. Last but not least, as described by Pietro before, we will leverage the competencies and capability of NBI and CSC to address the growing demand of sustainable building. On Slide 25, we have the second driver of our Roadmap to 2025, operating efficiency and cash generation. After successfully saving EUR 60 million in costs since 2020 reducing overhead incidents to 3.6% in 2022 versus 2021, we aim to save even more in the next 3 years, thanks to the larger scale. At corporate and project level, we target further EUR 180 million cumulated savings in '23-'25 period. At corporate level, we are optimizing activity at our branch offices and subsidiaries as well as looking at extracting synergies from our recent acquisition in Australia. An important part of savings will come from specific initiatives we have identified for some of our Progetto. Finally, a part of cost saving will come from what we call back-office automation. With the use of the latest technology, we can automate more of our back-office operations. We also elaborated a plan of savings on capital expenditures with the reutilization of assets such as machinery from 1 construction site to another and the optimization of contracts that we have with suppliers, we expect to be able to reduce CapEx plan in '23-'25 period by EUR 50 million. Cost and CapEx efficiency plan will allow us to improve our 2025 margins by around 100 basis points within 2025. These levers, together with continuous and rigorous project management, an improvement of payment cycle and the monetization of some slow-moving assets extracting cash from working capital will allow the group to improve its cash generation and financial structure. On Slide 26, we have the third and the last driver, investment in Safety & Environment. I cannot emphasize enough the importance of innovation. It permits our entire operation and produce benefits throughout it. I just mentioned that the automation to help us to reduce costs like in back office. Out in the field, it helps improve the safety of our workers, a top priority, the top priority at our company. We have had great success in lowering the lost time injury frequency rate in the last 5 years. It has gone down more than 40% to 2.79 beating our target. This is the result also of nearly 3 million hours of training in safety in the last 4 years. We now aim to reduce it by a further 9% to be reached in 2025. Innovation also plays such an important role in making projects more sustainable that it has become a major feature in making our bids more competitive for future projects and to achieve our reduction targets of CO2 emissions. We have 2 targets here. By '25, we aim to reduce 50% in carbon intensity emissions. With respect to 2017, this is the target linked to the sustainability bond issued in 2022. In 2022, we also obtained the approval from science-based target initiatives for our 2030 CO2 emissions reduction in absolute terms. We aim to reduce them by nearly 500,000 tons. All 3 of these drivers will let us reach the financial targets you can see in Slide 25. As already anticipated by Pietro, we expect our average book-to-bill to increase more than 1.1x. As described earlier, we will continue to focus on low-risk markets and this will bring our lending backlog in 2025, coming for more than 85% from those countries for around 50 billion. It will be the remaining backlog at the end of the business plan. Revenues to reach EUR 9.0 billion, EUR 9.5 billion in 2023. And finally, EUR 10.5 billion, EUR 11 billion by the end of the period for the business plan. Looking at geographies, 80% of cumulative revenues will come from our key markets such as Italy, Australia, U.S. and so on. EBITDA would stand to widen to more than EUR 700 million in 2023 and near EUR 1 billion in 2025. And we aim to maintain our net cash positive position while reducing gross debt for EUR 200 million and EUR 250 million by 2025 and paying our shareholders EUR 160 million, EUR 170 million of dividends. I thank you for your attention. We are now ready to take your questions. So as not to slow things down too much during the call, the Investor Relations team and myself, after the call, we are ready to answer to any specific questions you might have on, one, figures or another or some technical detail mentioned in the presentation. Thank you very much.

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

Yes. [indiscernible] 2 questions. The first 1 relates to the evolution of the margin from 2022 to 2025. So in our target, there is a margin increase, improvement of more than 2 percentage points from 7% EBITDA margin to...

Sorry, Matteo, we cannot hear well. Can you change something...

Can you hear me better now?

I understood something on the margin -- on the evolution...

Can you hear me better now?

Yes, much better.

So basically, the first question relates to the margin evolution in your targets. Your plan to improve your margin from 7% in 2022 to more than 9% in 2025. You are saying that 100 basis points will come from operational efficiency, mostly, let's say, overheads. Can you a little bit elaborate on your assumption for the remaining driver of the profitability, particularly in regards the cost base for raw material and the pricing of the contract, which is embedded in your backlog. Then, the second question is in regards to the impact of Clough because this 2% plus improvement of the margin from 7% to more than 9% comes despite the fact that, if I remember correctly, on February call, you've indicated to Clough, Clough is supposed to post the margin, which should be somewhat below average between 6% and 7%. So the question is, can you confirm that Clough should contribute around EUR 600 million of revenues in '23 up to around EUR 1 billion in 2025, number one. And can you confirm the margin of Clough around 6% and 7%? And I was curious to understand better what kind of contract renegotiation [indiscernible] backlog compared to the previous situation because you said in the February call that you are pretty confident to generate this level of margin, thanks also to the fact that you have secured a sort of contract renegotiation of -- on some jobs which were previously maybe problematic and now maybe not anymore. So can you elaborate on these topics?

Thank you, Matteo. So let me start from the last 1 question regarding Clough. First of all, we put in the business plan, the plan approved by the commissioners, by the public administrators without any synergies, just putting the new contracts that the administrators renegotiated, you are right, with the clients. All the contracts are now cost plus, while they were before lump-sum. So we have a pretty sure picture for the coming year without including any synergies and improving that Clough can have, from the new order and the commercial activity, that we will push in the coming year. It's right also the contribution in terms of revenue for 2023, it will be around EUR 1 billion equivalent coming from Clough. And an additional information, the net backlog added by Clough to the Webuild group, one, it will be EUR 3 billion. If you consider the works that we are performing together, it is now EUR 4 billion. But the additional, one, net, it will be EUR 3 billion. Regarding the trend of the improving marginality, it will come from operational efficiency. As mentioned before, both from the overhead incidents that will go decreasing, lower probably than 3.6% of revenues, that is our actual average, thanks to the improvement of the action that we already launched, and we will launch in the coming weeks. And there will be also an efficiency coming from the indirect cost program. Totally, we expect 1% of EBITDA margin coming from efficiency. Then another contribution to the path of the improving marginality come from the new orders acquired in the past 2 years that are -- with an EBIT margin expected higher than the average that we put usually in the business plan. Then, regarding the cost, the increase of raw materials, we got in '21 and '22 after accounting a check that we made in the past few -- also in the past few weeks for the accounting closure -- closing of figures, we got a neutral effect at portfolio level. So we can say that we have been able to pass through any effect in terms of increase of raw materials and other costs -- this, thanks to new laws, managing the contract with the clients, adjusting with them all the issues and fix them.

The next question is from Emanuele Gallazzi of Equita.

I have 3 questions. The first 1 is just a clarification, Massimo. You said EUR 1 billion of revenues from Clough in 2023 or 2025?

'23, EUR 1 billion.

Okay. And then on the net financial position, if you can just clarify the dynamics that you expect, which are the main moving parts and on the net working capital -- sorry, let me correct. We expect EUR 600 million of revenues in '23. EUR 1 billion...

Including the contract that we already have, this is the confusion because we already consolidate -- fully consolidated this contract. So EUR 600 million plus coming from Clough in 2023.