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

Good morning. This is the conference operator. Welcome and thank you for joining the Webuild First Half 2023 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. Good morning, everyone, and welcome to our conference call dedicated to Webuild's first half 2023 results. Let us start with highlights of the results. Since the beginning of the year, we have had an outstanding commercial performance. We recorded new orders worth around EUR 18 billion. These results bring us to set a new record in terms of backlog of EUR 61 billion. This amount fully cover our 2023-2025 revenues and EBITDA targets. At operational level, we recorded a robust performance, closing the first half of the year with double-digit growth across all lines. Revenues grew by 18% to EUR 4.6 billion and EBITDA by 15% to EUR 289 million. On the financial side, we registered a solid financial structure with a net cash position improving by EUR 835 million versus the same period of last year. Gross debt dropped by more than EUR 100 million versus first half 2022. We also delivered several complex products, such as the latest section of the M4 metro line in Milano, the bridge on the Danube River in Braila, Romania. This project demonstrates, once again, our ability to deliver projects on a deadline with the highest level of engineering content, quality and performance standards. Completing projects on time is one of our distinctive mark, which is essential for the implementation of the PNRR, or National Plan for Recovery and Resilience, in Italy. Considering the strong results achieved in the first half of the year, we are confident in confirming our guidance for 2023. I may remind you that we overperformed in 2022, and we have already in this first half of the year exceeded some of the KPI and targets for the guidance given for the 2023. Going to Slide 5, we took a -- we take a look at our commercial performance. As I said earlier, so far this year has been extraordinary. We set a new record with EUR 17.7 billion worth of new orders. This means we have already exceeded the guidance of EUR 10 billion to EUR 10.5 billion that we have set for the entire year. The order intake includes EUR 4.4 billion of contracts for which we have been identified as preferred bidder. Those contracts will be included in our backlog upon receipt of the final notification of the tender award by the client. I want to remind you that we come from a very strong order intake in 2021 and 2022. If you combine the orders during those 2 years with those received in the first half of 2023, we are looking at a total of more than EUR 45 billion. This result confirms there's a strong and enduring momentum behind the global market trends, such as the fight against climate change, energy transition and population growth. These trends have contributed together with the group capacity to propose a quality offer to the remarkable order intake we have enjoyed during the past 3 years. Over 90% of the order intake year-to-date comes from low-risk countries, namely Australia, North America, Europe and Italy. In the first months of 2023, we experienced a strong relaunch of public tenders in Italy. As you remember, there were relatively few tenders during the same period last year, but we remain confident that our bidding activity would accelerate and generate positive result by the end of 2022, as well as in 2023. And that is exactly what happened. We were awarded around EUR 9.2 billion worth of contract for strategic projects where we supported well-being of many communities in Italy. I am referring mainly to Sicily, where we won another freelance for the modernization of the railway between Palermo and Catania. High-speed railway are the key for the development of Southern Italy. Our commitment to support this project has also seen us winning the first lot on a railway between Salerno and Retro Calabria. Lastly, in Italy, we signed yesterday a contract for a total value of EUR 1.8 billion to start the executive design and work on another section of the Verona-Padova High-Speed railway. It concerned the crossing of a junction in Vicenza. The project is already included in our backlog as part of the overall Verona-Padova line. Positive results have also come from abroad, mainly Australia, North America and the Middle East. Australia was responsible for EUR 4.1 billion, including projects like the one for the urea plant for fertilizer and the water treatment plant at Woodman Point through Clough, our newly acquired subsidiary, in that country. In North America, we received a new order for EUR 1.7 billion; while in the Middle East, we were awarded EUR 1.8 billion worth, including one of the first lots related to the mega project promoted by Saudi Arabia, the futuristic NEOM. In addition to this EUR 17.7 billion of new orders, there is a Messina Strait bridge and all the related rail and road network. Although a value is yet not determined for the project, it will be in the range of EUR 10 billion to EUR 15 billion. Webuild reached -- the Euroline Construction, a general contractor for its constructions, we have 45% shares. As it is easily understandable, it is not worth developing high-speed rail from North Italy to Palermo without having a link between Messina and Retro Calabria, connecting Sicily to the Mainland. During the first month of 2023, the Italian government decided to restart the development of the bridge, revamping the contract with a general contractor that was in charge of the project. The project foresees the construction of the longest suspension bridge in the world at 3,660 meters with a span of 3,300 meters. Now we are working on updating some aspects of the project and the contract in order to align it to the new rules and regulations. The final project is expected to be approved by mid-2024. We will start the work immediately. The bridge will be built in around 7 years. Turning to Slide 6. Our total order backlog reached EUR 61 billion, of which more than EUR 51 billion are related to construction projects. As you can see from the slide, year-by-year, we keep breaking new records. The total amount has reached such a level that it will cover 100% of revenues and EBITDA targeted for the period 2023 to 2025. This amount gives us more than 6 year of visibility and that bring us to plan how we will deploy our resources in a more structured way. The order backlog is well distributed geographically. This makes us more resilient in withstanding temporary shocks that can occur in one region or another. Approximately 78% of the amount comes from low-risk markets, such as Italy, Central and Northern Europe, North America and Australia. True to our commitment, to sustainable development, nearly all our backlog is dedicated to achieving United Nation goals. Nearly 78% is related to sustainable mobility projects, whether they be high-speed railway, metro line, roads, bridges and so on. As you can see on Slide 7, we still have in front of us a very promising market. Our commercial pipeline has reached EUR 41 billion. Of this total, EUR 13 billion are contracts for which we have presented already the bid and we are awaiting an outcome. Like I mentioned earlier, our focus remains on countries that we consider to be low risk. In Australia, we are building Snowy 2.0 and the North East Link, and we are awaiting for the outcome of another iconic project. This is a market that is driven by mega projects backed by the government, and we are expecting compound annual growth rate for 2023-'27 of 5%. After we completed the acquisition in February, we restarted Clough, speeding activity, focusing on its core market and segment. The potential addressable market for Clough is made up by around EUR 52 billion of small- and medium-sized projects, well distributed in mining, liquefied natural gas and ammonia plants. There are also power stations, transmission lines and hydro projects. In the United States, we've been awarded EUR 1.7 billion worth of contract in the first half, and more is to come following the boost of the sector, thanks to a huge investment plan by the government. We are talking about an overall market in North America worth more than EUR 950 billion that is expected to grow by 8% every year. Looking at core countries in Europe, investors are being supported by the next-generation EU and other funds. More than EUR 300 billion are expected to go to areas that Webuild covers. Italy is expected to contribute by more than EUR 70 billion with an annual growth of 3.7%. Finally, the Middle East, and more precisely Saudi Arabia, is attracting many investors through an innovative and futuristic product called NEOM. Related to these projects, we have presented a bid, and we are awaiting an outcome for contract worth around EUR 2.4 billion, and we are preparing at a bid for a total amount of more than EUR 18 billion. Turning to Slide 8. I would like to give you an update on our domestic market, Italy. It is here where we are working on EUR 25 billion worth of project. We are obviously not developing them alone. We are joined by around 10,500 businesses in the supply chain. Approximately 16,300 people are working on our projects. We are developing strategic projects. Most of them are expected to enhance sustainable mobility, reduce travel times and create stronger connection among regions. I'm talking about the high-speed railway in the north and south of Italy, like the Messina-Palermo line, the Napoli-Bari and the Verona-Padova. I'm also referring to the new Breakwater in Genoa. This project, we consolidated the role of Genoa port system with the trans-European transport network corridor. Part of this network will be the high-speed Milan-Genoa railway, which is also being built by us. We are in line with targets set by our clients under the PNRR, and the government is taking a series of measures to accelerate the project. This will lead to a higher-than-expected production in the next coming months. In addition, last Tuesday, the Italian Minister of Infrastructure presented an ambitious plan, Italia di sì, that is, " The Italy That Says Yes, " which forecasts to invest by 2030 EUR 50 billion in roads and EUR 125 billion in railway, of which EUR 11 billion by year-end. I want to emphasize here how much the criteria for a winning bid in a public tender has changed. As I mentioned in our last call, price is no longer the main factor of that consideration. It represents only 20% of the weight. Be they're valued more on technical aspects, such as expertise, experience, innovation and sustainability. On Slide 9, we want to give you an overview of our second market base side, Australia, where we completed Clough acquisition in February. Thanks to the work of more than 5,000 people, the group is operating on more than EUR 7 billion of project. As already discussed in March, we want Clough to be our platform in the Australian market. The operation has also allowed the group to enter new promising market where demand is growing on a global scale. We are referring to the energy segment, ammonia and natural gas plants. Immediately after the close of the deal, we started the process integration, firstly by setting up a team in charge of the process. The group has already completed a major reorganization of Clough, defining the government, establishing a new integrated organization structure. The company will be managed and administered with local expertise, operating in line with Webuild standards. We are already working on an integrated group. I will now let Massimo presents more in detail our financial section.

Thank you, Pietro, and good morning, everybody. Before I go through the results, let me remind you that as it's customary, we are presenting adjusted figures to represent the recurring performance of the business. You can find all details of the adjustments in the appendix. So let's start from Slide 11. Here, you will see some key numbers of our results for the first half of 2023. We generated revenues of EUR 4.6 billion with an increase of 18% versus previous year, driven by domestic projects, Australia and Middle East. EBITDA come up at around EUR 289 million, growing by 15%. EBIT rose by 12% to reach EUR 139 million. The EBITDA and EBIT margin, broadly in line with the first half of 2022, reflected the seasonality effect that we always experience in the first half of the year compared to the latter half. It is in line with the profit margin forecast in our budget, but has been also impacted by exchange rate of U.S. dollar and cross-related currency. The higher EBITDA expected for the second half of 2023 is due to an increase in production and the start of several projects acquired in '22 and also in '23 in Italy, Australia and Middle East. Results are on track with our guidance with sustained growth in terms of revenues, EBITDA and EBIT. On Slide 11, you can see the geographical breakdown of our revenues. Italy comes to represent 30% of the total. Revenues in our domestic market increased by some 27% versus the first half of 2022, also thanks to the investment in sustainable mobility as part of the PNRR. But Italy is only part of our business, which is spread across the globe. We generate 70% of our revenues outside Italy. Our presence in Australia, as mentioned by Pietro before, is steadily growing, generating 21% of the revenues, while just 1 year ago, it accounted only 14%. It is mainly thanks to the acceleration of works on projects like the Snowy 2, hydroelectric project and the North East Link project. Our acquisition of Clough in February 2023 is also contributing. In Australia, we are facing a changing in the attitude in the sector. All the stakeholders, including clients, are becoming more and more aligned for one goal: to deliver the projects that are needed for the well-being of our communities and that help clients facing climate and energy transition. Lump-sum contracts are leaving ground to new model, such as cost-plus and alliance contracts, sharing the risk of construction instead of challenging the contractor on inch or penny paid. We have successfully amended to cost-plus the contract for 3 projects of Clough, and different other projects in our backlog are cost-plus or in the process of being transformed into a cost-plus model. In North America, where we operated mainly through Lane, our subsidiary, we generated 16% of our revenues. With Lane, we are working on a turnaround plan that will aim at derisking its order backlog. The plan for U.S. subsidiary will focus on profitable projects in key markets, strengthen the management of operations, simplify and reduce the cost base. In Europe, we did 13%. Activity were driven by our sites in Romania, such as the bridge over the Danube, which, as Pietro said earlier, was delivered to the client, and a highway in the north of Bucharest; in France, on the Metro Line 16 and in Switzerland with the works performed by our subsidiary, CSC. It's worth mentioning that we do not have any active projects in Ukraine nor Russia. We have recently signed the memorandum of collaboration to build hydropower facility with the main operator in Ukraine, once the war ends. The Middle East also registered an increase, thanks to the acceleration of works on the mega carpark in Riyadh. On Slide 13, we have the P&L below EBIT line. In the first half of 2023, we recorded a positive net profit of EUR 23 million. However, this result was influenced by various external factors when compared to the same period in '22. Financial income was EUR 34 million, less than the same period in '22. This is because the first half of '22 benefited from EUR 29 million of positive one-off items related to the settlement of debts in one subsidiary and interest collected following a favorable legal judgment involving a motorway project in Romania. Financial expenses amounted to EUR 111 million, marking an increase of EUR 22 million versus the first half of the previous year. The main contributing factors to this increase were bank charges associated with the escalation of Euribor rates. Exchange rates had a lower impact in '23 by EUR 62 million in respect to the first half of 2022, mainly driven by the strengthening of the euro versus the U.S. and Australian dollar as well as the Ethiopian birr. On this point, let me remind you that despite short-term swings, profit and loss resulting from exchange rate fluctuations ended up being neutral in the long run. At the bottom of the slide, you can also see a bridge from net profit reported to the adjusted one. The adjustments refer to accounting nonmonetary items, such as EUR 26 million for the amortization of the positive bargain we registered in 2020 related to the Astaldi's acquisition and EUR 31 million related to the final resolution in the proceedings for damages related to the construction of the Panama Canal lock gates. On the next slide, we showed a strong improvement of our net financial position. We performed much better than market expectation, overcoming the seasonality which typically impacts the result in the first half. As we have said many times, cash generation is a key part of our business plan. We successfully increased our net cash position to EUR 438 million. It means EUR 835 million of cash generation in the last 12 months, thanks to the EBITDA increase and a strong improvement in the working capital level benefiting also of advance payments coming from strong order intake. We are putting in place different measures to optimize working capital. I remember, we launched at the beginning of the year a plan in order to improve the working capital management at group level. And we are running around 1,000 different specific actions. One key area of focus is reducing the gap between work performed and the amount certified by the client. We want to ensure that with the certification processes in line with contract specifications and -- that there are no inefficiency. We are exploring the potential for contractual negotiations with clients to accelerate the billing for work performed. Additionally, we are conducting an analysis of the accounts receivable to make sure we are taking all the necessary steps in accelerating collections. At project level, we are assessing the balance between warehouse stock and project requirements to make sure we are working at efficient level of warehouse stock. To address slow-moving items, we are working to maximize and expedite cash-ins, especially when dealing with disputed transactions. In Italy, with the new code of contracts called [ Sedalia Appalti ], it has been introduced at a collegial body, the so-called collegial consultive tactic, or CCT, for the prompt resolution of all disputes that may slow down or compromise the regular execution of the works on public projects. Thanks to this simplified process, in the second half of the year, we expect to solve and cash in relevant ongoing disputes. A further boost on a cash flow and profitability will come from subsidiary optimization. We are reorganizing our subsidiary to extract value from them. We aim to improve their efficiency and profitability, seize market opportunities and identify potential divestment options. For example, we have identified a portfolio of concessions valued at about EUR 400 million to EUR 450 million at book value in the balance sheet that we can -- we will put in a single company. We are looking for potential investors to be a partner in this initiative and to help finance greenfield projects. Lastly, looking at the gross debt. It stands at EUR 2.67 billion, broadly in line with the 2022 year-end and EUR 104 million lower than first half 2022. On Slide 15, we show the main figures of our corporate debt and the liquidity profile. The next relevant maturity date relates to a bond maturing on October 2024. We have a comfortable liquidity position of more than EUR 3 billion, including EUR 920 million of undrawn RCF lines. 87% of our corporate debt is at fixed rate, and it corresponds to bond, and the cost of our corporate debt is a bit more than 4%. I will now leave the floor to Pietro.

Thank you, Massimo. Moving to Slide 17. I would like to go, once again, through the main pillars of our road map presented in March, for which we are now in execution mode. We want to deliver value to all our stakeholders through business growth, greater efficiency and more cash generation. We are also keeping a clear focus on the safety of our workers and sustainability of our operation. In terms of business growth, we will leverage on our robust order backlog, which, as I said earlier, fully covers our revenue and EBITDA targets for the next 3 years. We will continue to focus on key countries with massive reinvestment plans where we can leverage on our know-how and deepen our presence through our local platforms, such as Clough and Lane, for example. And we will continue to explore new profitable business, such as the urea plant being built in Australia, by leveraging on Clough expertise. As Massimo explained earlier, we are reorganizing our subsidiaries to extract value from them. Together with our business growth, we will continue focusing on safety and sustainability. In 2022, we reduced the injury frequency index by 41% compared to the 2017 baseline, exceeding the target of minus 40 for the year. We'll continue to work on every day in order to ensure safer working conditions for all our people. Reaffirming our commitment to fight climate change, we have set ourselves challenging targets approved by science-based target initiatives. The reduction of Scope 1 & 2 absolute emission by 224,000 tons and Scope 3 by 274,000 tons by 2030 versus 2019. In terms of the efficiencies and cash generation, we are committed to saving about EUR 180 million from corporate to project costs. We are working on different streams from the optimization of branch offices to synergies with Clough and several specific initiatives identified on each project. These are being supported by automation and the sharing of services. On a direct cost, we have already achieved more than EUR 20 million of cost-saving initiatives. We are working to reduce our CapEx plan by EUR 50 million. Operating new projects and speeding up activities means that we must invest more on machinery and tunnel boring machine. Thanks to fleet allocation being managed on a regional app, we can reduce the number of machinery needed for the project. Furthermore, we have recently signed a contract with a primary TBM manufacturer to refurbish the ones we have left over from a completed project. We can use them again on another project. This means a significant saving. We remain vigilant on working capital. We aim to optimize it by carefully managing all essential components of the working capital, as Massimo explained earlier. In conclusion, we are taking a series of initiatives with the aim to extract value from all the lines of our budget clients, sometimes that we can now do, thanks to our size. Let us finish with Slide 18. In light of a strong order backlog and solid net cash position achieved in the first half, we can confirm our guidance for 2023. We have already surpassed our book-to-bill guidance for 2023. We expect revenue to reach EUR 9 billion to EUR 9.5 billion and maybe something more. We see EBITDA widening to a range of EUR 720 million to EUR 760 million. The higher EBITDA expected for the second half of 2023 is due to an increase in production and the start of several projects acquired in 2022-2023, in Italy, Australia and Middle East. And finally, we aim to maintain a positive cash position. What else is in the store for the future? We are on track to achieve our 2025 targets. As you can see, by 2025, Webuild will be a group with EUR 57 billion worth of order backlog. More than 85% of it will be distributed across low-risk countries. Revenues will stand at more than EUR 10 billion, thanks to our annual growth rate of 10%. EBITDA will reach EUR 1 billion with improved marginality, leveraging on the efficiency plan and recently acquired high-quality project. Of course, challenges are -- always lies just around the corner, but we are equipped to address them. We have organized our company as a global one. We have the necessary people, expertise and a large amount of order backlog to allow us to address what is ahead of us. And then we have the bridge over Strait of Messina. It will be an iconic structure worth between EUR 11 billion and EUR 13 billion. As I said earlier in the call, it is now closer than ever in becoming a reality. The government is strongly committed to delivering the project. What is happening now in Italy? Violent storms in the north, forest fires in the south. It's the latest reminder that we must start now to address climate change and save the planet. Together with our 85,000 people in 100 countries, we are ready to join our clients in developing sustainable mobility, providing clean air, water, clean buildings and clean hydro energy. Thanks to our size, we can keep investing in workers' safety, innovation, digitalization, know-how and young people, everything that is key for building sustainable and innovative infrastructure for a sustainable future. I thank you for your attention. We are now ready for the Q&A session. So as not to slow things down too much, we encourage you to focus on the group strategy and other broad initiatives that underline its current and future financial performance. For a questions of a more detailed nature, you may have on one figure or another in a table or some technical details mentioned in the presentation, Investor Relations team will be available to answer them after the call. Please go ahead with the question and answer.

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

I have some questions. The first one relates to this abnormally strong, I would say, cash flow performance in the first half. Typically, in the first half, we see some deterioration of that financial position by, let's say, EUR 300 million, EUR 400 million. This year, we have seen an improvement by almost EUR 200 million, which in turn, if you look at your balance sheet, is mostly driven by over EUR 1 billion improvement of the contract liabilities, so advanced payments. The question is here, can you -- your guidance point to positive cash position, which is a general statement. But given this different trend compared to typical seasonality, can you help us, let's say, forecasting an approximate net financial position figure for the end of the year? This is the first question. The second question relates your allocation of the liquidity into financial instruments and NDL. Because you have said that the gross debt has remained broadly stable at EUR 2.6 billion. You have plenty of liquidity, no? You have, I mean, EUR 3 billion of liquidity in contract, in construction vehicles here and there and so on. The question is, and it relates to your financial charges, are you earning any yield on this cash pile which approximates EUR 3 billion? And if yes, can you elaborate a little bit what kind of investment you do with this liquidity, if any? Just also to help us understand an approximate figure for the financial charges for the full year. The third and last question relates to Clough and the negotiation process. You have clearly seen that this remains in focus for the market for the simple reason that there are very, very frequent article, let's say, on the Australian press and also because of the size of the contract and so on. So correct me if I'm wrong, what we have read is that the contract size could double. So the amount could go up from around AUD 5 billion to around AUD 10 billion. But given the fact, and correct me if I'm wrong, that it's going to turn into a cost-plus contract at the end of the story, despite the significant extra cost and given the renegotiation of the contract value, you could end up with no losses or maybe some profits. Can you a little bit elaborate on this issue? Because it's clearly something which investor are asking many times.

Let me start with Snowy. That is an important issue in Australia. As you've seen, there has been many press release made by the clients. I think it's not proper at this stage to -- for us to add anything on that. But what we have to say that, of course, Snowy for us is a project that brings in profit and must be a project that brings us profit. So this is, and I say, an average profit, nothing that is extraordinary. We do the things on working together with the client on open books, which was foreseen by a proceed that can end up with cost-plus contracts. So everything is now on the table. And we think that in the next coming, let's say, weeks or -- it's going to close, this new contract revision, by exactly reflecting what is the discussion that are on the table and are given to the press by the client.

Regarding the net financial position for year-end, we confirmed the target of a positive cash, of course, starting from this extraordinary position for the first half. And the pipeline in terms of advanced payment that we still have to get in the second half of the year and some other important cash-in coming from cash collection around the world also in the most profitable works, we expect to do better than just plus some million. So we will help you in the coming months in order to put some targets more realistic, but we are really much more optimistic than what we were some months ago. Regarding the liquidity, we earned EUR 18 million in the first half in terms of positive interest. We are trying to manage the better we can the liquidity that we have. You know that is the other side of the profitable part from the banks that are very rigid, very stuck on maintaining a very low, close to 0 remuneration to the interest for the deposit. Are you okay?

No, just a follow-up with this. So this liquidity is held in bank accounts. It is not invested in almost risk-free initiatives, which in this market can -- 2%, 3%, because -- yes?

Absolutely. Just deposit, in bank's account.

The next question is from Alessandro Tortora of Mediobanca.

I have, let's say, 3 question, if I may. The first one, sorry, is a follow-up on what you mentioned before on the net cash trajectory for the full year. So if I understood well, let's say, you are talking about, let's say, potential improvement versus the last year level, net cash or versus, let's say, first half level of this year, just to better understand what you said, Massimo...

Yes. Okay. Go ahead.

Okay. That's the first question. The second question is on the turnaround of Lane that you mentioned before. If you can, sorry, again, tell us about the main initiative that you are doing on Lane in order to refocus the backlog, but also probably, let's say, allow the company to release some cost efficiencies. And the last question was on the concession that you mentioned before. Is M4 included in this EUR 400 million portfolio concession? Or this is a concession that will take, let's say, another route in order to be -- let's say, the value in order to be crystallized?

Okay. What we said before regarding the net financial position was versus the target that was just cash-positive. So we expect to do better, probably much better. I cannot say how much. And we didn't increase the target just for a conservative approach that we want to maintain. Regarding Lane, we are streamlining the organization in order to reduce the overhead cost to the group level. That is around 3.9% of the revenue. And we are going to centralize some processes, mainly the bidding and contract management in order to focus Lane on commercial development and operational management. This could bring Lane at breakeven probably before the end of the business plan. And we are focusing on new bids that are more profitable than the one that we made in the past, and we are much more selective than in the past. The last question, sorry, Alessandro, I didn't take the note. What it was related to?

It was related to the portfolio concession you mentioned before where, let's say, you already said this portfolio and you're looking for, let's say, a potential partner. What I would like to understand is if the M4, the stake you have in the M4, the subway in -- here in Milano, is an asset including this portfolio? Or this is an asset that will take another direction?