Fincantieri S.p.A.

Good morning. This is the Coru School Conference Operator. Welcome and thank you for joining Fincantieri First Half 2021 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Bono, Chief Executive Officer. Please go ahead, sir.

Good morning, dear all. Welcome to our conference call. Mr. Galli and Mr. Dato will show you that our first half 2021 results display a true positive turnaround of the group performance. But before that, I will just underline a few aspects that, in my opinion, stand out. During this time, deeply influenced by the pandemic and other difficulties, we proved beyond any doubt our skills in adapting our operations, even in adverse conditions with of qualified workforce and the values of components and raw materials. We can claim our business is robust and sustainable, two elements that are essential to be competitive in the current global economic scenario. We can say that we have already laid the foundation for what Fincantieri will become 10 years from now. In fact, thanks to this order acquired in the defense business in which we established our leadership, we are positive and will achieve higher marginality and a strong cash generation. while keeping the highest production standard on the market. I want also to underline that those orders are just an example of what we can achieve thanks to our competencies and capabilities, as well withstood by our long-term vision. our competencies in non-maritime sector and with the satisfaction we are starting to see very good results. The commitment and the determination of our people and of those of our suppliers have never been so high, even during the dark hours over the last 18 months. And for that, I want to thank each and every single one for their dedication. This is also why I feel we can reach outstanding economic and financial performances in the next future. personally proud to see that our efforts allow Fincateri to grow and become such a strong and global group. I wish this gloomy period will soon come to an end, letting us all come back to a normal life. And now I leave the floor to Mr. Galli. Brief.

Thank you and good morning to everybody. We're here to present what we consider a very healthy set of results. Key messages are we're back to profitability, revenues up 28% excluding pass-through activities. The BDA is roughly 220 million with a margin which is in excess of 7% compared to the 5% recorded in the first half of last year. The net income is around 50 million, with 42 million extraordinary costs. And net debt is in line with the first quarter results. It reached 1.6 billion, but as you may know, we had three ships delivered in July, so that net debt and construction loans are now back to a very low level. We can confirm our guidance for 2021. Revenue expected to grow by more than 25% and with EBDA margin around 7%, notwithstanding increasing commodity prices. Total backlog is very solid with a number of 37 billion, which is about seven times 2020 revenues, 111 units. Backlog with 93 units and soft backlog with 9.4 billion. Production volumes are a historic high. We've been working 8.4 million production hours in Italian sites with a growth of 50%. That was instrumental to deliver on the backlog we have been building over the years. and we can say that we are in line with the delivery schedule. Corporate vaccination program has been successfully launched and has been very well received by both our colleagues and all the subcontractors. In terms of delivery, seven ships has been delivered from six different shipyards and six cruise ships to be handed over in the second half. Actually, three have already been delivered in the month of July. In terms of new orders, as you may know that U.S. Navy has assigned the second option for the future frigate. That is a very important part of the progress we are building in U.S. with the role of prime contractor for the six frigates in the Indonesian Navy. reached an agreement with MSC to build a new cruise terminal in Miami. 85% of our revenue base in this first half of 2021 has been represented by international clients, and 80% of the production has been carried out here in Italy. If we go to page six, we have a brief business update. Five cruise have been delivered. in this period, after which three in July. What is important to note is that we have a very broad and diversified client base, which is certified also in this first month of 2021. You can see we've been delivering both for Viking, Apagloid, Virgin, MSC, Holland America yesterday. In terms of defense, we already mentioned the Indonesian contract and the second consolation class frigate for U.S. Navy. It's really important to see how the success in U.S. last year allowed us to go with this very prestigious, very important reference every time we have to deal with new clients. In terms of offshore and specialized vessels, Varda, our Norwegian subsidiaries, have been providing North Star Renewables, three operating vessels, to be deployed at one of the largest European wind farms, which is North Bank, east of England. Varda also is about to supply cable repair vessels to Orange Marine. In terms of equipment, systems, and services, we partnered with MSC for the construction of Port Miami, a very important project which is about to be delivered in the next two and a half years, while Fincantieri Next Tech has been finally launching the operational execution of the agreement reached with Autostrada and IBM. If you turn page and look at key strategic initiatives, we continue to be totally committed on environmental transition. We are collaborating with Enel, Enel X particularly, to build the next generation port infrastructure, which is key for a new way of cruising. We've been partnering with a company, Feist Electronics, to build lithium-ion batteries. that is about the production expected to be launched early next year. And in terms of building hydrogen-propelled vessels, we partner with both MSC, one of our most important clients, and SNAM for a feasibility study to design and build the first hydrogen-powered cruise ship. In terms of sustainable mobility, with our subsidiary, we partner with Almaviva to deliver program to support digitalization process in transportation and logistics. And last but not least, we partnered with Comal from the Exo Group to develop prototypes, robotized steel welding solutions in our yards. We've been investing a lot to provide our shipyards with state-of-the-art technology, taking also the opportunity to be in a position to invest for better technology, more competitiveness in our yards, also in light of our competitive position versus other players. A brief update on ESG activity. In terms of environment, clearly tackling climate change is one of our key priorities. 100% of electricity needed in Italian and Romanian yards have been purchased from renewable sources. It's also important to highlight how two-thirds of our R&D budget is devoted to clean tech. In terms of social, clearly protecting the safety of our people, of our suppliers, of our communities has been of paramount importance. We also implemented five shifts in order to ensure a productive production activity, efficient one, but also enabling safety and social distancing. We already mentioned the corporate vaccination program in our yards. In terms of governance, we approved a group tax strategy, which is fully in compliance with the GRI standards. And rating agencies have been appreciating our progresses. Gaia Rating, which is a French rating agency, awarded us a very high score, 85 out of 100. And in this ranking, we are the second one in a sample of 500 plus industrial companies worldwide. Green Star 2021 Steel from the German Institute for Quality and Excellence in Safety and Improvement in Safety awarded by the FMM. That testifies our commitment, and clearly our commitment is about to stay for the years to come. Next page, we can have a look at new orders, shipbuilding. We had, as we said, the frigates for U.S. Navy, and then this Somnio super yacht project, maybe some of you already read about it. It's an innovative project, and we're really happy to collaborate with this entrepreneur to launch This is an innovative solution. In terms of offshore and specialized vessels, free services operation vessels for North Stars and deliveries, we already elaborated about that. Again, I would like to highlight diversification of our client base, but also diversification of our industrial footprint. You can see that not just Italian yards, but also Romanian, Vietnamese, are working and allowed us to have a unique industrial footprint. Next page, about backlog. You see all the numbers. Again, it's important to highlight the visibility that is provided by this backlog. Indonesian projects included in the soft ones, and you can see that boat and cruise enables The visibility is guaranteed 25, 26 and beyond. While on the offshore specialized vessels, we have ships and vessels of totally different dimensions, but we are pretty much encouraged by what we see in the markets. I will hand it over to Giuseppe for the analysis of the financial results. Thank you.

Good morning to everybody. I move now to page 12 on order intake and backlog. The order intake for the first half of the year came in at roughly 1.8 billion euros and despite the hold stance that the cruise sector as as taken in uh you know signing new contracts during the period we had approximately 1 billion euros in orders in the shipbuilding segment uh out of which uh we can pinpoint the award of the second constellation class frigate as we said before and uh as mr gallia mentioned the first residential yacht for somnio this is an important order that might uh might signal the opening of a new market for us. In the equipment systems and services segment, the order intake more than doubled compared to last year, and this is thanks to a new order in the infrastructure business to build the new cruise terminal for MSC in Miami. And we had an order intake related to the construction of complete accommodation and cabins in the captive business. The backlog, as we mentioned before, $37 billion, including a hefty self-backlog, $9.4 billion. That includes as well the Indonesian contract that was recently announced. Regarding revenues, We had in the first half of this year record high production volumes. And this, let me underline, it is a true rebound compared to last year. And we have proven in the first six months of the year that the intention and the strategy that we envisaged last year to fight the pandemic was right. And here we are. revenues grew almost 28% and I have to pinpoint the growth in shipbuilding. In the naval business, revenues grew of almost 50% and in cruise we had a growth of roughly 26%. We basically recovered all the hours and the revenues We lost last year during the first six months of the year. Also in the offshore specialized vessels, revenues were brought in line with 2020 levels and we partially recovered the volumes lost in the first quarter of this year. Revenues increased as well in the equipment systems and services, 23% almost, mainly thanks to the recovery in the complete accommodation business to supply our cruise business for cabins and public areas. 88% of the total revenues were generated from international clients. This gives you the true global footprint of the company. On page 14, Of course, the recovery in production volumes and revenues has had very positive effects on our profitability levels. We reached almost 220 million euros, and this comes with a margin of 7.2% excluding pass-through activities. And this is slightly higher than the guidance that we gave for the year 2021. This is mainly driven by the shipbuilding segment, up 91 million year-over-year, with an EBDA margin of 7.7%. And also in barred offshore, we have a positive EBDA of 5 million, for a total growth of plus 84% compared to the EBTA levels of last year. We move to page 15. We have tried to explain where the growth comes from. And basically, out of the 100 million euros in growth, almost half came from, more than half actually, came from the growth in production volumes, the recovery in production volumes, and the other half came from the improved operating margin, thanks also to a mix in revenues that's more balanced. The growth has been higher in the naval business than in the cruise business, and you see the benefits also in the EBITDA margin. And of course this boils down to a positive net result before extraordinary items, 49 million of adjusted profit against a loss of 29 last year, and of course to 7 million profit after almost 50 million euros of extraordinary items, 29 of which related to asbestos claims. Page 17, the CAPEX program still continues and the investments for the first six months of the year are mostly related to the completion of the upgrade program of the Marguerra shipyard where we are today. Today we delivered also a ship out of Marguerra and the revamping of the American shipyards before the start of the construction phase of the first-in-class frigate for the US Navy, which is envisaged to start end of this year, end of 2021. Networking capital and net financial position. Networking capital increased in the first six months of the year, of almost 470 million euros net. And of course this is related to the production plan. And the increase of net working capital was mirrored also by the increase in the net financial position. You see it's almost symmetrical if you look at the numbers and include of course the CAPEX. Of course, as we said, we had a quite intense delivery schedule, mostly concentrated in the month of July, and today we completed the delivery program for the month of July. We delivered four cruise ships in total, three out of Italy and one out of Norway. And as you very well know, with the completion and delivery of the cruise vessels, we cash in the delivery payment, that's roughly 80% of the contract value. So we can say and state that the figures that you see for the end of June are stale in a way, because as of today, net financial position and networking capital, net financial position and construction loans improved a lot. As of today, net financial position went down from 1.6 to 1.2 billion, and the construction loans went down as well from roughly 1.3 billion to 300 million. So this more reflects the real situation of the company as of today, of the group as of today. I leave the word to Mr. Gallia for the outlook for the remaining part of the year now.

Thank you. So, we're about to close. We would like to give you a brief update regarding Cruiser Markets. All the major operators are listed. Therefore, we know you're familiar with what's going on. We can say that the work is over. That is true also when reading their statements. They are, in the end, positive about the prospects for a second part of the year in which cruising will resume everywhere around the world, clearly with different intensities. But what is very important is to read what they have been stating about 2022 prospects. They are solid ones, both in terms of booking and in terms of prices. Some of the owners are saying that Prices in 2022 are expected to be higher than 19, which bodes well also for what is the resilience of this industry. We recently physically met again with our clients, and what has been a really positive surprise is the fact that we've been talking about future. We've been talking about new projects. We've been talking about new clean technology to be put on board and it's about the future, which is very encouraging. And when we have to talk about the last page about the business outlook, we can confirm our guidance, notwithstanding prices in commodities which are moving up. If we just compare where we stand today in the summer of 2021 to where we used to stand One year ago, the world was paralyzed at the time. The yards have been facing hard difficulties. We had a safety issue, safety priority for everybody, and the business was really with huge question marks. One year after, we can say that our positioning is very solid, is very healthy, both when looking at Fincantieri per se, but particularly when we look and compare to our other players. We can say that this competitive position is strong because of the diversification of its client base. It is unparalleled. The diversification of the industrial footprint. We can tap skilled labor forces in other countries where other players cannot. and that allows us also to have industrial flexibility. We have a diversified business portfolio. We have defense, which is clearly benefiting from the work done and the extraordinary success in US last year. We've been investing. We've been investing a lot, as you've been seeing before. Investing is about having more efficient yards. It's about instilling inserting in the arts state-of-the-art technology sooner than others. It's about technology for healthier shipping or more respectful shipping in the future. It is about also clean tech and that we clearly look through different areas of applications and that allows us to be very committed on sustainability. before we look at the future with trust, confidence, and ready to take the opportunities we have ahead of us. Thank you, and we are ready for questions.

Excuse me, this is the Colosco Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. This first question is from Monica Bosio with Intesa San Paolo. Please go ahead, madam.

Good morning, everyone. I have three questions. The first is on the net debt evolution, can you give us a rough indication of the expected CAPEX by year-end? And if I'm not wrong, your net debt guidance is not including the finalization of the Indonesian contract yet. Did you expect the finalization might occur by the end of the year, and if yes, Can we expect a positive impact on the net debt compared to your guidance? The second question is on the future business opportunities in the novel segment. When is it expected an outcome for the Greek frame tender? And the very last is on raw materials. I understand that cost inflation is not impacting your margins and not very much so far, but what about 2022 and beyond? Do you expect that this could be an issue for the future? Thank you very much.

Good morning, Monica. Giuseppe speaking.

Good morning.

On your first question, net debt evolution, First of all, Indonesia, we are guiding, we keep the guidance for year-end for net debt levels broadly in line with last year's. Indonesia, of course, is not included any effect coming from Indonesia. We do expect the contract to become effective by year-end. of course they have to complete some steps including the finalization of the financing um what we have to say and you know this month of july uh is is is uh you know offers a crystal clear evidence of this we have a very intense delivery schedule also next year. First, cruise vessel will be delivered end of January next year. It is a sizable cruise vessel with a sizable cash inflow. Therefore, all in, we see that situation as healthy and very, very, very positive. The numbers you're looking at, again, the numbers you're looking at as of the end of June are stale. The situation is completely different. On the raw materials, of course, there is volatility and there are price increases going on, but we have proven also with the results at the end of June that we have the opportunities and the scope to offset and recover the potential price increases. So for 2022, as we look at it right now, we are pretty confident.

Thank you. Just a follow-up.

Yes, on Greece, on the Greek project, I mean, it's still... We're still in the context, of course, there are many, many competitors. We are very well positioned because we have proven to gain leadership in the surface vessels, notably in the FRAME Frigate product, but we'd rather not comment and we wait cautiously, okay?

Let me elaborate a little bit more regarding this. Clearly, the company is concentrating on having the naval business grow, and we can definitely leverage the success of our Frem, our multi-mission frigate. And we know that the market is a growth one that is expected to grow for the world. It will be growing more in Asia, less so in Europe and the U.S. but Fregate is expected to grow a multiple of the growth rate represented by defense expenses and expenditures. And we're leader in this field. And then normally when we have a dialogue with our clients, which are the Ministry of Defense in other countries, this is a very respected product. And clearly we know that all these negotiations are not easy ones, but well positioned. And it's important for you to know that the market for frigates is expected to grow in excess of 6% compound annual rate for the next 10, at least 10 years. That is according to studies and researches of anybody. So we're clearly keen to exploit the competencies we've been building over the years and clearly capture part of this growth. As far as the defense business growth, we know that these businesses are not equal. Profitability is different, and interestingly, the working capital cycle is different. The more we grow on the defense, the less we'll be indebted. And by the way, also on the cruise business, profitability today stands at a different level versus where it used to be. Also because of investments, our yards are more efficient than before. Our production methods, processes, has been improved by our own people. Just compare Fincantieri positioning versus the ones of our competitors. And that tells you we are probably the only one who can continue to invest for the future to exploit this opportunity in a complicated and uncertain environment to improve even further our ability to perform. And you can see also how that will be reflected in the composition of both P&L and balance sheet with respect to the question you posed regarding non-performant loads. On raw material, Giuseppe has already elaborated. We don't control them. We cannot hedge steel. We can do something on copper. But clearly, we have a duty which is continue to be committed, focused, and be more efficient. and being ready to improve our profitability, which allows us also to compensate for some unexpected hurdles, which can materialize down the road, like the ones which just materialize on raw materials, but we're there.

Okay, thank you very much. Can I ask just a short follow-up? Do you have enough indication of the total CAPEX spending for this year?

Well, the investment plan is an important one because in the last few years we've been invested in our Monfalcone yards, in our Marghera, but that is true almost everywhere else. Very importantly, this year, next year, we will be ramping up investments in U.S. for the production of our U.S. frigates. Last year, we invested more than $300 million. This year, it's going to be around $400 million. Next year, it's going to be probably lower, but it's important to expect that this is the curve, and we're expecting to reach the zenith. And then it should go down to definitely lower levels, even because these investment cycles take years, but also, luckily, last years. When we invest for equipment, when we make some marine works in our yards, that used to last for many, many, many years. Therefore, when you look out the plan and also the target that Mr. Bono has been providing you a few months ago, you can count on that investment curve will definitely move south.

Okay, very clear. Thank you very much. Thank you.

The next question is from Emanuele Gallazzi with Equita. Please go ahead, sir.

yes good morning everybody three questions from my side uh the first one is on the cruise business can you comment more on the dialogue and negotiation that you have with cruise operator just to understand the general mood now and if you still expect orders to resume beyond 2023 the second one is on the iss division uh it ended with a margin of uh 7.7 in the first semester. Can you comment on it? What do you expect for the full year and what could be a reasonable profitability in the medium term for the division? And my last one is a very quick one on the business plan. If you can just give us an update on when you expect to disclose the new business plan. Thank you.

Okay. Let's start with the first one. Thank you for the question. You mentioned the name Mood. The Mood is a positive one. All our clients, the three major Americans and the Swiss ones, are thinking about future projects because this industry is considered to be in a secular growth phase. Penetration of cruising holidays is still a low as it's considered to be growing in the years to come. You have different penetration rates from U.S., which is around 4 percent. You have 6 percent in Australia. Europe is lower. There's more between 2, 3, 4 percent. Then we have big question marks from China, which is less than 0.5 percent. are now considered to be among the safest way to spend time with your families and friends. Because the protocols which have been inaugurated by MSCs, particularly the strictest one a few months ago, are basically allowing tourists to live in a kind of a bubble. And the fact that bookings are resuming to a very sustained rate is very encouraging. Tourists today are spending much more than they used to spend two years ago. And this is a pattern which happens only if you talk to hotel operators, if you talk to entertainment operators, they will tell you the same thing. Clients want to enjoy after a very dark period. And so What's about the future? We're not expecting any new orders this year on cruising, even though we captured the Somnia project. We're not expecting new orders next year. But who knows? If things resume, we know that new ships are more efficient in commercial terms and therefore in terms of profitability for owners. But above all, everybody is talking about how can we build ships, how can we operate ships which impact to a lesser degree on the environment. And this is about technology. This is about how you project, how you team up with your clients in order to provide incredible products, like the ones we've been delivering in the last few days. The last one was last night is amazing products. Our clients was really enthused by the product. And we have to say that we've been delivering that through the pandemic. And it also tells you how the FinCAN tier is strongly motivated, how it's cohesive in order to capture this moment. We're being through hell, but we think that with all the uncertainties we have, and we know the Delta variants, and we know this in certain words, we're definitely well positioned. Therefore, this is a secular growth sector. We have roughly 40% plus market share We are the technology leader. We are the environmental technology leader, and so we think we can continue to work well and partner with our clients to build beautiful vessels, capitalizing on improved industrial processes, new technology, and progressively totally revamped shipyards. In terms of the other segments, you know that they are made up by a number of other different activities. Some of them are basically working for captive clients. The for profitability is less meaningful, but clearly everything has been regulated at market standard prices. And I would like to mention that the technology division, Nextech, is still a small one, but to us it's very meaningful. because it boasts great technologies in certain fields. We're small, roughly 200 million revenues, but growing nicely with a lot of respect being conquered on the market. Margins here are clearly higher. So if we manage to grow as we are expecting to, that will give a boost to overall profitability. In terms of infrastructures, we continue to stick to a very selective approach, so we're going to stick to what you already know, make it better. We've been putting on board new competencies and new skills which allowed us to structure good deals as the ones for the terminal or the work we've been doing, and there are other projects we're about to participate. But it would be a very selective approach. Then we have all the design and furniture, which is basically a captive business. We have good opportunities also outside of captive business, but that has to be developed. Therefore, we'll be talking about it maybe one year out or a couple of years out. But therefore, it's important to know these divisions are smaller, but it will contribute to the growth of the company. And regarding business plan, so far we're working with the guidance we gave you, and we'll keep you up to speed.

Okay. Thank you very much.

As a reminder, if you wish to register for a question, please press star and 1 on your telephone. The next question is from Gabriele Gambarova with Banca Acros. Please go ahead, sir.

Yes, good morning and thanks for taking my questions. The first one regards, again, Indonesia. I was wondering if you could share with us a few more details about the value of the contract or the delivery cadence of the ships or the vessels. The second one was on CAPEX. I understand that there is this peak of investments this year and next year, especially in the U.S., and I was wondering what could be, let's say in the medium term, a normalized level of investments for you. And the third one was about the cruise market. Your clients scrapped tens and tens of ships, even 20 years old. I was wondering if you have an idea of how much capacity in terms of births was lifted from the market through this scrappage campaign. Because assuming that the market comes back to a normal level, I'm wondering if there may be somehow a capacity constraint at this point.

Thank you for the question. Indonesia, we cannot disclose, but I think you can gauge the order of magnitude when comparing to other public information. But I believe, and we all believe, that this is a very important project that we're going to pursue and deliver in the next few years. Regarding investments, so already being elaborated about investment curve, investment cycle, the purpose of these investments, let me be very clear. Cash flow will more than compensate for the investment plan that we are about to put in place. We said very clear that 2021-22 will be very intense. and very cumbersome in terms of investment plan and curve, but we're expecting that this will go down. And by the way, even in this intense period, our cash flow will cover it, and that is very important. I will not go back to what I said before, but having more efficient yards allows us to have higher EBDA, I put it very bluntly, okay, and allows you to be more competitive, more flexible when we have to cope with very distinguished competitors. So that is really important. And cash flows will cover investments. Regarding scrap, there's some public figure. I will go by heart, because I don't know all the exact statistics. But the largest operator, which is Carnival, has been scrapping roughly 19, pardon, have been reducing the fleet by roughly 19%. More or less 10 have been sold. Nine have been scrapped. That means overall reduced capacity. There are some minor operators which have been buying the ships actually also hope to refurbish one of them with our service division, but you know that the last year they had to survive and capital market provided the cash in terms of both equity and loans and bonds to go through hell. Today they are refinancing themselves. you can see that almost every month you have the Carnival, the Caribbean, the Norwegian, the other ones who are announcing new terms and conditions for their loans. And every time they save from $90 million to $120, $130 million in terms of the cost of this debt. Therefore, if next year the situation stabilizes in terms of pandemic, And the scenario becomes clear. We cannot exclude that this positive thinking we've been recording, we've been physically recording when having discussions with them in the last few weeks can bring to new projects. And our scenario that orders will resume in 23. So we'll see if things will be faster and better. Maybe there can be some positive surprises. Otherwise, we stick to our scenario, which is a very conservative one, of new orders in 2023, no sooner.

Okay, thank you very much.

Once again, if you wish to ask a question, please press star and 1 on your telephone. Gentlemen, there are no more questions registered at this time.

So if there are no other questions, we thank you. And on behalf of Mr. Bono and Mr. Dado, we thank you for your attention. We look forward for the next set of results. Thank you. Bye-bye. Bye.