Fincantieri S.p.A.

Good morning. This is the Coruscall Conference Operator. Welcome and thank you for joining Fincantieri 9 Months 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. Gallia, General Manager. Please go ahead, sir.

Thank you, and good morning to everybody. I'm here with Giuseppe Dato, our CFO and team, to present to you our third quarter results. We can start on page five of the presentation deck with the executive summary. Let me say that these represent a very solid set of results. Revenues are up by 28%, about $4.5 billion, better than what we're seeing in line with expectations, with EBITDA going up by 65%, with a margin of 7.3%. As indicated in the presentation, it's lined again with our forecast, which is likely north of a billion. Backlog and therefore visibility, long-term visibility, is 36 billion, represented by 110 units. And we can confer our 2021 guidance. I would also like to take the opportunity to say that the company has been managing, I would say effectively, this pandemic and even in circumstances, behavior in our yards has been very conscious. Therefore, I would like also to say that these set of results highlight what is the resilience of our business been able to do in the face of the pandemic. We can move to the next chart regarding business update. This chart will somehow highlight our performance as being resilient and positive across all of our segments. We've been delivering four units in the third quarter in the cruise sector. As we speak, there is a delivery of Silver Dawn in our shipyard in Ancora. But you can also see from this page how diversified has been our delivery platform. In defense, we've been running up to speed with all our major commitments. Qatari Minister of Defense has been the launch of the third corvette and the delivery a few weeks ago of the first corvette of the Azubara class. The program for Italian hail is progressing according to plan, while also in U.S. Navy we already commented about the second option which has been awarded a few months ago and has been MOU in Europe with Navantia. In offshore and specialized vessels, again, as somehow was evident in the last few months, the offshore wind sector is going in the right direction. With eight SOVs in our portfolio, according to official statistics, we've been becoming a market leader in this specific area. While on equipment systems and services, we already commented about the initiative in Miami for MSC Cruise Terminal and the progress by our tech subsidiary with the acquisition of IES Group. We've been also continuing our investment plan in our Italian yards and in our American, US-based yards and investing in technology. The group evolution recorded in the past years has been quite significant. We diversified both in terms of products, in terms of clients, creating synergies across different geographies and business units. Investment plans allowed us to be more competitive and the increase in technology investments is becoming more and more a feature of our group. We try to extend our skills, our competences, and try always to get synergies for what we do, trying to serve our clients better and focusing more and more in higher margin solutions while keeping a strong focus in best-in-class execution, operations, integration capabilities, and adding to this technology in order to become what RCO called a tech platform. Page seven, we have a sustainable strategy page. It is important to highlight that there is a timeless effort to become a model in our industrial work. We've been believing in this responsibility for many years. We can say that sustainability is somehow embedded in our culture. Somehow this is also certified by the ratings we've been given. For example, by DE, we are in the advanced range and we rank first among our peers this year. You can also read the other ratings we received by CDP and from others. We want to extend the number of key ratings firms in order to be able to communicate in a more effective way with investors and all stakeholders. Clearly sustainability is about culture, behaviors, it's also about actions and investments. We continue to invest because part of this path for our companies, I would say for the whole economy and society. It's about also investing in technology and innovation. This is really a key part of our DNA and we continue to do that directly and also through different partnerships. You can see that we have agreement with major players for hydrogen, for green hydrogen, decarbonizations, And it's also important to highlight that we have a day-to-day dialogue with our key suppliers, particularly with reference to propulsion, and you know that this is a key part of our business. We have a number of initiatives we will have the opportunity to comment in the months to come, but it's important to highlight how deeply committed the company is. We can flip to page eight and see new orders and deliveries. I will just highlight the fact that the new orders reached 2.3 billion. You can see what is the split between shipbuilding and offshore and specialized vessels. And we've been delivering 13 ships this year. These are coming from 10 different yards in three different continents. And again, I'd like to highlight diversification and the fact that all of our components of our industrial footprints are efficient and delivering according to schedule. At page nine, we have the backlog development. Again, we can confirm the long-term visibility, the diversification of both client and product base, which is really essential for a lower and safer risk profile of the company, we recorded no cancellations. And you know how important that is also for our financial profile. And it's also, closing my initial remarks, important to highlight that after the pandemic, our clients, particularly in the cruising segment, are in much better shape and conversation regarding new projects received. Therefore, no orders, but conversation regarding new projects which somehow testify a different environment. I will hand over to Giuseppe for financial results.

Okay, thank you, Fabio. Good morning, everybody. You can go to page 11 and start commenting on the intake back, or in general, the numbers really signify full recovery of the business of the whole group. We had no water cancellation which is a significant achievement and on the back of the COVID-19 pandemic we were able to preserve, fully preserve the backlog despite the challenges of the pandemic. In the first nine months of 2021 the order intake came at 2.3 billion up 25% year-over-year, with a very positive impact, as we mentioned before, from the offshore specialized vessels, the equipment systems and services, and also the shipbuilding as well. And this segment was we did not have any new orders for cruise ships. maintaining a good order intake coming from the defense business. Our U.S. operations were awarded the second FFG-62 class frigate, and we had further orders. Total backlog is approximately 36 billion, including 9.4 billion in soft backlog. This is thanks to the recent achievements in the defense, as we said. Long-term visibility, again, because the opportunity to shape a medium-term investment plan to create production efficiencies whose results are starting to materialize, and we'll see this in the following numbers. If we go to revenues, first nine months of 2021, a strong revenue performance. driven by exceptionally high production volumes. We had roughly 12 million, in excess of 12 million production hours in the shipyards. This is despite safety protocols in place. And this comes on the back of the 3 million hours that we lost, as you remember, in 2020 due to the pandemic. Given these production volumes, revenues closed at 4.5 billion euros excluding pass-through activities, which were 235 million. Revenues excluding pass-through activities grew in excess of 28%, with shipbuilding contributing to most of the growth. And within shipbuilding, we had the cruise business growing almost 26% and defense 36%. Cruise still accounts for more than 50% of the total revenues, while in the defense business, we moved from 21 to 23%, and this also has a good, although slight, impact on margins. The reduction in offshore and specialized vessels compared to In the same period of 2020 we grew 15.3%. We are recovering the volumes lost in the first part of the year. Also in the equipment systems and services we grew almost 30% for all the operations aimed at supporting the OEM business in shipbuilding. Going to EBDA, 330 million. That's an exceptional growth with respect to last year, 65%. 330 million at 7.3%. We improved from 5.7 to 7.3. And this is higher than the guidance of around 7% EBITDA margin that we provided for year-end. In this respect, the Q4 marginality is expected to be in line with the previous two quarters. Therefore, we are confident that we can reach over 7% of EBITDA margin year-end. This very positive operating result is mainly driven by the shipbuilding segment, with an EBDA margin of 7.6, especially thanks to the very positive performance in cruise deliveries. I remind you that we delivered three vessels in a month in July. Also, we had a positive contribution from offshore and ESS. In offshore in particular, 6 million euros of positive EBA, we are reaping the benefits of the turnaround strategy that we have implemented starting from 2019 and that sees vast repositioning in more promising markets on which we have already a leadership position. Well, slide 14 shows you better than my words where the recovery came from. And the 130 million more that we did comes, we can split it exactly in two, in part for roughly 50% of it, 67 million comes from the full recovery in production volumes, with most of the contribution coming from shipbuilding. And for the other half, in improvement in operating margins, and this comes from the fact that, as we already said in our business plan back in our 1822 business plan, right now we are working on ships that were acquired at very good prices first. And thanks also to all the technological development and the investments that we did in the past years, we were able to perform better than expected in the construction activity. This is not withstanding the pandemic, and this clearly, clearly shows in our growth in EBTA. Let's move on to page 15 on the CAPEX. This comes mainly from the scaling up of the United States and the tail of the scaling up of our European shipyards, notably the two main cruise shipyards, Marghera and Monfalcone. in order to compress lead times and improve efficiency. And this first nine months of 2021 show that investments from this perspective are paying off. Networking capital and net financial position. Networking capital is negative at 398 million going down with respect to the beginning of the year and this is mainly driven by the deliveries that we did in the third quarter. Net debt is stable with respect to the end of last year and improving with respect to the levels we had in June. Remember that for first quarter and June of this year, we said that net debt levels would have reached a peak. And from there on, we're going to see an improvement. And the improvement is already ongoing. Net debt is roughly at the levels we see for year end. We also had an improvement in construction loans, which were at 976 million euros. We reimbursed roughly 350 million of construction loans. We see these debt levels going to year end with a growth in construction loans, though, because we need to finance the very, very numerous delivery plan that we have for the first six months of 2022. Most of you, we have the first delivery at the end of January of 2022. As with the outlook, I give the floor to Fabio final words on how we see the end of 2021.

All right, thank you. Page 18, we have the usual update on cruise being a large contribution to our business. More than 200 ocean ships are back into operations as of the end of October. It represents roughly 60% of the global feed. Pent-app demand is reflected in very solid bookings for 2022, and the pupacy level even this month is constantly improving. Some numbers can be captured also by the results of our clients, for example, like Carnival, Norwegian, Royal Caribbean, and interestingly, they all point to increasing activity for the Christmas season and particularly positive outlook for 2022 in terms of booking, in terms of price. One of these companies publicly stated that 2022 pricing is going to be better than 2019. And this somehow is reflected also in the capital markets valuation both for equity or the cost of financing and their CDS. So we're still probably not really out of the wood with this pandemic, but clearly the outlook is totally different, and therefore we have a positive attitude towards the future. Page 19, our final page. As we already said, we confirm our 2021 guidance that is due to the strong effort and commitment done by the whole company, which allowed us to capture efficiency improvements. And this is also due to investments we've been putting in place. We're expecting revenues for 2021 with a growth in the range of 25 to 30 percent, with a BDA margin north of 7 percent, and with a debt in line with 2020 levels. We believe that the backlog preservation is a strong feature of our company, I would say quite unique. And we can also say that commodity pricing is going to be mitigated by the positive effect of planning and designing processes, purchase activities and strategy, and by important CapEx plan we've been putting in place with the addition of an increased focus on technology. Regarding ESG, we'll be more detailed in the year-end presentation in a few months, but we strongly believe that technology will be an enabler of both less impactful shifts and differentiating factors when having a dialogue with our clients, keeping a focus on reducing emission while raising energy efficiencies. We're working on specific emissions. We will continue to promote growth, enhancement, and training of our people with particularly focus on inclusion and diversity. And clearly, our pilot effort to reduce CO2 and other polluted emissions will continue to characterize our actions. I will stop here, and we are happy to take your questions.

Thank you. Excuse me. This is the 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 touch-tone 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. The first question is from Alessandro Pozzi with Mediobanca. Please go ahead, sir.

Good morning all. Thank you for taking my questions. I have a few, but I'll try to limit to maybe two or three. First of all, good research results. You maintain the guidance for 2021. As we look at 2022, I think the main uncertainty, I guess, is raw material cost inflation. Can you give us a sense or whether there could be any impact on margins in 2022? Or maybe can you give us a little more color on the timing of steel purchases and whether you have already started purchases, raw materials, whether you're going to do it in one batch or it's going to be deferred throughout the year. So any color around procurement, that would be great. Also, on net debt, I believe you mentioned deferrals will likely to be repaid in Q4 and also throughout 2022. Maybe can you give us a bit more color on the timing of those and potentially how the net debt could evolve?

Can you repeat? We didn't get you. Sorry.

Okay. From the beginning?

No, no, no, just the last part regarding the financing.

Yeah, about deferrals and the evolution of net debt in the next few quarters into 2022. We know it's going to be a step in 2021. It's going to be in line with 2020, but I was wondering in 2022 if you can give us a bit more color on how net debt is going to evolve throughout the year.

Okay, regarding the first questions, the comment we have to make about that is that as of today, with the information that we have, we're confident that we can offset decrease in raw materials, so let's call it this kind of inflation, with the actions we already put in place. And we can confirm that. This is according to what the estimates we have on regarding pricing evolution. Steel for us is very important. Copper, while we are less impacted by energy pricing. And by the way, we have purchasing policies which allowed us to absorb part of the increase in raw materials. And as I said before, and a number of other actions we put in place and we regularly put in place and clearly we increase the intensity of these programs in order to be more and more competitive working on processes, organizations, and technology. And clearly we also reap the fruit by what has been done in previous years. I will stop here and Giuseppe you can.

Yes. I gave you some hints before during the presentation, but we confirmed that the levels we saw end of year and the first six months of the year are peak levels. We are directionally pointing towards deleveraging. There is a tail of the recovery of the deferrals we gave to our clients in order to support them during the pandemic we have roughly we had we put on the table an effort of 900 million euros as you remember but the residual part is roughly 300 right now so on that matter we are again they're actually going towards the full recovery of these values uh you can see already uh what we mean when we say the leveraging The leveraging is already ongoing right now because peak levels were reached first half of the year. We're going to close the year with roughly the same debt levels we had as of the end of 2020, but with a much higher EBDA. And, as I said, with a very intense delivery program ongoing next year, in particular in the first six months of 2022, the first ship in January. And also, the average size of the ships we are going to deliver next year is much, we are going to deliver one more, one ship more than this year, but also the average size is higher in terms of gross tonnage. Therefore, in terms of price, therefore in terms of delivery installment therefore in terms of the effort that we have to put right now to finance them okay okay so should we expect the working capital to improve further next year well with the improvement of net debt uh with the leveraging yes networking capital should improve and of course The things I'm saying do not factor in the advance payment that will come when the contract with Indonesia will become effective.

Okay. And just one point on the previous question on steel purchases. Have you already started making those purchases for next year? And are they going to be staggered throughout the year?

Are they going to? Yes, we are really looking at the market. We need to buy still. The point is that, as Mr. Gallia said very clearly before, we don't see the cost inflation tempting our trajectory for the next years. We are very confident that we can offset these cost increases for us. We also do not see any major disruption in the supply chain when it comes to timing of the supplies and so on and so forth. But on this matter, we are protected from a contractual standpoint. So, of course, we monitor very carefully this situation. But there are no major concerns at this point in time. Let me stress this once again. Operationally, we are working full steam, very well, very efficiently, with good results.

If I have time, just last one. There was no order from Cruise in this quarter. I guess it was well expected. As we look at next year, you have conversations with the cruise operators. Is there any chance we could see orders in cruise in 2022?

On orders in the cruise segment, we maintain a cautious stance here. We're going to see. There are some clients that are talking about new projects, but it's really too early to say.

Okay, thank you very much.

The next question is from Monica Bosio with Intesa San Paolo. Please go ahead.

Yes, good morning everyone and thanks for taking my questions. The first one is on the third quarter. Did you release any provision in the third quarter? And if yes, can you please quantify it? The second question is a follow-up on 2022 profitability. Given that you are confident to offset the raw materials and considering that there are no major disruptions and considering the better pricing, I know that it's premature, but do you believe that there's room to improve your margins by 100 basis points to 8% or would you be more prudent on the back of the cost inflation scenario. And the very last question is on CapEx. CapEx has increased for this year. What about 2022? Thank you very much.

Monica, you're posing too many budget questions. I know, sorry. Budgeting process is ongoing, but it's premature to comment. For the moment, you have to live with our decent confidence on next year. Therefore, I leave it for other conversations and for the next conversations, let me say. On Q4 of 2021, we see a good quarter coming in. to maintain the guidance even though we are clearly saying that EBDA margin will be slightly above 7% per year. And on provisions coming from the delivery of cruise vessels, of course there were some provisions that were released given the very good operating performance We have that and we are having right now, but we do not specifically need the numbers. But delivery of three big size cruise vessels with a very good performance means very good results, so and very good releases, let me say.

Okay, thank you very much. I will skip the budget question over the next month. As for the novel segment, can you give us any flavor as for your MOU with Navantia? Does it mean a more, let's say, proactive approach toward the consolidation of the novel segment in Europe or is there some project on which the two companies can cooperate and get new awards?

Well, the agreement comes on the back of the two companies, ourselves and Amancia, are reference shipyards for the respective countries at also European level. The target of the agreement is to assess any future opportunity for the national navies, but also in the framework of the development of the European programs, like the European patrol corvette, and that sets the rationale of these agreements.

Okay, so the European corvette could be focused for the players in the sector over the next month.

Among other initiatives, this is the first. Of course, we mention it because it has been already formalized and launched at European level. This is the first in line of many others that could come in the future. Again, for the national navies and at European level.

Okay. Many thanks. Thank you.

You're welcome.

The next question is from Matteo Bonizzoni with Kepler. Please go ahead, sir.

Thank you. Good morning. I have two questions. The first one is related to the slide on page 12 of the presentation in which you show that really the weight of the naval business in the nine months of this year increased compared to last year to 26%. Last year it was 21%. The question is if you can provide information a rough indication of how much the naval business could wait in three years as a percentage of total. I guess this percentage is going to further increase thanks to various contracts you have taken, including the last one in Indonesia. And also, you have never disclosed in your account EBITDA margin delta between naval and cruise, but I remember that in the past you commented that Naval is around low double digits while the cruise business is not more than mid-single digits. Is it still true despite the reshuffle of your portfolio in Naval with the addition of large non-captain contracts like the US, Indonesia? Then you have taken Qatar in the past. So the question is just to understand if the margin delta between Naval and Truis is confirmed at several percentage points. And the last question is always related to Naval. Timeline for the closing of the contract with Indonesia I think is more likely for start next year than by year end at this point. And if you can confirm that the advance payment related to this contract will be at least 10% of the nominal value. Thank you. Matteo, are you still there? Yeah, yeah, I'm here.

We had some connection problems. Actually, I answered to your question, but I was not aware that the line was down. No, I think nobody heard, so I think nobody heard. Going back to your questions, we do expect the share of the revenues in other business to increase. And this is embedded already in our backlog. Of course, and I mean I reiterate the message that the margins are, somehow higher in the naval business as we shared in the past in the high double digits. Whilst at the same time margins, EBDA margins in cruise show a very good pickup thanks to the improvements that we are realizing right now and also thanks to the fact that as we said many times also in the past years, the ships that were acquired in know starting from 2015 onwards were acquired at very good prices and therefore a very good potential margin the good news is that these potential margins are becoming actual margins as we are delivering those ships um and these were the questions on ebda i'm sorry but on on the on can you repeat the the second question that you asked

Yeah, is that an update on the finalization of the contact with Indonesia?

Yes. As of yet, we can only say that whilst we, you know, target the end of the year, probably will be most likely in 2022 as we are quickly reaching the end of 2021. We are working, the teams, the Fincantieri team and the Indonesian Navy team, are already working together. Our people are in Indonesia right now, but we can't expect it to be closed by year end.

Let me just add another comment. When we look at Cinque Terre, we see a design manufacturing company which is somehow showing a unique positioning. I mentioned several times, we mentioned several times the word diversification. Diversification is very, very important in this business. We're not depending on just one engine. And by the way, Cruise, which has been through hell in the last few years, has been recording very positive performance in absolute terms, but even more stunning when compared to competition. Our naval business is a second and growing part of our business, and clearly all the work which has been done for years for our national navy has been even strengthened in a very, very visible significant way thanks to the awards of the U.S. Navy contract, which allowed us to have a different positioning versus the past, clearly in a competitive We're also exposed to a growing part of this heat building business, which is represented by the trend in offshore wind farms. As you all know, renewables would be a key part of this net zero emission global target for all of us, and we are there in the leading position. And therefore, we somehow reinvented our company, which is smart, shifting its production from oil and gas to wind. And by the way, by the way, probably oil will be needed for quite some time. And therefore, we still have capabilities with that respect, plus fishery, plus aqua farms. And if you look at these sectors, specific sectors, you can see that the growth characteristics are quite positive. The four can boast diversification, scale, scale and financial resources to invest, to innovate, to invest in technology and to have a first class network of partners. with whom we can sit down and talk and be at the very edge of innovation for this very complicated business in which, by the way, we can boast a global leadership. Fourth, we are exposed to some growth sectors like tourism, which has shown its resiliency once again. 9-11 crisis, different crisis, and now the pandemic. But you know that, like any researchers, you can see that tourism is there and that this kind of tourism, cruising, is expected to perform better than average. Defense, and by the way, I'd like to highlight again that we're leader in the frigate segment, which is probably the highest growth part of defense investment. And again, we talk about wind and renewables. when we talk about our different pillars of the business, plus the extension of our skills, which are all deriving from what we do in our core business. That's nothing strange. It's just extension of what we do in our chips. So we think that this competitive position will allow us to be competitive also in the future.

Thank you.

The next question is from Gabriele Gambarova with Banca Acrus. Please go ahead, sir.

Yes, thank you for taking my questions, and good morning. The first one is on offshore and specialized vessels. We touched on this point a few minutes ago. I was wondering if you have any visibility on the possible, let's say, margin evolution for this business, which now is at zero margin, basically. So, basically, if the offshore offers better opportunities in terms of margins. The second question is on naval. We saw that Greece chose a naval group for its big frigate program, but after a few weeks, showed a certain interest in rescuing the Greek elastis yard. So I was wondering what's behind if you see other opportunities on this market. So basically, what is the rationale of this move on this possible rescue of the Greek yard? And the third one is a little bit more strategic. If you want, I saw that around one week ago, The Chinese GSI yard delivered a very big ferry boat, 70,000 tons, 550 berths to an Italian client. So it's almost a cruise ship, a small one, let's say. So I was wondering if you see any... it's a threat or any evolution in the competitive landscape in the cruise ship market, specifically from China. Thanks.

Okay. On offshore and specialized vessels, of course, we're not happy with the EBDA levels that we have right now, but still we are let me say, starting to enter this market. We acquired seven plus eight vessels this year. Of course, the benefits of these other acquisitions in terms of margins are going to start to flow in from 2023 onwards. Let me say, we do not have a specific guidance on this, but the target is to improve and to reach possibly the current EVDA levels that we have in shipbuilding, okay? But this is long-term strategic targets. On Greece, of course, the fact that Greece has awarded the contract for the frigates to our group does not stop us to discuss with the Greek Navy and with the Greek government of any other further opportunity and the agreement that was announced falls within this attitude and this process. We're going to see if there are other things. Greece does not need or does not want only the frigates, to put it this way. The ferry boat and the competitive landscape, we do not see any evolution as of now in the competitive landscape when it comes to cruise shipbuilding. We have a joint venture in China that's forming well and almost according to schedule, notwithstanding the COVID-19 pandemic. But as of now, we don't see any change. And the ferry you saw, the ferry was delivered, yes, it was a big, big ferry. But size does not close the gap between ferries and cruise vessels. Still, there is, and I'm not a naval engineer, but I can tell you, and you should come and visit our yard in where you will be able to show how complicated is the production process and how, you know, complicated is the product in itself. Okay?

Okay, thank you very much. If I can, a very short follow-up. Given that, let's say, the COVID issue is almost, let's say, a thing of the past and that your, let's say, perspectives are somehow improving, do you think you will – do you plan to have, I don't know, a capital market day or, let's say, an occasion, an event to do – to speak about the company, the perspective, the plans, the long-term plans, or something similar?

We do plan this, but circumstances have not been beneficial for such a plan at this point in time. Right now, you said it right, we are moving out of the crisis. notwithstanding the recent increase in daily cases, we keep our fingers crossed, but things are working very well. And in due time, we will organize and set up an effective way to communicate our direction and our strategy and the future of the company. Okay. Thank you very much.

Gentlemen, there are no more questions registered at this time.

Thank you very much. Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.