Fincantieri S.p.A.

Good morning. This is the CoruSchool conference operator. Welcome and thank you for joining the Fincantieri first quarter 2022 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. Gaglia, General Manager. Please go ahead, sir.

Thank you. Good morning, everybody, and welcome to the first quarter presentation. I'm here with Giuseppe Dada, our CFO, and our team, and we'll guide you through the first quarter results, 2022. We can start saying that it's a robust set of results. Revenue came in at roughly $1.7 billion, excluding pass-through activities. with an increase year-on-year of roughly 18%. Contribution has been positive and consistent across all segments. The BDA is up roughly the same measure, around 17%. It's reached almost 120 million with a margin of 7%. This confirms operating profitability and confirms also the resilience and ability of the company to face unprecedented increase in raw materials and challenging condition in the supply chain and I would say in overall business environment. Net debt at south of a billion, 940 million to be precise, brought in line with a year-end 21 and well below last year figures. Notwithstanding capex, capex expenditure plan is going on, is proceeding according to plans, and higher revenues. The backlog is quite solid. The total is around $34 billion with 111 units representing a multiple of five times plus our 21 revenues, while the backlog is $25 billion with 93 units. Ships delivered in the first quarter. There are five ships and they've been delivered in four different shipyards. And I will just say that diversification and consistency across different business lines and different geographical footprints is one of the characteristics of think and hearing. CapEx, as I said before, is mainly devoted to building and strengthening our U.S. shipyards capabilities, upgrading our yards in Italy and investing in technology. Production volumes are coming in around 4 million hours. That's a very, very high productivity level, and I would say, as a general comment, even considering that we do business with foreign clients, which represent almost 90% of revenues. This represents, I would say, confirms the resilience of our business. If we flip to page six, we have some comments regarding the business update. As I briefly hinted before, operating performance has been consistent across different segments. Delivery first quarter has been of six Princess Cruises in Monfalcone, enable construction activity for the Qatari Minster Defense Continuo at regular speed as anticipated, with the launch of the fourth combat and the delivery of the first OPV unit. Activity also for Italian Navy progress has seen the delivery of the first EPA which is the first of seven units, and construction activity for the first two of the generation of submarines for the Italian Navy has also started. I would say very constructive news coming from the offshore division thanks to the competitiveness of our subsidiary VARD in building a market leading position on international level in the vessels for offshore winds. We've also been awarded a new contract for six marine robotic vessels for Ocean Infinity. And in the last division, ESS will launch the construction activity for MSC terminal in Port Miami. Strategic PSG initiative. You can see on page 7 that we are fully committed on four different axes. We would like maybe just to highlight the fact that we continue to work and commit ourselves in, I would say, wide range of partnerships from decarbonization to digitalization to ecological transition. We signed a few memorandum understandings, one with EMEA, regarding energy transport and circular economy, with RINA for decarbonization of parts, infrastructures. And regarding people and society, we brought ourselves with remembering and reminding that Varda has offered its facilities in Romania to accommodate up to 250 Ukrainian refugees. We launched School for Life, along with other important Italian companies, basically to combat the need issues, which is an important and a harsh one in our society. And we also launched, as announced a few months ago, a corporate nursery program. working with our subsidiary Nextech for an agreement with Amarillo Leonardo to offer digital solutions applied to dynamic monitoring for the security of Italian critical infrastructure. Last but not least, we had an agreement with BNP Paribas for issuing a sustainable lean guarantee facilities related to the achievement of two KPI regarding energy consumption management and sustainable supply chain. You know how important supply chain is for us. And the key part of our effort is also to involve all of our suppliers, most of them, in our effort. At page 8 you can have a picture of our ratings and awards just to confirm our efforts to become a mode of excellence addressing social, environmental and government topics. Page 9, we have deliveries in order. We already commented before. Just highlight the fact that we've been working for different for this delivery, and we've been also managing to acquire new orders, roughly half a billion. And the majority of these offshore divisions represent the very bulk of these new orders acquisition. In terms of backlog, page 10, you can capture with a glimpse how diversified our backlog is, how deep in terms of duration, and that allows us to state that we have long-term visibility for a backlog both cruise and naval, and that the diversification of our wind offshore operations allows us to be very constructive for the future, considering also the development and investments which are expected in the next few years in order to drive this energy transition process. I will hand it over to Giuseppe for financial results.

Good morning, everybody. I'm on page 12 now. For a quick comment on all the intake, we already went into it, but what we need to note is the very important pickup in all the acquisition with the reference to the offshore specialized vessels. And you will see also this result has been consistently going on through the last quarters, and it has had a very important impact. on revenues. Backlog visibility is north of 5.2 times current revenues, so it's still very good, notwithstanding the lack of new orders in the cruise segment for the moment. Revenues on page 13. We grew roughly 18%. You can easily note that the bulk of the revenue growth comes from the novel. shipbuilding activity and offshore, which doubled revenue with respect to the first quarter of last year, and of course also equipment systems and services thanks to the consolidation of the in-sub acquisition. We do expect, of course, cruise revenues to grow throughout the year, and therefore don't take this first quarter as a reference. for the year 2022 when it comes to cruise revenues that are still in a growth path, at least for this year, 2022. 86% of revenues, we said it before, come from international clients, confirming our truly global footprint. As with EBDA on page 14 and 15, EBDA growth roughly mirrors the growth in revenues. You saw that, you can see that we did roughly the same production hours as last year, as the first quarter of last year. We are working at full production capacity at this point in time. And the growth, of course, comes mainly, on page 15 now, mainly from higher production volumes We have to say it differently. From the production of projects that have higher margins, let me say, and this is the contribution of the revenue growth, notably of the novel segment. And, of course, also when it comes to shipbuilding, of course, improvements also in operating margins thanks to the fact that we're still treating the benefits of all the efficiencies and change management that we implemented in the past few years. But as we said also in the past conferences, allows us at this point in time to offset and compensate the very important, I would say, increases in commodity prices. CAPEX program is proceeding as planned. We still are in the tails of the investments in our Italian shipyards, notably . These investments should phase out this year. And we have a very strong activity in the United States in order to be ready to start the construction of the program for the United States name. As we're working out the net financial position, basically the two figures are roughly and broadly unchanged with respect to last year. We do expect, as I said, a pickup, very important pickup in the second part of the year of cruise revenues as we expect to deliver seven vessels this year and seven cruise vessels next year. Therefore, you're going to see networking capital levels to increase. There is already evidence of this. If you look at the work in progress, it has increased by roughly 800 million euros in the first six months, notwithstanding the delivery of one cruise vessel. And it's also evident that we financed the bulk of this growth through construction loans, which have increased from roughly 1 billion euros to 1.5 billion euros. Therefore, net financial position is roughly unchanged. Of course, we reiterate the message of being able to fully support our networking capital needs with our funding sources. And all our funding sources do not have no covenants at this point. And at this point in time, also, we do not have any major exposure to interest rate risk as we are fully edged. Now I turn the word back to Mr. Gaglia for the outlook.

Thank you. And just page 19 you can have a good description of how we see our near-term and a few comments on the longer-term prospects. Regarding the Starcom Cruising, which represented the majority of our business, There are a number of information here, but I think it's important to highlight the fact that boating trends for 2022 and 2023 are in line with 19 levels at higher prices. That bodes well for a comeback and new investments, and we can confirm that we are expecting for next year new orders. Should things go better and faster, there might be also some, I would say, consolidation regarding these expectations we have. We also know that public information regarding the companies which are listed say very clearly that they turned positive regarding What is the short-term prospects and above all they all confirm that it is a long-term business which is about to grow and expand its share in terms of household expenses as far as the travel destinations are concerned. Clearly the industry is fully committed to net carbon neutrality and we say so because A lot of our investments and efforts are about becoming better and faster than others to adapt and provide our clients with ships which have a technological edge versus containers regarding the commitment for this carbon neutrality path. On labor, you know that global spending defense reached 2 trillion plus, and the unfortunate events over the last few months are pushing defense in this field at a higher level. And that is true, I would say, globally, and clearly that impacts also our continent and our Europe. Just to give the major comments, we are exposed to basically three business lines. Cruising. Cruising is a sector which historically outperformed GDP growth. We're being able to cope with COVID. Now we're coping with conflict. in Ukraine, but long-term trends are solid, and we have very robust competitive positions versus our competitors. So we look at the long-term prospects in this field, which is about to enjoy our technological edge, our industrial culture, and the investments we're doing in order to provide better and more and more ESG compliance vessels. Defense. This business is going up, and there will be an acceleration in investments. So again, we're exposed to a sector with a leading competitive position in surface vessels and we're also about to strengthen our positions in suburbs. Offshore has been through hell and back because it was basically exposed to oil and gas sector lost roughly 90% of its revenue base with being able to use our competences, our experience, our technology, and in order to reorient the business model and exploit the boom in investments, particularly regarding offshore wind farms and we have been building leadership position at worldwide level. Clearly that is also possible to the strong culture of these companies which also proved how resilient it has been so that we can confirm that assuming no further relevant deterioration in geopolitical and global health situation, long-term growth and profitability can be preserved and defended by a company. We can expect solid revenue growth, which is about to increase, exceeding 21 levels, with solid marginality, despite what is happening at the commodity prices. So, in a nutshell, the capacity to face unforeseen events and exploiting and leveraging a strong competitive position we have in the global market and a very strong industrial and cohesive culture. Thank you for your attention. We're happy to take your questions.

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 1 on their touch-tone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Monica Bosio with Intesa San Paolo. Please go ahead, madam.

Good morning, everyone, and thanks for taking my questions. The first one is on the naval defense business. I'm not asking if you are getting or not further contracts, but can you comment on the main tenders currently underway in the sector? And on top of Italy and USA, where do you see further opportunities for Fincantieri? And my second question is on Cruisits. In occasion of the full year 2001 results, the group was not seeing any new orders in Cruises in 2022. Do you still keep with this view? I know that you do not comment or press rumors, but it seems that Norwegian lines aims to to ask for new quizzes. So any colors on this would be helpful. And the very last is on the equipment system and service area. Can you give us just a rough indication of the breakdown of the division or at least how much is the infrastructure business? And do you have any down payment in this area?

Thank you very much.

Okay. Thank you, Monica, for speaking.

Well, on Navala defense business, at this point in time, we are pursuing some commercial leads, but rather not to be more specific than this on what leads we are pursuing, as competition is very fierce amongst European players. We still have a hefty backlog to execute. The two programs we have in execution, the one for the Italian Navy, the one for the French Navy, and we're going to start to our U.S. operations, the U.S. Navy program. Those three programs give us very good visibility for the future. And you're seeing in the numbers right now that, you know, activity is picking up. It's picking up in terms of revenues and also in terms of margin. We do expect a change in, you know, in the appetite and demand for our vessels in the defense business as, you know, the geopolitical situation is in a turmoil, I would say, and therefore And also, let me add, you said leaving aside the Italian Navy, but the Italian Navy has some development programs under study from what we gathered. In cruise, there have been press rumors about an interest of NCL for new vessels. I do not comment press rumors. But we said it during the call, the cruise business has been growing above GDP growth for years, has proven to be very resilient to, you know, sudden shocks and to the economic cycle. Of course, by also listening to what our clients say, the recovery is underway in terms of passengers, in terms of resumption of passengers' levels, especially for 2023. Of course, uncertainty is still linked to what will happen during the winter if there will be a new pandemic wave or not. Therefore, you know, there are still a few question marks. But we still believe, even under these circumstances, that all the acquisition will resume, if not in 2022, we're sure about 2023. Of course, I forgot to mention that, you know, to the cruise operators that are listed, they raised huge amounts of capital either through equity and that in hybrid forms. You know, there is still a need to, let me say, sort of repair their balance sheets for the near future. But if I take from, you know, the CLIA study on passengers forecast and if I plot also The current capacity plus the capacity growth embedded in the deliveries for next years, if we plot these two lines, passenger growth and capacity are going to meet in 2026, 2027. That means there could be the need, there's going to be the need for further capacity. If you need further capacity in 2026, 2027, I think 2023, 2024 are the right times to make new orders. And, you know, this is purely an analysis based on numbers and forecasts. We're going to see what happens. We'd rather not give indication of EBITDA margins within the segment, but we can tell you that roughly 30% of the total revenues is related to the infrastructure business. And then there is a very important part related to the interiors for ships, which is roughly 25%. And the rest, a third is on, you know, support systems for propulsion systems for, you know, for the captive business. We are thinking about improving and giving more disclosure on this segment, but we still haven't taken the decision, let me say, okay?

Okay, thank you very much. Sorry, and about down payment in infrastructure business, do you have any down payment? I think, yes.

Well, we have some projects ongoing that we are being paid for. We haven't announced or closed any major, major projects. Usually in this business, though, we do not experience what we see in the cruise business. We are paid at milestones. So it's a more novel-like terms of payment business.

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

You're welcome. The next question is from Alessandro Pozzi with Mediobanca. Please go ahead, sir.

Hi. Good morning, all. Thank you for taking my questions. The first one is on margins. I think it's great to see that you still have managed to deliver a 7% EBITDA margin despite, as you mentioned, the .

Alessandro, can you speak a little louder? Because we can't hear you. I don't know if it's the line, the volume, or the voice.

I was saying it's great to see that you managed to deliver a 7% EBITDA margin despite the raw material price pressure. And I was wondering, can you give us a sense of what that has been in Q1 and what the margin could have been using, let's say, flat cost versus Q1? And as a follow-on from this, there is a consensus, basically, that probably we are reaching peak inflation right now. Is that what you see? I mean, do you expect inflation to moderate when you talk to your suppliers, or do you expect inflation to basically carry on throughout to accelerate or stay where it is throughout the year? Thank you.

Alessandro,

Well, commodity price inflation has been going on since last year. It has reached higher levels in the past few months, also due to the, you know, war in Ukraine and Russia. We saw it in the prices and in the numbers. steel prices have increased further and also, you know, its visibility of, you know, supplies in terms of quantities and price is very, very, very limited in time. We're not in a situation in which we were two years ago, three years ago, in which we could plan, you know, make orders with a six-, nine-, 12-month disability. Those times are over. What EDA levels would I have had if with no price, with no inflation on commodities, probably for the first quarter, I would say half a point higher, so more in the 7.58 range. Also last year, last year probably, you know, the price inflation has costed us between 0.5 and 1 point of EBITDA, 1 percentage point of EBITDA. But what is remarkable is that we are able and thanks to, as I said before, to what we did in the past and what we are doing now in a very difficult production environment let's not forget in the past two years we worked under you know a pandemic in a production model that you know it's very intensive in terms of labor so let's not forget this We were able, and we are able, I maintain this stance and this guidance, we are able to offset price increases. At this point in time, we are factoring, in our forecast, we are factoring prices that are higher than last year. And I think we have taken a prudent stance in this for the year 2022. Of course, we don't have the crystal ball. You know, things can worsen. Things can improve. So I make reference to what you said. Are we at the peak? I don't know. I really don't know. So in my forecast, we're taking the peak prices as a forecast. And understanding this, we are pretty confident of being able to maintain these margin levels throughout the year.

Okay.

Just to remain... Just let me add one comment to what Giuseppe just said. in the long term we think that energy prices still prices are really out of equilibrium any equilibrium models you can find so we don't have crystal balls clearly but you might expect that the price levels will normalize and you you can you can have the sense of the effort that the ticket theory put in place in order to improve profitabilities in this period through pandemic through Supply chain disruptions. It's not just price. It's having the availability. It's having the availability of materials. And clearly a predictable spike in prices. Investment which we have been doing, we're about to continue. And the economy scales we're enjoying. So that I would say allows you to somehow predict when things, if and when clearly things will normalize. that our earning capabilities, the engines which underlie the competitiveness of our company, are stronger than ever, and importantly, are stronger than anyone else in the sector.

Thank you. Just to remain on the inflation theme, I know your orders at the moment are, of course, because the crews are on the weak side, The orders that you are going through, basically, that you are booking right now in Q1, are you able to pass to your customers the increase in raw material cost inflation with the new orders, or do you expect to offset the raw material cost inflation in the future just based on higher efficiency?

Well, the very low amount of order acquisition for the first quarter, the answer is yes. We are able to pass through clients in new orders, at least to pass through clients the price notation. Otherwise, by no means we would be able to reap the benefit. Of course, when it comes to new orders, there is the negotiation process. that involves several things. Technical specification, of course, are in first place, and there is a mix of things. Therefore, we do balance everything out, but I do not expect us to experience important margin pressure on new order intake.

Okay. Thank you very much. I'll turn it back.

You're welcome.

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Excuse me, this is the operator. We have a question from Gabriele Gambarova with Banca Acros. Please go ahead.

Yes, good morning and sorry for the late question. Regarding the offshore business, this very strong growth recorded in Q1. I was wondering if we can take this number as a reference for the remainder of the year, if we will see similar growth in the coming quarters, and also what you see for what you envisage for margins. And more or less the same question on ESS. I understood we can't consider this number, 359, this number of revenues as a new normal. I was wondering on margins if you have any comment, any indication on the 2022 expected performance.

Thank you. No. The answer to your first question is no, we do not expect revenues to fully double an offshore specialized vessel year over year. The revenue growth has been going on also in previous quarters. Of course, this is a very important pickup. I remember last year, all the acquisition in this segment was very good and mostly focused on wind offshore, which is good, and good and beyond expectations, I must say. Also, what we need to appreciate, understanding the bulk coming from offshore, from wind offshore, is the diversification of water intake. Because we have wind offshore as the bulk, we also have vessels for the fishing and industry. And in this quarter, we have the continuation of orders for robotic vessels, which are very small vessels that enjoy some degree of automation for a company that does research, deep water research. So again, no doubling of revenues year over year, but still good growth. to stay revenues as I said that during the presentation don't take the cruise revenues quarter over quarter as a reference for the year because we do expect a double digit growth in cruise revenues as well. Again, the ships, the revenues we're going to book this year are related to the ship we're going to deliver in the second part of the year, 2022, but mostly related to the seven vessels that we're going to deliver in 2023, and the average size, and this is also a reference I made for, you know, for the potential comments on net-dead levels, also the size of the vessels in terms of physical size and also cash inflows size of the ships who are going through the river in 2023 is much higher than the size of the ships we're going to deliver in 2022. On ESS, I'd rather not give you further details on margins, as I said before, to answering to Monica's question. We do believe that time is right to, you know, to be more analytical and give more disclosure to that, but we're still taking our time.

Okay, thank you very much, Giuseppe. You're welcome, Gabriele.

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Thank you all. Thank you for attending this presentation. Have a good day. Bye.