Fincantieri S.p.A.

Good morning, ladies and gentlemen. This is the Coru School Conference Operator. Thank you and welcome for joining Fincantieri Half Year 2023 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. Folgiero, Chief Executive Officer and Managing Director. Please go ahead, sir.

Good morning. Good morning, everyone. Thank you for joining us and welcome to Fincantieri Half-Year Financial Results Conference Call. This set of results shows once again a solid top line with revenues up by 4.5% to 3.7 billion euro. This is line with expectations and with development of the background. EBITDA margin stands at 5% in line with 2023 target and improved when compared with first age 2022 results. 2.6%, and fiscally at 2022 results, 3%. 2022 was in fact impacted by the inflationary pressures, one-off items, and the lower marginality, especially in the infrastructure business. In the first half of 2023, we recorded a positive adjusted net income at 3 million euro before extraordinary or non-recurring Abestos-related litigation costs. Net loss ends up at 22 million. Order intake came in at 2.1 billion euro with a positive contribution from wind offshore. During this period, the U.S. Navy exercised the option for the fourth frigate while just a few days ago. We received confirmation regarding the construction of the third new generation submarine for the Italian Navy. We have now a total backlog of almost 33 million, securing 4.4 years of work when compared with 2022 revenues. Net financial position landed at Euro 2.8 billion in line with cruise delivery schedule with a total of four units expected for the second half. Now, just three for the rest of the year. Since just a week ago, we delivered the first of four luxury ships for the new MSC brand, Explorer Journeys, Explorer One. Giuseppe will give you further details on the main financial and operating performances of the period later on. Let's now move to slide seven for some business updates. Our operating performance has been consistently positive throughout the first six months of the year. Indeed, the group's shipyards are running at full speed with 11 vessels delivered from eight shipyards, highlighting the global reach of our operations with local capabilities. Offshore business area accounts for seven units delivered out of these 11. Eleven units were ordered, resulting in a total of 88 vessels in the period. Noteworthy mentioning that just last Friday, the order for the third near-future summoning became fully effective. We confirm our tireless effort to become a model of excellence in the sector, already well recognized at international level. During the first semester, Fincantieri has signed some agreements with Credit Agricole Eurofactor, IF Italia, SACE, FCT and Unicredit in order to promote awareness and improve the ESG profile of its Italian suppliers. As a result, suppliers with better ESG performance will be able to benefit from a better rating, accessing more advantageous financing terms. Brand Finance assigned a rating of AA to Fincantieri, now among the 50 strongest Italian brands. We also received the Top Employers Italy 2023 certification from the Top Employers Institute. All ratings are confirmed. Just a few comments on our order book. As you can see, we are loaded with deliveries for the medium to long term, hence our visibility over revenues is very, very high. As we speak, Cruise accounts for 24 vessels in portfolio. The construction of 31 defense units is expected up to 2029 and 33 further vessels in the fast-moving offshore business for a total of 88 ships in backlog. Backlog coverage stands at 3.0. Commercial opportunities are up and running in all businesses. Now I will hand over to Giuseppe, who will discuss our financial results. Please, Giuseppe.

Yes, good morning, and I continue starting from slide number 10. on order intake and total backlog. Well, the order intake, it's worth to note the very important increase in the offshore business, which recorded 84% more order intake with respect to last year, and this falls within the growth strategy in the wind offshore sector. We closed the first half of the year at over 0.1 billion euros in terms of all the acquisition and the shipbuilding business. We have one cruise ship and the fourth frigate for the Constellation program in the United States. As Pierroberto said before, the commercial pipeline is up and running across all businesses. It's worth to note with reference to what the CEO said before on the submarine, for the Italian Navy, we expect to sign the contract pretty soon as it has been approved by the Italian Parliament. And we also have on top of this another 700 million waters coming, roughly 700 million coming from the defense business in the very near future. Going to revenues on slide 11. Total revenues were up, as expected, by 4.5% compared to the first half of 2022. Shipbuilding is broadly in line with the same period of last year, with crews accounting for 49% of group revenues and defense for 24. Revenues in the offshore and specialized vessel business increased by roughly 28%, and this underlines positive trajectory in growth that reflects the effective repositioning of VARD towards the offshore wind sector. And it's a growth that we expect to continue as the order acquisition is flowing in very well. Equipment systems and infrastructure business recorded an increase of 45.8%. And this is mainly due to the infrastructure business as the project in Miami is going at full speed. Net of eliminations, shipbuilding accounts for 74% of group's revenues. Offshore and specialized vessels for 12%. And 14% is related to equipment systems and infrastructure. Moving on to EBDA. 185 million euros, and this is, of course, I would say, a substantial, solid improvement, to say the least, compared to the EBDA margin of the first six months of last year. Of course, the first six months of last year was affected by many one-offs. Still, our EBDA levels reflect high inflation costs and high pressure on raw materials and in the cost of labor. So we haven't seen yet, let me say, a weakening of the pressure. Shipbuilding closed at 6.1%. And this is an improvement with respect to the second half of last year to actually to the total of last year, 4.6, but lower than the first half. The first, the margin of these apples still affected by the impacts, as I said, occurred in the second half of last year. And this is largely due to the geopolitical context fueled by the Russian-Ukrainian conflict with the consequent further increase in raw materials prices and also affected by the inflation costs, notably in the U.S. labor market and supply chain. Offshore closed at 19 million euros of EBITDA with an EBITDA margin of 4%. That's 2.5 at June 30th, 2022. And this is broadly in line with the business plan targets, higher margin for offshore. And this is driven by the increase in demand in the offshore world. Bard as a company closed the first semester of 2023 at break even, which is a remarkable result compared to the history of ARD. Equipment systems and infrastructure, the EBDA is positive for 7 million. It was negative by 90 million as of the first half of last year. The margin is 1.2%. Of course, these EBDA levels are still negatively affected by the EBDA margin recorded in the infrastructure business, even though the electronics and mechatronics businesses registered a positive margin of respectively 1.8 and 7.3% in line with 2020. Moving on to the net results, we recorded a very small adjusted net profit at 3 million euros And that is before the unfortunate asbestos related extraordinary items, which came at 33 million euros for the first half of this year. So we have a net loss at minus 22 million euros. It was negative 234 at first half of last year. Net financial position and net working capital on slide 14. net debt at 2.8 billion. We have a net debt situation that is consistent with the progress of the production volumes, and as we're working full speed in the cruise business, as you know very well, networking capital absorption there is pretty high. It's worth to note that we delivered two cruise vessels in the month of July, the Explorer, well, we delivered one cruise vessel, sorry, in the month of July. We expect to deliver a cruise, a very big cruise vessel for revision cruise lines next week in our Marghera shipyard. Of course, these debt levels are still affected by a portion of the deferrals we granted to clients after COVID-19 pandemic, roughly 92 billion, million at this point in time. Networking capital is positive at almost 900 million. And the main changes are related to the increasing work in progress and client advances related to the production volumes of the period. And, you know, going to the current debt levels and the EBDA, when we look at the EBDA and net debt over EBDA ratio as of the end of 2022, which was in excess of 11 times. Right now, if we of course sum EBDA of the first half of 2023 plus the EBDA of the second half of 2022, and we do the net debt over EBDA ratio, we stand roughly in the low nine times ratio, which is a slight improvement, but this is the path on which we are walking and we'll keep walking on it. And now it's back to Pierroberto.

Thank you Giuseppe. Turning to markets and in particular here at the cruise industry, starting from the third quarter 2022 Almost the entire fleet was back in operations, with 93% of the global fleet capacity calculated in lower birth sailing as of December 31, 2022, and occupancy rate in line with pre-pandemic values. Bookings for 2023 are likely to get back to historical levels or even to reach new peaks. Such promising signals, along with the resumptions in order intake already in 2022, are backing expectations for the acquisition of new orders, taking also into consideration the necessary financial support provided by institutions to clients as per industry practice. We are best positioned to seize further opportunities from the near comeback and the green transition of the whole cruise market. Let me remind you that we are fully aligned with the emissions reduction roadmap for cruise ships. As a matter of fact, the first dual-fuel ship propelled mainly with liquefied natural gas and featuring a lubrification system for reduced friction resistance is scheduled to be delivered in the first half 2024. As for the naval, global defense spending is expected to further accelerate in the upcoming years. In such business, we are second to none in the construction of high-tech surface vessels like frigates, and now increasing our role also in the underwater domain. The commercial pipeline with the Italian Navy encompassing 1.2 billion orders, either in the process of finalization, the European Paddle Corvette and the Midlife MLU of the Horizon Frigates, are already effective. U-212 NFS submarine. Turning to offshore, as of today worldwide, wind farms are delivering a normal power of around 59 gigawatts that is expected to rise to a total global capacity of around 270 gigawatts by 2030. We are market leader with a share of over 30% in the construction of service operation vessels and construction service operation vessels in terms of order book and expect the market to rapidly grow. Commercial opportunities will also come from the subsea installation for the offshore wind, in particular in the specialized niche market of cable layers. In addition, let me remind you that we have a strong track record in development of cutting edge offshore units, featuring green propulsion and remote control solutions. Let's turn now to the last slides of the presentation. Execution is key and these results are proof of the management's full commitment to reach our targets presented back in May. A solid top line with group margin already in line with the target for 2023 and adjusted net income already positive, net of Abestos related litigation costs. We have a unique business model, our shipyards are running at full speed, the backlog is robust and the commercial pipeline constantly increasing for all the businesses. We are best positioned to be a frontrunner towards the next industrial cycle, strong in our financial discipline while improving production efficiency and cost discipline with a core attention on cash flow generation. In the first half of 2023 Fincantieri launched the higher priority strategic initiative to pursue the 2023-27 business plan targets and evolve the operational system in order to support the competitiveness of the long-term value creation. Actions will continue in the second half of the year to further increase operational efficiency, modernize shipyards and contain procurement costs of material and services, as well as production costs. Net of further deterioration of the geopolitical and macroeconomic instability and potential operational and financial impacts, we confirm 2023 operations in full swing. The consolidation of revenues and margins foreseen at around 5%. 2023 next financial position is expected to be substantially in line with end 2022. Now let's open the stage to Q&As.

This is the Coruscall conference operator, and 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. We kindly ask to use handsets when asking questions. Anyone who has a question may press star and one at this time. That's star and one. We will pause for a moment while questioners join the queue. The first question is from Monica Bosio with Intesa San Paolo. Please go ahead.

Good morning, and thanks for taking my questions. I have three. The first is regarding the NABAL business. In the first half, revenues were down, in comparison to the first half of 2022. I was just wondering if you are going to confirm your revenue guidance in the NAVA business at 2.2 billion by year end. And looking at the EBDA of the shipbuilding division, the margins were above 6%, so a bit my estimates. I was wondering if you can give us some color about the cruise business, EBDA. margin trend and the NAVAL one. I'm just wondering if this is mainly due to the improvement of the cruise or maybe to the NAVAL. And the very last is on the infrastructure business. If you can give us some color on the state of the art in the deployment of the backlog. In the first half, if I'm not wrong, the EBDA of the infrastructure was at minus 10 million. What do you expect by year end, if you can give us some indication? Thank you.

Good morning, and thank you for the question. Let me give just an introduction, and then I will willingly leave the floor to Giuseppe. Let me make always the same warning. Looking at movement quarter on quarter on a business of the biorhythm of the shipbuilding, it's a complicated exercise. That's the most obvious answer. So whenever you see a movement quarter on quarter on revenues, It has to do with the normal deployment and rollout of the backlog, which is not, which curves are by definition not, you know, as fluid as you would like to, because it has to do with deliveries. So our business is made of blocks. It's not made of It's not made of smooth curves. And this is a matter of fact. So I don't see any meaning in certain quarterly differences. I believe that we have to assess the picture with a timeframe that is as coherent as possible with the biorhythm of the business. So the good point is that All in all, we are working on costs. And when you work on costs, you generate benefits everywhere because you generate benefits on the job margin because a portion of your GNA are calculated in the tariff, which tariff is used in order to allocate costs to jobs. When you manage costs, you create improvement in every part of the company, and you improve also your GNAs that are not allocated to projects. So all in all, this enhancement in the marginality has to do with the initial positive signals of the strong commitment and strong focus on governance of costs. But I would like Giuseppe to give you a more precise answer. Thank you.

Thank you. Good morning, Monica. Well, novel business revenues, the outlook is really in line with our forecast. We did expect, we are expecting, we were expecting decreasing revenues in 2023 over 2022 as the programs we are executing are from time to time completed. In our business plan, the increase in NAVA revenues is expected from 2024 and 2025 onwards. Cruise is working at full speed, so we do not have any change compared to our budget and business plan. As with EBDA, of course, shipbuilding in total is substantially flat with respect to last year. What we see is an improvement, of course, I can also describe from a qualitative perspective here, but we see an improvement in crews because first half of last year had some one-offs related to the to the positions we had with some clients with respect to their credit standing. So these one-offs were related to the first half. Whilst this year we don't have them, of course, they are already accrued. So we can say that shipbuilding, cruise shipbuilding has improved whilst NAVAL, the contribution of NAVAL has decreased because revenues have decreased as expected. This is in general the qualitative comment on EBDA. On the state of the art of the infrastructure business of the backlog, as I said before, the major project that we have on the execution right now, the major project and unfortunately the project making us suffer and the project that we clearly said we're not gonna do any other projects like this one is the Miami Terminal, which is progressing and progressing well, although there are several criticalities and several things that require us to be very cautious when formulating a guidance and an outlook there. We hope to finish it as soon as possible. That's the message I can give you. I don't know if Roberto wants to add something there.

No, just to complement what you're saying, on the naval, you know that there are programs like Qatar that are in advanced delivery stage, then there are new programs with the Italian Navy that are So we gave today you an additional information on the fact that on top of the overall order intake of the first six months, we have in these days basically secured additional 1.2 billion from the Italian Navy for a number of new investments that are kicking in. So I don't see any, again, I don't see any disruption apart from the natural sequences of things. So on Naval, we are truly in good shape. And again, we are very focused and very positive on a number of international opportunities. in the naval business. So this additional 1.2, which again is not already recorded in the first half total order intake, but this additional 1.2 is national, is Italian. We are not yet disclosing any possible touchwood, less touchwood, possible developments in the international market. So the tailwinds, behind the NAVAL is so powerful that I see no issue while analyzing the trajectory of the revenues. On the infrastructure business, as Dario clarified, the name of the game is Miami, and 2024 is the year of the finalization of the job there. I would say there are no particular surprises at the horizon. And at the end of the day, 2024 will be the year of delivery of the terminal. So we don't need to bet on the future. We need just to work hard, fulfill our obligations, deliver impeccably in 2024, finish and get back to Italy.

Okay, I fully agree. Thank you for the call. And if I may, just a final question. I've seen that notwithstanding the rising interest rates, the financial charges in the first half were a bit lower than my expectations. Can you just give us a rough indication of the financial charges expected by year end?

Well, yes, there was an improvement also with respect to our initial forecast on financial charges in the first quarter. But by this improvement, we maintain our forecast of financial charges in the range, in the low 200 million at this point in time.

Okay, the low 200. Okay, thank you very much.

Thank you. The next question is from Matteo Bonizzoni with Kepler Chevrolet. Please go ahead.

Thank you. Good morning. I have three questions, I would say. The first one regards the margin. We have already seen in the first half of the year 5% of the margin, which is fully in line with your guidance for the year. You commented before, Giuseppe, that you have not felt any particular benefit from the slowdown of the inflationary trend. You commented about labor costs and other input costs. So I just want to have maybe some color on what you expect going forward as regards particularly I would say the evolution of the raw material costs and in particular steel in the next month or quarter. Considering that you have a certain time lag as we know from the moment when the steel price goes down or up and the moment when you feel the impact on your P&L due to the normal turnover of your inventory. So the question is basically if we should expect to see some initial benefit already in the second half of this year or maybe more next year. Then in relation also to the question of Monica before, not only we've had more benign than expected financial charges in the first half, but you have now commented that in the full year we should go back to let's say $200 million, which is more or less what we thought, but also we had, I think, two other items which benefited your bottom line in the P&L. The first one is depreciation because the guidance which you have provided for CapEx says that you are going to invest 300 million, which is 1.2 times depreciation. So I would infer that the depreciation in the full year should be more or less 240, 250 million, while in the first half we saw only 113 million. So I just want, it's a technicality, we know, but just to understand a little bit the dynamic of this trend of the depreciation. And the second item, which benefits a little bit your bottom line, is success, impact. We know there are a lot of moving parts, let's say, So the taxes were a positive item instead of being a negative item. Can you also comment also for this item, first type, and also an expectation for the P&L tax charge for the full year? Thanks.

Matteo, I didn't get your third question. What item do you want? The third one. No, no, the third one. Tax. Tax. Sorry, sorry, sorry. Okay, first question. Steel, very quickly. We haven't changed our, let me say, our position vis-a-vis steel costs. We still maintain a very cautious approach vis-a-vis the forecast on steel prices, as we clearly said when we presented the business plan, our assumptions are based both on current price levels and volatility. So now we stand in the fact that we are experiencing somehow lower price pressures. We still are in a very volatile environment. Therefore, my expectations is the same as we had last year. end of last year and when we presented the business plan period. On depreciation, yes, we closed it at lower levels compared to the forecast if you, of course, do the total yearly depreciations divided by two, but we maintain the total, the current guidance for the second half of the year is consistent. with a total depreciation that we are forecasting in our budget and therefore we forecasted in the business plan. On tax, there is some tax benefits related to the fact that we do have an agreement with our main shareholder on, you know, we consolidate our tax charges together with our shareholder and therefore this is a benefit related to that. We will see whether at the end of the year this is confirmed or not, and that depends on our tax capacity, on the tax capacity of our shareholder, and of the other companies that fall within this agreement on tax charges. But all in all, we stand in the benefit we had in the first half. tax forecast on tax and our forecast on bottom line at the same levels as we had two months ago so all in all on these three items situation is slightly better or not worse than we expected we keep our forecast for year-end thank you you're welcome

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

Yes, good morning and thanks for taking my questions. The first one is on the Greek Corvette contest. Is something going on that has been going on for a while? I wonder if you have any update on this particular selection process in terms of timing, of course, not else. And then, if possible, any comment on the ThyssenKrupp marine system statements you made a few days ago. I mean, you said you are willing to improve, to increase the partnership with them. I was wondering if this, I mean, if you can give more color even on this in the past. I think Anteriori spoke about surface vessels and not submarine. I mean, any information on this aspect would be interesting. Thank you very much.

Thank you for your question. On Greece, the tender is very open. I believe we are very well positioned. I've been saying it from the very beginning because we couple a very advantageous economic offer with an execution strategy that is heavily involving the local content, heavily involving the local shipyards. So the alliance we made with the best Greek shipyards is projecting on us a local content, I would say, plus, which associated with a very advantageous economic offer and with our impeccable products puts us in very good position. So that's what I think. Where is the process? The process is technically finished. Now it's time for the decision of the ultimate decision makers. To our understanding, this decision has been postponed after political elections, which resulted into a very clear confirmation of the existing government and existing leadership who get out of these elections much stronger than before. So I believe that very, very soon we will listen and hear from the decision makers the results, I remain very, very positive and I believe that the timing is this one. Moving to your second question on TKMS, ThyssenKrupp Marine System, it is official that the company is evaluating a process of spinoff from the big conglomerate, ThyssenKrupp Group. I believe it is essential for the company to be independent in order to pursue with maximum entrepreneurship all the opportunities that are outside in the submarine domain. So that's my understanding of the strategy. Our position was to enhance the commercial collaboration, first of all, because we believe that if we create together strong fundamentals, there is value creation, whatever is the future of TKMS. So the ultimate meaning of my interview was exactly this. So we know each other. We are actively collaborating in the commercial space. We are willing to be helpful, first of all, commercially, because I believe that whatever are the future shareholding developments of the company, it's always good to have stronger fundamentals. It's always good to have a stronger partnership, in particular when you want to increase your throughput capacity because the market is demanding a lot, and in particular if you want to increase your geographical footprint because the market is global. So no more than that and no less than that.

Thank you very much. Thank you.

Once again, if you wish to ask a question, please press star and one on your telephone. Or any further questions, please press star and one on your telephone. The next question is from Giuseppe Grimaldi with BNP Paribas. Please go ahead.

Good morning, everybody. I have a question around the development of the infrastructure business. First off is, Are you still gaining intake so far in the year in the infrastructure? And the second one is on the run rate of the profitability of the business. If we shall expect in the second half of the year still loss-making development in the infrastructure related to, let's say, the difficult execution of the Miami contract that you suggested us before.

Your comment on the order intake, if your comment on your order intake is the fact that you are noticing that the order intake is increasing, this is part of our strategy. So part of our strategy once again is de-risking and partnering. So we want to strengthen the company as we are doing. from a management perspective, from a processes perspective, from the risk management perspective. So the strengthening of the management is there. And the strategy of de-risking and partnering means that we have a company and we need to fuel the order intake. We need to somehow nurture this creature. We need to feed this creature. We want it more disciplined. We want it fitting very well. We want this creature to be handsome and educated and polite, but we need to feed the creature. So the quality of the order intake is the quality we would like to have. So it's small size, it's in partnership with a leading partner, It is focused on the niche in which we believe we have distinctive competencies. So specific projects, for example, in the hospital business, which is, you know, a good niche in this business, where if you are disciplined and if you have a product, you can find your corridor of comfort. Let me use this image. So it is not necessarily we don't have to take orders in the infrastructure. To me, it is that we have to have a stronger management, a stronger set of processes, and at the same time filter jobs that are coherent with the new strategy, which is a strategy of valorizing what we have also, obviously, feeding with healthy backlog, this story. Moving to your second question on Miami, Miami is the other round. Miami is a business in which we took the 100% of the risk in a geography we don't know, with an execution strategy which was not, I would say, very knowledgeable about how to deliver in the Miami construction environment. We have extensively, during Investor Day, we have extensively explained that that business model is no more with us. So we don't want to go far from home being entrepreneurs and pioneer in a business which is a very well-known business, which is a business of construction. So Miami is a different story with the backlog we are incurring in these days. As I told before, Miami is under control, under control with the client, under control in terms of estimation to complete. But it's not finished until it's not finished. So it is under control. We have no surprises. We are on top of it. But most importantly, in 2024, It is going to finish. And when Miami will be finished, will be very good news because we are in a way that is clear and I would say definitely addressing the matter and getting back to our beloved country.

Thanks, very clear. Maybe just a quick follow-up on the naval business. Maybe you have explained this before, but is it fair to say that basically the trend of the naval business for the rest of the year is quite similar to the one we saw in the first half, so a bit of slowdown and then a pickup in 2024 and 2025?

Yes.

Thanks a lot.

You're welcome.

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

Thank you very much for joining us today.