Fincantieri S.p.A.

Good morning. This is the course call conference operator. Welcome, and thank you for joining Syncantieri's 9-month, 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. Folgero, Chief Executive Officer and Managing Director. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for joining us and welcome to Fincantieri 9 Months Financial Results Conference Call. This set of results confirms once again 2023 guidance and shows a solid top line with revenues up by 1.3% to 1%. This is in line with expectations and with the development of the backlog. EBITDA improved by 60% when compared with the same period last year, with margin at 5.1%, way better than last year. Net financial position came at 2.7 billion euro, in line with targets. We have now a total backlog of almost 32.6 billion euro, securing 4.4 years of work when compared to 2022 revenues. Order intake came in at €4 billion, with a strong contribution from wind offshore and the fence. In the sole third quarter, we recorded €1.9 billion of new orders, with a book-to-bill ratio above 1. An important milestone in October with the signing of a Memorandum of Understanding with Leonardo aiming at defining initiatives and developments related to systems, including underwater drones, for the protection of critical underwater infrastructure. This strengthened further our partnership already consolidated through the Horizonte System in a Valley joint venture and represents another opportunity to innovate the sector with cutting-edge solutions. Overall, This set of results is proof we are in the right trajectory and we do confirm the targets for year-end on revenues EBITDA and debt. Let's now move to slide six for some business updates. Our operating performance has been consistently positive throughout the first nine months of the year. Indeed, the group's shipyards are running at full speed with 17 vessels delivered from 10 shipyards. Out of these 17, 10 are for the offshore sector, including three marine robotic vessels for Ocean Infinity and five units for the wind sector for four different clients. Over the period, 15 units were ordered, resulting in a total of 86 vessels now in portfolio. Turning to slide seven, our unique competitive global reach across all business segments, the long history of our industrial excellence, the top-notch competencies of our people put Fincantieri in the best position to seize market opportunities. Cruise recovery, Increasing attention on defense assets and the buoyant offshore wind market are the main current trends and underpin potential acceleration of the business and further sustain our already solid commercial pipeline. Here are some examples of the new orders received in the first nine months of this year. Starting from the left, the new order for two new hydrogen power ships for MSC ready by 2028 is a sign of the growing vitality of the cruise sector. This offers us another strategic opportunity to lead the digital and green transition in the shipbuilding industry and is proof of our full commitment to achieve net zero ship by 2035. In the center, the next generation near future submarine program, where we are both design and authority and prime contractor. The submarine is a unique strategic and industrial asset combining shipbuilding at its highest standards with the underwater, a sector in which crucial games will be played. The prosecution of the program acknowledges Fincantieri's technological leadership in full continuity with the pillars set out in our business plan. Finally, on the right, on offshore, Fincantieri reaffirms itself as a prime mover in the construction of support vessels for the wind offshore sector, and as a technological partner for the companies intending to strengthen their fleet with cutting edge products. Just a few comments on our order book on slide eight. As you can see, we are loaded with deliveries for the medium to long term up to 2030, offering a very good visibility over revenues. As we speak, Cruise accounts for 22 vessels in portfolio. The construction of 34 defense units is expected and 30 further vessels in the fast-moving offshore business for a total of 86 ships in backlog. On offshore, it is worth to mention that over the period, we secured contracts for a total of nine SOVs, CSOVs, out of 18 ordered globally in the first nine months. This number rises to 11 if we consider the last order finalized in October for Windward Offshore Consortium. The commitment in the growing wind market has led the group to secure contracts for a total of 23 CSOVs out of 61 ordered globally since 2020, representing more than one-third of the demand. Overall, commercial opportunities are up and running in all businesses. Now I will hand it over to Giuseppe, who will discuss our financial results. Please, Giuseppe.

Good morning, everybody. We now turn to page 10 and a few comments on order intake and total backlog. Order intake was $4 billion for the first nine months of the year, with 60% coming from chip building and in-chip building We have new orders in defense, the near-future submarine that we talked about before, and three new OPVs for the Italian Navy, and another, the fourth, free gate for the U.S. Navy on the Constellation Free Gate. Twenty percent of this order intake comes from the offshore wind sector, in which we have experienced a dramatic growth, I would say, in the first nine months of this year compared to the first nine months of last year. Orders grew 64%, and this is a sign of the pickup in demand for new offshore wind vessels. And we'll see this ripple into revenues in the next year. Book-to-bill ratio stands at 0.8 versus 0.6 over the nine months of last year. And in the third quarter, we had a positive, a book to build above one as we had 1.9 billion euros in orders compared to a little less than 1.9 billion in revenues. Total backlog at 32.6 billion, 4.4 times of 2022 revenues as we said before. And the backlog stands at 22.2 billion euros. On revenues, page 11, 5.4 billion euros for the first nine months of 23, up 1.3% compared to last year. The overall increase is mainly driven by revenue growth in offshore and specialized vessels, and the equipment systems and services, thanks to the infrastructure business which grew by 25.3%. Shipbuilding still accounts for over 70% of total group revenues and most of the contribution in shipbuilding comes from the cruise segment. On EBDA, page 12. Well, this quarter, let me say, further consolidates the positive results of the first half. EBDA stands at 276 million euros, up 60% compared to last year. And EBDA margin is at 5.1%, higher than what we saw in September of last year. Shipbuilding stands at 256 million euros with an EBDA margin at 5.9%. And Marginality compared to last year is impacted as expected, I must say, by somehow lower production volumes in the naval business. Offshore doubled its EBDA compared to the first nine months of last year, moving to an EBDA margin of 4.3% and 31 million. It was 2.7% as of nine months of 2022. 21 million euros coming from the equipment systems and infrastructure. Of course, a dramatic improvement, a changing sign also compared to the first nine months of 2022, which were heavily impacted by the whole life cost revision of the infrastructure projects. It's worth mentioning now on the infrastructure that following the review of the production activities of last year, the marginality of the business is holding steadily and closing almost at breakeven. On page 13, net debt as fully in line with expectations, 2.7 billion euros. And that financial position is right now consistent and reflects the changes in that working capital, mostly related to the cruise business. We just delivered a cruise vessel yesterday and cashed in over 400 million euros. It's worth mentioning this. Net debt, of course, is still affected by the strategy of deferrals granted to clients after COVID-19. and we still have 94 million euros of deferral impacting our net debt levels. Networking capital is positive at 710 million euros. And the main changes are related to the increasing work in progress and advances from client for 94 million. And basically this is it. Now the word goes back to Piero Roberto for market trends and concluding remarks.

Thank you, Giuseppe. Turning to market trends in the cruise industry on slide 15. During the summer, the cruise sector recorded passenger volumes above pre-COVID levels, confirming the rebound of the cruise industry's long-term growth path. This trend, in combination with the rising interest in green and increasingly technological products and the entry of new clients in an ultra-luxury sector, is the key driver for the recovery of the new cruise ships, demand in a still wavering scenario. We are best positioned to seize further opportunities from the near comeback and the green transition of the whole cruise market. We are not just fully aligned with the emission reduction roadmap for cruise industry, but we set the target to achieve the first net zero by 2035, quite industrially courageous, I would say. Optimizing efficiency, innovation, and development of new technologies and collaboration across stakeholders are key enablers to reach this goal. As for the naval, global defense spending is expected to further accelerate in the upcoming years with geopolitical pressures continuing to support investments, including the maritime sector. In such business, we are second to none in the construction of high-tech surface vessels like frigates and corvettes. The underwater domain is becoming increasingly important due to the presence of critical infrastructure, resources, and assets. As mentioned before on the matter, we just signed an MOU with Leonardo to strengthen further our strategic partnership while sharing the best technology for mutual competencies. Turning to offshore, Despite high inflation and rising interest rates impact on costs and on the timing of wind farm investments, the underlying fundamentals supporting long-term growth in the offshore wind sector are confirmed, especially for the floating. We are best positioned at the moment playing the role as market leader in the construction of service operation vessels and construction service operation vessels in terms of order book as pointed out before. With an unprecedented political support for green transition, favorable market growth scenario and the renewed activity in oil and gas, the offshore wind activity is expected to accelerate starting in 2028 with further investments in next generation units characterized by high efficiency levels, flexibility and increasingly lower environmental impact. Let's turn now to slide 20, the last slide of the presentation. Execution is key and we are fully committed to reach the target set in our business plan. A solid top line with group positive EBITDA margin of 5.1%, the leveraging is ongoing, all coherent with the target set for 2023. We have a unique business model and competitive positioning. Our shipyards are running at full speed. The backlog is robust. and the commercial pipeline in all business. We launched higher priority strategic initiatives to pursue the 2023-27 business plan targets to evolve the operational system, supporting our people in the supply chain in line with the needs of production activities while managing operational risks in order to support the competitiveness and the long-term value creation. Actions will continue in the second half of the year to further increase operational efficiency, modernize shipyards, contain procurement and production costs, energy and digital transition. Net of further deterioration of geopolitical and macroeconomic instability and potential operational and financial impacts, we do confirm 2023 business volume expectations with revenues substantially in line with 2022 levels and marginality at approximately 5% and net financial position substantially aligned with N2022. And now let's open the stage to Q&As.

Excuse me, this is the chorus call 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 your question from the question queue, please press star and two. We kindly ask you to use handsets when asking questions. We will pause momentarily while questioners join the queue. The first question is from Emanuele Galazzi of Equita.

Yes, good morning, everybody. Thank you for taking my questions. I have three questions. The first one is on the infrastructure business. We have seen that in the third quarter the business was above breakeven. Can you just comment more on this and do you expect the business to stay above breakeven also in the fourth quarter? The second one is on the new MOU with Leonardo. If you can just elaborate a little bit more on this and on the next step of this agreement and if you can just give us an idea on the potential opportunities that may arise from this agreement. And the last one is if you can share with us a general comment on the ongoing negotiation with your client in the shipbuilding business, just to understand if you are seeing an environment that is improving from this point of view. Thank you.

Thank you for your questions. Infrastructure business, as we anticipated, we are taking the effects of the reassessment, strategic reassessment of the jobs, economics, of the project economics. So we take our view at the beginning of our tenure. And as a result, what you're seeing is the, I would say, ballistic continuation of the operations in the infrastructure business. So it is turning around slowly according to expectations and we have nothing to add in this respect. Our view, let me just reconfirm our view, which is to manage the risks, manage the appetite for construction risks, for infrastructure risks, carefully. Concentrate on our clients, concentrate on our backlog, concentrate on a flawless and smooth execution. So this is what we want to do. And then, valorize this asset, step by step, pursuing selectively new initiatives, according to the core competencies which are in the, I would say, specific niche we are in with the infrastructure business. Moving to the second point, which is some more color about Leonardo MOU, let me say that the MOU is basically the intention to create a stable joint task force in order to put in common the expertise we have in the underwater domain, which is mainly driven by Fincantieri knowledge of the submarines. This is the rock bottom of the competencies of our country, of Italy. So let's capitalize on what we have which is the know-how in the submarines. You know, the Fincantieri built something like 100 submarines in its history. So it is clear that the rock bottom, the core of the competencies of the country is with us. We want to foster and enhance the collaboration with Leonardo in this domain, as far as electronics is concerned, as far as telecommunications are concerned. So the new domain of underwater is not a single element underwater, but it's an ecosystem. So there are a lot of dots to be connected. There are a lot of components of this ecosystem and this ecosystemic view is what we want to develop together with a third very important actor, which is the Italian Navy. You know that the poll for the underwater domain is being sanctioned by law and this poll will involve the Italian Navy as the proof of concept player for these new ideas and new solutions. So the underlying idea is to procure that Fincantieri is the locomotive of this new supply chain that is made of institutions. First of all, as the way to validate this new model and also non-institutional clients, i.e. company corporations that are involved in the underwater domain, namely oil companies and anyone that is involved in this new domain, not from the military and naval perspective, but from the civil perspective. So this is the mandate of the national poll for underwater, and this is the ambition of Fincantieri in that respect. Your third point about some more indication about the ongoing commercial discussions with the ship owners in the cruise sector. Let me first of all confirm that as we expected from the very beginning, this market is gaining traction in every respect. First of all, in terms of occupation rates, so all the fleet is in operation, but all the fleet is back or even better than the occupation rates pre-COVID. Secondly, the yields are going very well, i.e. the rates and the revenues per passenger are going very well. As a result, the cash generation is increasingly good, also because this good top line, i.e. numbers of passengers and revenues for passengers, is coupled with a lot of cost discipline applied by shipowners out of the COVID times. So the COVID times, during COVID times, everyone, not only ourselves, but also shipowners, learned a lot about cost discipline. So the combination of a robust top line and the stringent cost discipline is giving momentum to the margins and to the cash generation of our esteemed, beloved ship owners. So all in all, this is creating an appetite for investment. You know that the projection of the cruise industry are very positive and therefore all ship owners are anticipating a mismatch between supply and demand in term of available beds. The cruise sector is very attractive in term of alternative to traditional hotellerie kind of offer because the value for money is much better. So the cost of the airplanes, the cost of the hotels onshore, the cost of the restaurants compared with the equivalent holiday and vacation on board is remarkably accretive in term of value for money. So this is pushing more and more the commercial proposition of the cruise holidays vis-a-vis the onland, onshore holidays. We are very positive in terms of appetite for investment of shipowners, not only because it's our job, but because we see these underlying fundamentals turning very, very well.

Thank you. Thank you very much, Erika.

As a reminder, if you wish to register for a question, please press star and 1 on your touchtone telephone.

Good morning, everyone, and thanks for taking my questions. I have a few. The first one is on the offshore business, which is progressing very well. The underlying fundamentals are very good, but the scenario in the renewable segment has somewhat muted on the back of rising inflation and rising interest rates. I was wondering if you expect some pause in the order intake for 2024, and if yes, if Pink & Carey can compensate with other orders in the segment. The second question is on the infrastructure. It's a follow-up on the Emanuele question. It's going well because of the reassessment of the risks. And I was wondering if you are confident to be profitable already in 2024 in this sub-segment. Another question is on the press rumors regarding TUI that would have asked apparently to postpone the deliveries in the second half of 2024 and at the beginning of 2025. I don't know if you can comment on this, but if yes, if the company is planning some deferred payments with these customers. And the very last is on the underwater business. I read that the value of the market for underwater is, if I'm not wrong, something in the region of $90 billion. It's an ecosystem made by submarines, drones, and others. Which is the segment that you see growing the most in the underwater business in the horizon period? Thank you very much.

Very clear, very clear. Let me start from the wind offshore. If you get into what is going wrong in the wind offshore, you will appreciate that the greatest, on top of the issue of interest rates and so bankability and I would say the financial burden of any investment-driven business, but if you get into the dynamics of what's going wrong in the wind offshore, you will appreciate that there is a big congestion in the supply chain. So there is a lot of business and everybody is, you know, securing too much business, let me say. And the supply chain is suffering accordingly. So on the one hand, there is a heavy competition from Far East on certain critical equipment. On the other hand, there is a a dramatic congestion on the supply chain. So this is something I would say physiological. Again, when you have a huge wave of growth in industries that are quote unquote brand new, it may happen that this congestion is creating disruptions. and so is absorbing value instead of creating value. So let me specify, therefore, that the issue is not the demand for construction service offshore vessels or service offshore vessels. This is not the issue. The issue is that there is too much demand. And this is the same on the rest of the components of the wind farm industry. installation. So the answer in order for this disruption to be addressed and to be managed, but the answer is to grow more in the supply chain. So this is not a crisis that is creating issues on the supply chain. Developers are suffering because there are extra costs in the construction of wind farms. Producer of large critical equipment such as turbines are suffering because they cannot follow as they would like the production stages and they suffer also for international competition by the way. So I don't see negatives. on the supply chain. Because again, at least to my reading, the roadblock is the lack of adequate supply chain components. So that's why we don't experience, we are not experiencing issues in the ordering flow. Let me also add that there are other components to the bigger picture of the wind farms that are the necessity to lay cables. So the ecosystem is also realizing that it's not all about building wind farms, but also to connect wind farms. So we have a kind of market edging because when The system is pushing a lot on the wind farm construction. We see a pickup in the demand of supply, service offshore vessels. When we see that the market is concentrating more in the connection of existing wind farms, we register a pickup in the cable layers. So all in all, I'm very, very positive on the development of VART, of our business in the offshore industry. because the pipeline of opportunity is truly robust and the issue is what's the best production scheme in order to serve in a smooth way as a supply chain contributor to this long-term new growth. Moving to infrastructure, again, we are very prudent on the infrastructure business. So we want to deliver step by step. Our core business is elsewhere. So we don't want any kind of overexposure and any kind of, you know, specific guidance. I want you just to appreciate quarter by quarter the results of the work we are performing. in terms of de-risking and in terms of re-addressing our niche of competencies in a value, in a creative and value-creating way. Moving on to we, we are not in the position to give any specific information simply because there are no information in this respect. The only information is that periodically we assess with our clients the constraints of the execution of the project. And we are always ready to sit around the table with our clients and understand what's their need, what is important for them, what is important for us. and how we can accommodate any constraints and any requests. But as of today, we have no information to give and there is nothing specific to add in this respect. On the underwater domain, let me say that if you look at the underwater from our perspective, we believe that it's a new ecosystem, it's a new world. is like the space 40 years ago, where you need someone that is master planning this new space. Master planning meaning joining dots, connecting dots, providing solutions to our customers. So if we start from the Navy, the Navy is evolving its military doctrine involving drones, swarm of drones in association with ships. So the first ships and submarines. So the first new doctrine, the new concept is to consider not only the ship as a system of systems, but all the, I would say, underwater welfare as a system of systems whereby the ship itself is part of this system of systems, other systems are submarines, and other systems are drones. And they have specific mission to accomplish, and this is the new domain that we want to enable. So in this new domain, you need smaller submarines, drones, command and control systems, manned and unmanned, and everything somehow monitored and controlled from the surface vessel. So this new concept of underwater warfare will be the occasion to validate new technologies in the underwater domain and then procure that these new technologies are exploited in the duality vision of the business, i.e. from the military to the civil, which is the characteristics of Fincantieri. So we strongly believe that the underwater domain will be an additional demonstration of the merit of being at the same time partner of choice of the military and naval player and partner of choice of every other requirements coming from the maritime and civil space. If you go underwater tomorrow morning or tomorrow afternoon, maybe the water will be better for you, you will find submarines, And you will find all companies. All companies are accustomed to manage subsea operations since ever. So I'm giving a kind of initial example of who is building the requirements of the future. Our company in the enlarged meaning involves energy player, telecommunication player, whoever is taking care of the sea beds, which is again a new player to come, a new kind of partner of choice to team up with. So this is an initial vision. Let me anticipate that Fincantieri is taking very seriously this new market. We are ready to step in as leader For the reason I told you, because we are integrator of solutions, we can master plan this space and we can drive the ecosystem from a starting point, step by step into this new industry. And we are going to grow and we are going to take steps in this direction with the right set of entrepreneurship and vision.

Thank you very much. Thank you.

There are no more questions registered at this time, sir.

Thank you.

Thank you for attending. Goodbye. Thank you. Bye.