Tesmec S.p.A. (TES) Earnings Call Transcript

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Tesmec Group First Half 2026 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Carlo Caccia Dominioni, CEO. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining our conference call to discuss our first half results. We appreciate very much your interest in our company, and we welcome the opportunity to update you on our performance and outlook for the end of the year. First of all, I would like to start with 3 key main messages that in our view, summarize the first half of 2026. First of all, the group continued to improve its overall performance, and this is the first very important point. The overall performance in terms of revenues that increased by 12% year-on-year. EBITDA increased by 14.7% and net profit that reached EUR 4.5 million compared to a loss in the first half of last year. Last but not least, the net financial debt decreased up to EUR 120 million. Second message I would like to share is the fact that the performance of our businesses nowadays reflects, of course, different stages of development. On one side, energy continued to benefit from positive market dynamics and for sure, strong execution, as you can see also in the results. Trencher are showing the first concrete sign of recovery, especially if we look at the transition between first and second quarter. While Rail achieved important commercial milestones that are reflected in our backlog figures. But at the same time, as I also anticipated in our first quarter conference call, is still suffering from some delays in the -- let's say, expected delays in the start-up of new projects. Last but not least, the third point is that we are -- I would say we are entering, but also maybe worth reinforcing a period in which we have a greater visibility in terms of market perspective and opportunities. If you saw our results, the backlog has increased up to EUR 498 million. Increasing both compared to the end of last year and compared to March 2026. This result, of course, is important for us because it give us a very strong basis for the execution over the next coming quarters -- let's say, coming quarters, but also coming years. So just to sum up, of course, there is still work to do across some parts of the portfolio. Of course, there are still some activities that we have to reinforce in the next coming quarter, but we believe that as we are also showing in our results that the group is progressing in the right direction with a strong focus in our operational and especially financial priorities for the next future. Before going into the dynamics of the different business, I will leave the floor to Ruggero Gambini, our CFO, that will go on with more details on the figures.

Thank you, Carlo. Welcome, everyone. As usual, we made available a presentation, which you can download from our website, Investor Relations section. And going to Page 5 of this presentation, just to comment briefly our KPIs, starting from the economic ones. As Carlo said, both revenues and EBITDA showed a robust performance during the first part of the year, and gaining -- confirming again of momentum which started actually in 2025 and which is getting even more robust throughout this year, which is important, especially when we look at the estimate for the year-end that will be commented later on. In terms of revenues, EUR 144 million, so a 12% increase versus the first part of last year with a 15% -- almost close to 15% increase in EBITDA, which went above EUR 24 million with profitability close to 17%. I remind, as we already communicated in the past that our target EBITDA margin is well above this level, and this is part of our midterm work to be done which is ongoing as the app are showing. Just a couple of comments. Clearly, a more than proportional growth at EBITDA level, thanks to operating leveraging versus the growth of sales on one side. On the other side, in terms of contribution to the growth of both sales and margins, there is a sort of differentiated trend between the business units. The single most important business unit driving this growth is represented by the energy sector, more especially stringing -- on stringing sales grew by close to 50% in the first half of this year against 2025. And while the automation sector achieved a growth of sales of around 18%. Also, Trenchers, as Carlo anticipated showed first signs of recovery against the second part of last year that was particularly negative, if you could remember, first half of 2025 still positive for Trenchers with a slowdown in the second part of the year and then affecting the 12 months result of the division in 2025. The first quarter results presented 3 months ago showed a first sign of recovery. This was confirmed by the second quarter sales. So also, Trenchers grew around 5%, keeping good -- keeping an acceptable level of margins in absolute terms. Still to do in terms of marginality. This will be commented later on. In terms of EBIT of operating result, the growth was even higher, 25%, thanks to depreciation almost in line half year against half year, '26, '25. This is the direct result of the over investments which were done in the past years, leading to a level of depreciation substantially at maturity. So now we are simply continuing the level of depreciation D&A, which, by the way, are also a good measure also of total CapEx. So, as we will see briefly with CapEx nowadays in line with the level of depreciation. This is very important because to the extent this is confirmed, the EBIT could be a very proxy measure of the gross cash flow generated in the period. Financial charges remained stable in spite of a decrease in the bulk of the net financial position, both against June last year and December last year. This is due to a lower total debt with an increased average cost of such debt. This is going to improve in the forthcoming quarters. There was a positive contribution, very positive contribution on an incremental basis against last year from foreign exchange rates. This is due clearly to the dynamics, especially of the euro-dollar currencies. We already explained this every now and again. The ForEx variations are mostly linked to unrealized variations rolling with uptrends and downtrends from quarter-to-quarter. In this last year, we were particularly penalized this year given to the rebound in the euro-dollar exchange rate. There was a gain of EUR 1.2 million, as you can see, leading to on an incremental basis, an improvement of around EUR 4 million. Ending result is represented by a pretax profit of EUR 7 million. And finally, a first sign also of return to profitability with the generation of an after-tax net result profit of EUR 4.5 million -- as you might remember, as we stated in the previous earnings calls, we always said our target was not to breakeven. That was just the first step of our relaunch strategy and actually and that our objective was to make money and create value for our shareholders. Finally, we are seeing the first outcome of the strategy implemented 2.5 years ago also in the results and which is very important. Clearly, the second part of the year, we hope could even be better in order to reinforce this very important message. In terms of net financial position, I would invite you to skip to Page 7 of the document. Here, as usual, we present the picture of the free cash flow generation. So total debt passed from the EUR 130 million of December last year to EUR 120 million at the end of June. So EUR 10 million free cash flow generation. Out of this EUR 7 million is directly connected to the operating activities and EUR 3 million as a reduction of IFRS 16. It is also very important to see and to notice the progress improvement in all the financial ratios such that if you remember, when we started with our process of relaunch from June 2024, at that point in time, the net financial debt reached EUR 185 million, around EUR 185 million. So, considering now after 12 months to 24 months, there has been a reduction of around EUR 64 million to EUR 65 million. Very important because, again, the cash generation is a very, very relevant confirmation of the goodness of the strategy so far implemented. In terms of -- one last comment in terms of debt composition out of the EUR 120 million, just to remind around EUR 64 million, something more than EUR 60 million is working debt, meaning backing the net working capital. Another EUR 24 million is represented by IFRS 16 financial liabilities. So that means that actually the real net industrial financial debt is slightly above EUR 30 million. If you compare this in terms of duration, with the overall amount of mid- long-term financial debt, which is above EUR 7 million, already excluding the portion of such debt expiring in the forthcoming 12 months, you can see that actually on top of having finally acceptable financial ratios, there is also a huge room for financial flexibility. I would stop here and leave the floor to our CEO.

Thank you, Ruggero. So, let's go and have a look in details on the single business units, starting as usual from Trenchers from the bigger one. For Trenchers, the first half showed a number of elements that support our view that the business is gradually moving towards a more balanced phase. In terms of revenues that increased by 5% year-on-year. And of course, looking at the backlog that increased significantly to up to EUR 81 million, providing visibility for the next coming quarters. EBITDA was -- if you look at these figures was stable compared to last year. But if you have a look in details, if you look at the second part of last year and the first quarter of this year, as expected, there was a significant improvement in Q2 -- and let's say, we foresee for the next coming quarters to go on in this direction. Of course, for tankers, we are not yet considering the recovery process completed. But the indicators observed during this half are consistent with the expectation that we had for entering the year. In terms of production volumes that compared to last year improved a lot and backlog that is higher, as I just said. There are, for sure, significant opportunities in markets that for us are very strategic in terms of applications, especially with the main focus on pipeline, energy infrastructure that is a current topic that we will see also later on for data centers with energy and mining. And last but not least, one very important point for this half, but I would say more important also for the rest of the year is the fact that the U.S. market is performing very well, and this is important for Tesmec in terms of volumes, in terms of geographical mix and in terms of profitability. Let's now switch to Rail. As you can see from the figures of rail, the performance -- the current performance of rail does not yet reflect the commercial progress that the company is doing in this business. I'd like to remind the fact that when also we met that for the first quarter, we underline the fact that these results for the first half of this year were foreseen and anticipated. When I mean results, I refer to the fact that revenues are slightly lower than last year, reflecting the transition between the former completed projects, the completed contracts that we were closing and the ramp-up of the new ones recently awarded. But at the same time, we have to have a look at the backlog. The backlog increased significantly, nowadays is around EUR 180 million. And this -- especially for rail and especially for the structure of the business of rail is very important in terms of providing visibility not only for the next coming quarter, but as you know, with the duration of our backlog also for the next coming years. So if you -- looking at the numbers, of course, revenue and profitability are still reflecting a gap between the old projects and the new contracts. But at the same time, I would like to spend some moments in underlining our activity in terms of sales activity that from our perspective is very strong in terms of, as you know, Tesmec is looking forward to development of the international presence of our railway business across European markets through the participation in major tenders. One of the evidence of this priority that we gave in terms of commercial activity is the Slovenian tender that we recently award of EUR 71 million is validating our capability to deliver complex solution for the rail infrastructure. One other important milestone for our development in rail is the fact that the new bimodal maintenance vehicle platform has entered into the certification testing phase. This is important in terms of evolution of our product development road map. And last but not least, we achieved in the first half some certification for specific markets, specific geographies that are foreseen to be very strategic for our next future such as France. If we look at the next future for this business as we move through the second half, the focus of our people, the focus of our structure in rail will be on the execution of the existing backlog that as I was mentioning is pretty important and the conversion of the commercial development and activities that we are facing in the last recent quarters. Last but not least, in terms of business, let's have a look at the energy business. As you can see from our charts, energy continue to provide a strong contribution to the group growth in basically every financial that we show in the chart in terms of revenues with a strong increase of 38% compared to last year. Probably the most significant and rapid growth is the one-off EBITDA that increased by 74% compared to last year, so going from 18% to almost 23% and backlog that, of course, is going on in a strong direction, as usual, giving us a very strong visibility for the next future. This business in each division, both Energy Automation and streaming is benefiting from positive market dynamics supported by ongoing investments in the grid infrastructure, both in transmission and distribution, as we were also mentioning while presenting Trencher. If we want to have a deep dive in the 2 divisions in streaming, the market is positive and driven by continued investments in the power infrastructure. Backlog that usually has a duration, as you know, that is very short is -- has increased by 86% compared to June last year, and this is very impressive from our perspective. And of course, as we were mentioning for Trenchers, one very important aspect in terms of geographies, in terms of mix is the fact that our U.S. market is performing very strongly and is looking for performing in this way also for the next future. In terms of technological platform, we have to -- also we communicated in the last couple of weeks also the launch of the introduction of the new underground product range still for transmission that is an important milestone, especially in perspective in order to complete our range for the transmission business. On the other side, for automation, the execution remains solid across the key project, the key projects in pipe and in the backlog with an increasing weight of substation automation systems compared to the sale of products, especially in distribution. The backlog conversion to continue to support growth in terms of volumes and of profitability. And of course, as per the railway business, there is still a continuation of our sales activity in terms -- in order to diversify our customer portfolio, not only in terms of technologies, but also especially in terms of geographies in Europe in general, not only in Italy. Before, let's say, closing our conference call, I would like to give you a look on the outlook of 2026. I would like to underline one very important aspect that is basically that our priorities remain the same. So we -- of course, we entered the second half of the year with a strong backlog, almost around EUR 500 million. Of course, this gives us visibility. I don't want to repeat too many times the same topic, but let's say, of course, gives us confidence for the future. On the other side, from a managerial perspective, the key priorities of our people, of our key managers of our people in Italy and in the international footprint of Tesmec remain very focused on cash generation, reduction of working capital and debt reduction. Of course, based on what we see in terms of current development, we continue to expect growth in our key economic indicators compared to the end of 2026 -- '25, sorry, and a further improvement in the net financial debt. So I think we are all done. So we leave the floor to any question or anything.

[Operator Instructions] The first question is from Enrico Coco, Intermonte.

I have some questions on numbers because you basically commented the semester. But if I see the trend in the second quarter, the growth is much more aggressive compared to the first quarter. For example, on the sales part in the first half, sales were up 12%, but this is down by 7% in the first quarter and 17% in the second quarter. If I see the Trencher, for example, Trencher were down 7% in the first quarter, but in this second quarter are up 19% compared to the second quarter of last year. So it's really a turnaround of growth in Trencher. And the only business going not really well is the rail. Now my question is on the rail business, based on -- you said that you expect an acceleration in the second half based on the backlog you already have in hands. So the question in the railway is, can you tell the revenues level you expect in the second half based on the conversion of the backlog. So the revenue level on which we have visibility for the second half. This is about the rail, which in the first half had sales of EUR 20 million. So the question is if you expect for the second half, I don't know, another EUR 20 million sales or at least we have visibility on this EUR 20 million sales for the first half for the second half? And then about the group, you expect an acceleration in the second half. The second quarter was already really strong in terms of growth acceleration. So the question is, if I look at your outlook -- for example, a level of revenues of EUR 300 million this year, do you think is achievable by the company? Because if I see, again, the trend of the second quarter and the acceleration you expect based on the backlog in the second half, the numbers should go up much more than your guidance. And also on the margins, so for example, in Trencher, in the second quarter, margins were 16.6%, so almost 17%. So margins are already at a level which is pretty high. And the question is, if you maintain this kind of margin around 17%, 18%, also the profitability should be much higher at year-end. So basically, my question is about understanding based on the acceleration you will have in the second half understanding the best fair estimates for the year. If you could provide some indication on this. And then I have another question about the JV in the U.S. Can you tell the impact I would see in consolidated accounts if you will start consolidating this JV. So what do you consolidate today? And what could change if you will start consolidating the asset line by line?

Thank you, Enrico. Very difficult question. Just before going on -- let's start from rail. As you know, as I was mentioning in the last couple of conference calls, we were expecting to have a slow first half of the year because we were still in the awarding phase of the new tenders such as the Slovenian one. And because we all know that in order to see the results in the effect of the new awarded tender, especially in rail, especially with our supply chain takes some time. I have to be very qualitative today, so I cannot give specific numbers. Also in terms of -- we want to be very current with how we have been in the last few years. So we want just to give a flavor or an idea of our perspectives without giving specific numbers. But we are positive for the rest of the year because, as said, we will see the results of the implementation of the new tender of Slovenia. Of course, you will not see all the results in the second half, but you will see also the results in the next years. And we will see the result and the start-up of new opportunities that we are facing and we are working on since not a couple of months, let's say, since a few quarters from now. So we expect to have the volumes in rail to increase significantly. And we expect also the profitability to be much better than in the first half. If you look to our track record in rail in the last few years, you see that it's more an outlier the first half of this year compared to other exercises in which the EBITDA was to a much more stable level. So we expect to go back to our direction in terms of profitability also because as a business and also because in terms of geographical and technological mix, as you -- as we have said many times, the railway business is going -- is moving towards a better direction for the diagnostic business and also for the fact that we are working to be more competitive in international markets that are more -- that has a higher profitability level compared to Italy. In terms of expectation for the end of the year, I would stick to our same position. So we are stick to the fact that we are positive. The outlooks are positive. Our commitment at the beginning of the year was to improve all our key financial indicators, and we are still very convinced to be able to do this. As you said, the first half was good. We expect to have a positive second half. Of course, we are in a market context that is -- the dynamics of the market are very difficult to read. So we are in good sectors, strong sectors. We have a very strong positioning in those sectors. But of course, as we all saw in the last few years, there are some uncertainties in the market dynamics that from our side, of course, are requiring us and our people to be very, very careful. And as I said, the key priority for us is to remain careful, remain very disciplined in the execution of our backlog and be focused in improving the net financial position that for us is a priority in order to be much more flexible. Last but not least, the JV in U.S. as of today is deconsolidated. As of today, we have 50% of the participation in this JV. As of today, the only thing that we see is that the market is performing very well. Our activity in that market is performing very well. Of course, on us, it's positive because our JV is -- because Tesmec is a supplier of this JV with our machine and technologies and the U.S. market is by far the best in terms of profitability and in terms of, let's say, cash generation. So as of today, we don't see any major change in the next coming future. But of course, the fact that the U.S. market is performing so well is very positive in our perspective. Taking into account that the dynamics of the market in the U.S. are seen very positive also for 2027 as of today.

A follow-up question is on CapEx. In the first half, CapEx were around EUR 10 million, of which 20%, so EUR 2 million were fleet. The question is about the CapEx level for the year, if we could take the first half indication as a good proxy for the year. So for the year CapEx level between EUR 20 million and EUR 25 million, of which 20% is fleet. Is this reasonable?

The total value, as I already mentioned, Enrico, this is speaking, is to make reference to an overall value of CapEx in line with D&A.