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 9 Months 2025 Results Conference Call. [Operator instructions]. At this time, I would like to turn the conference over to Mr. Carlo Caccia Dominioni, CEO of Tesmec. Please go ahead, sir.

Good morning, everyone, and thank you for joining our conference call. Before going into the presentation of the 9-month results of Tesmec, I want to give you a very quick picture of our company as of today. As you saw the results published a few minutes ago, Tesmec confirms with the 9-month results, the positive trends of the financials in line with our budget and in line with our plan. And the overall picture confirms the strong focus that the company and its manager gave on cash generation and, let's say, cash generation and a strong discipline on containing fixed costs. In terms of markets, and in terms of technologies, we go on with our development of high-value markets, both in terms of geographies and technologies. And the results on our financials show a picture of a strong reduction of the net financial position compared to the September 2024, and in line with the first half of the year. And the increase of revenues and profitability in high-value markets coming from, especially with a strong focus on Energy and Railway business. In the last few days, we have confirmed, also the finalization of the agreement for the joint venture in France, with our local partner, as it was already communicated during the year. And also in the last quarter, there was a very important milestone from a financial perspective that is the finalization of the refinancing of Tesmec Group that is, let's say, confirm the idea of the management of strengthening the financial structure of the group. This is in a few words, the general picture. I leave the floor to Mr. Gambini, our CFO, to go into more details on the figures on the financials. Thanks.

Thank you, Mr. Caccia. Welcome, everyone. As usual, we made available a presentation. You can download it from our website at the Investor Relations section. So starting from Page 11. Just a brief comment on our KPIs. First of all, revenues. Total sales reached EUR 192 million, thus marking an increase of EUR 12 million against the like period of 2024, and representing a growth by 7%. This EUR 12 million were mainly represented by the Stringing business, following the huge development of the reference market, and so linked to the energy infrastructures. At the same time, there was an increase of around EUR 2 million -- EUR 2.5 million in the Energy Automation business, another EUR 3 million are relevant to a sales growth in the Railway business, while there was a slight decrease in volumes relevant to the Trencher business units by EUR 2 million. The net result of this is an increase of the EUR 12 million we were mentioning. On this regard, let's keep in mind that, in line with what was already commented during the last earnings calls of early August, the downturn -- the light downturn limitation in volumes in the Trencher business was also accompanied by an approach of cash over volumes, but leading also to a reduction through focused actions of destocking of net invested capital. Going to the EBITDA. EBITDA grew by 7%, so in line with the progression of the sales closing at EUR 31 million -- EUR 31.5 million against the EUR 29 million of last period of 2024, achieving an EBITDA margin, so profitability of EBITDA against the revenues of 16.3%, in line with the same period -- with the same value of last year. On this, a couple of comments, because the result of this EBITDA margin being in line apparently would hide the effect of the operating leverage. As I was saying, this is the combined effect of 2 points. On one side, a different mix affecting the gross added value compensated offset on the other side by an increased efficiency of our fixed cost operating structure as our CEO was commenting before. In terms of the result before taxes and let me say, before the ForEx variations as ForEx variations are largely unrealized because like the previous period, they are mostly linked to intercompany financing, there was the result before taxes and net ForEx variations doubled, passing from EUR 2 million to roughly EUR 4.5 million. And this going down -- further down along the P&L, then considering the largely unrealized net ForEx variations, mostly linked to the devaluation of the dollar against the euro led to a negative contribution by these items of EUR 3.2 million, but driving to a result before taxes of EUR 1 million. Final result, was negative EUR 0.7 million, so very much approaching to breakeven against -- and this is very notable to be highlighted because it corroborates and confirms this continuous path of improvement against the previous periods. It is to be compared with the EUR 4 million losses of the first 9 months of last year. Clearly, as I said, I would say, during the last 3 earnings call, our target is not too breakeven. The target of this managerial team is to make money. In any case, this is a huge --huge confirmation of the correctness of the strategy pursued along this path of growth followed by the company. As far as the mix of net result is concerned, as you can notice at Page 11, the results from the continuing operations really approached breakeven at 0.3% negative result, while the contribution from the dismissed -- from the discontinued operations accounted for EUR 0.4 million. Going to the net financial position, we are presenting ourselves with a net financial position lowered down at EUR 136 million. If you remember, what we commented in occasion of the previous earnings calls, we presented ourselves with a reduction on a 12-month rolling basis in net financial debt of about EUR 40 million. The values at that point in time was from EUR 184 million of June '24 to EUR 146 million of June this year. On a rolling basis, this value of reduction of EUR 40 million was confirmed. So, starting from the EUR 176 million of September last year, we closed September this year, with a level of -- as we said, EUR 136 million. Out of those EUR 40 million, around EUR 15 million are directly connected to the deconsolidation of the net financial debt of the discontinued operations, while the balance EUR 25 million are entirely attributable to the continuing operations. This is very important on one side, because it clearly is the practical representation that the peaks in net working capital that were reached last year, for all the reasons already commented, actually were progressively reabsorbed with a positive in terms of contribution in terms of operating free cash flows from operations, so running activities, first comment. Second comment, in terms of composition and quality of the net financial position. As our CEO commented, and I would invite you to go to Page 12. There was a huge shift in the composition of net financial debt because actually most of the EUR 136 million were represented by short -- by long-term debt. This is a direct effect of the refinancing operation that was finalized on September 29. It was already commented in a dedicated press release. We are talking about EUR 55 million operated by a pool of banks, with which the company was already operating, supporting the implementation of our strategic and industrial project. The effect of this refinancing operations was clearly the creation of the conditions of occurrence in terms of duration of our financial liabilities with the programs of investments and I would say, with the composition with the duration of the net asset side on one side. On the other side, once again, let me stress that out of the total EUR 136 million net financial debt, EUR 30 million are represented by IFRS 16. We are all aware about, let me say, the nature of IFRS of this item, largely in our case, represented by the actual value of future renting fees. So, excluding this EUR 30 million and excluding the portion of the debt directly backing and financing the net working capital that is another EUR 83 million we arrived to a real so-called industrial debt slightly above EUR 20 million. This is the financial industrial debt that is our commitment to reduce in -- over the next -- over the following period. Clearly, this third deal refinancing operations also created the basis for a far high financial flexibility for our company that put ourselves in the best conditions under a financial point of view to put in place our industrial project. This in terms of commenting -- brief commenting of the financials. I will stop here and leave the floor to our CEO, Mr. Caccia.

Okay. Thanks. Let's go and have a look in details of the closing figures business-by-business. So, if you look at the presentation on Chart 14, we start from Trenchers as usual, the biggest business unit. The results of the first 9 months see the volumes in line with last year with a slight decrease in margins that is mainly coming from a few factors. The first specific one is the destocking activities that our management did and performed in the first few -- in the first quarters in line with our priorities of decreasing the working capital and decreasing the net financial position. And on the other side, a combined effect of a bit lower volumes compared to the expectation, and especially slightly worse mix in terms of geographies and in terms of product mix. What we expect on this side is a growth in the next coming quarters driven by our most strategic areas of business, and specifically our strategic geographies with particular focus on U.S.A. and South America. Going to the Railway business, the figures are in line with the previous quarters. So, we confirm a growth in volumes compared to last year and a growth in EBITDA and profitability that is mainly thanks to the shift that was made by the company and with the stronger focus given by the company on new technologies and especially on diagnostic vehicles that are basically representing the key of our future development. On the other side, on less positive side, there is a decrease in backlog that is -- but we expect this figure to grow in the next future, thanks to the current participation to different tenders in both in Italy and outside of Italy. Last but not least, the Energy business. So, we move to Chart 16. Energy business that, as Ruggero commented before, saw a positive performance, both in revenues and in profitability. For sure, the positive performance is coming, thanks to the strong growth of the streaming business and a strong performance of some of our key areas and key markets such as Australia, U.S.A. and Middle East. And by the way, let me say, also the perspective for this business in the next future are very positive in these countries. On the profitability side, positive results, both for the Energy Automation division and the Stringing division, thanks to the -- as I said, to the strong growth in volumes and the leverage -- operational leverage that we have made for enabling this kind of growth. By the way, probably some of you remember that there were some activities made -- some investment made by Tesmec last year in order to strengthen the operational structure of the Energy business in Tesmec that made possible this strong growth in terms of volumes. Last but not least, backlog that is significantly stronger compared to last year, especially thanks to the contract recently awarded in the Energy Automation business. But I would say, also the perspective for these kind of figures are seen in the next coming quarters to be stronger than this number that we see now. So, this is, in general, the situation of each business unit. If we move to Chart 21, I would like to comment briefly the outlook and the expectation of the management of Tesmec for the last quarter. We do see our outlook for the end of the year in line with our expectation. So, with an increase in volumes and profitability compared to last year. And we confirm the strong focus -- the strong attention that our management is setting up on giving the priority to creating value to reducing net working capital and to reduce the net financial position. Let me say, on this side, there is -- from one side, a strong focus made by the management, and there is also something coming from the numbers that me and our CFO just showed to you all that is the stronger impact -- the increasing impact on the total revenues of Energy and Railway business that in any case, is bringing besides all the focus and activities that we are doing as managers, but this kind of growth of this business -- of these 2 business are for sure -- will, for sure, has a positive impact on the financials of the company for the future. I would say the presentation is done. So, I leave the floor to any questions that you can have to Tesmec people. Thanks.

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

Congratulations for the results. In particular, this was another strong quarter also in terms of debt reduction, you reduced the net debt by around EUR 10 million compared to the first half of this year. And so, my question is if it's reasonable to assume that the net financial position for year-end will remain more or less stable at this level of EUR 136 million. I mean the question is, if you expect some reversal of working capital after the reduction you achieved in working capital in this first 9 months. So, this is the first question. The second one is about the Energy business. The Energy business is growing a lot and is also a profitable business in terms of margins. And I'm surprised by the growth in the Stringing business. It seems that, there is a new wave of growth coming not also from -- not only from Automation, so from energy transition and so on, but also on the Stringing business, which is the traditional, if you want, business, I'm seeing a lot of growth there. So, if you can elaborate a bit on this kind of growth, it is sustainable? And if you expect this kind of growth also for next year?

Shall we start -- I start from the second question that is very interesting because basically, most of the discussion made by the market a few years ago was that the Stringing business was mature and probably not so technological business. You have mentioned one of the key drivers of growth of Energy Automation that is the energy transition. Honestly speaking, probably we have to improve in our communication because the energy transition is among the key drivers of the growth of Stringing too, because basically, what we are looking at on the market is a huge demand of Energy, a huge demand of -- for any kind of industry and especially in any country and the huge demand of Energy, the first result that is the need of new transmission lines. What we are looking at now is a growth that is very diversified in terms of type of customers and very diversified and very spread all over the world. And we -- yes, I confirm that we do expect this trend to go on and probably to be even stronger next year also on the Stringing business. Let me say also that, our value proposition in Stringing has evolved a lot in the last coming years. We have introduced many technologies in terms of digitalization, in terms of securitization. And I guess, the results showed on the financials are also giving some evidence of this type of investment and of different business model that we have set up. If you see also the profitability of the Stringing business itself is higher, also thanks to this type of new innovation in the business model. So, to give you a very quick answer, the growth of the Energy business and all the drivers on the energy world have, of course, a very clear impact on the Energy Automation, but they have the same very clear impact and very strong impact also for the Stringing business. In terms of the first question of the net debt, as you see, we have communicated a strong improvement in the net debt up to this quarter. The commitment and the focus that all the structure has also for the rest of the year is to go on in this improvement for the -- up to the end of the year, also on the fourth quarter then.

The next question is from Emanuele Negri, Mediobanca.

I have a couple of questions. The first one is on Trencher. You mentioned during your presentation that Trencher should return into positive territory in the last part of the year. I was wondering if you can give us an idea of what kind of profitability you expect in a normalized year for Trencher, considering the one only for the last quarter of this year, but in general, what kind of profitability should we assume in this different scenario where you are prioritizing cash over volumes? And the second one is a follow-up on a previous question on the net financial position. I was looking to the component of the net working capital, and I saw that an important driver was the increase in payables. Can you explain this? And can you explain which kind of driver you expect to lead to a further improvement in net financial position through the last quarter?

Thank you, Emanuele. I will start in this case from your second question. Yes, your comment is correct. First of all, let's clarify the value of the accounting payable is in line with the one that we already presented at the end of June because the number at that point in time was EUR 94 million, and now we reached EUR 98 million. There are a couple of points -- very important points on this regard. First of all, the cash conversion that we experienced last year, we tried last year to explain it every now and again because I clearly remember that in the earnings calls to comment the second quarter and the third quarter, this was clearly mentioned. There was a slowdown at that point in time directly linked to the Rail business on one side. This was motivated also in terms of net working capital to, let me say, some effects from the logistics cycle that affected also Tesmec. In this case, as far as this year is concerned, both in March, in June and in September, the huge -- on one side, the huge increase of the Energy business significantly contributed to the level of accounting payables together with the level of trade receivables and inventories that should be seen together. Why? Because the Energy business has a negative working capital. This is one of the most important component on one side. On the other side, why am I saying that inventories, excluding the work in progress, accounting payable and trade receivables should be seen together because the effect is that we accelerated the purchases of new materials between the end of the first half and Q3 in order to get prepared to the volumes that we're going to process and manufacture between Q4 and especially during the first part of 2026. So, you see apparently a slow decrease in inventories, but simply because we consumed the inventories accumulated last year that was transformed in revenues, and then with the cash conversion ratio transformed into cash at the end of September. while these were replaced by the new purchases of the year, adding clearly, since they did not become overdue yet, the level of the trade payables. These are the 2 effects that combined led to this net variation. Clearly, the target is to fully convert the EUR 82 million of net working capital into cash. That's why this should be seen altogether. I would -- as far as the Trenchers are concerned.

I'll go back to the first question related to Trenchers. I would like to share with you, the key message that we have in our company as of today also for Trencher that is the focus on the quality of our revenues. So, we -- what we are seeing is that we see also for the Trencher business, a strong focus on the countries and the industries that are recognizing and giving values to our business model and to our value proposition. So let me say, a strong focus on strategic countries such as U.S.A., such as Middle East. By the way, those are the same countries that I mentioned to you on other business because we are counting on leveraging the synergies, in terms of market approach, and in terms of recognition that we have in some of those countries. And at the same time, a strong focus in terms of applications and industries, with a key attention to especially the Energy business, and the Mining business for Trenchers that, by the way, are very competitive in the geographies that I just mentioned to you. So, the expectation that we have for the next future is not to work that much on volumes that are already significant, but work on those type of aspects for the business of Trencher in order to bring back the Trencher business on a profitability that is closer to the 20%. let me say, around 17%, 18% of EBITDA.