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Edited Transcript of SAL.MI earnings conference call or presentation 31-Jul-19 7:00am GMT

Half Year 2019 Salini Impregilo SpA Earnings Call

SESTO S. GIOVANNI Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Salini Impregilo SpA earnings conference call or presentation Wednesday, July 31, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Massimo Ferrari

Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate

* Pietro Salini

Salini Impregilo S.p.A. - CEO & Director

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Conference Call Participants

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* Alessandro Tortora

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Bruno Permutti

Banca IMI SpA, Research Division - Research Analyst

* Matteo Bonizzoni

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Salini Impregilo First Half 2019 Financial Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Pietro Salini, Chief Executive Officer. Please go ahead, sir.

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Pietro Salini, Salini Impregilo S.p.A. - CEO & Director [2]

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Thank you. Good morning, everyone, and welcome to our conference call on Salini Impregilo's first half results. I'm Pietro Salini, Chief Executive Officer, Salini Impregilo. For Progetto Italia, which is a transformational development, we will give detailed information in the next coming days. We're planning a board meeting fully dedicated to the project for tomorrow.

So let me start talking briefly about our group main achievement during the period. There was an impressive order intake. The value of new orders totaled more than EUR 6 billion, that's a record. And most of these orders came from markets where we have been expanding to lower our risk profile, Australia, Europe and United States. In fact, the one market responsible for a big part of this EUR 6 billion in the first 6 months of the year was Australia. So we are succeeding in our strategy to shift our activities towards more stable markets that offer greater certainty and visibility.

As for our economic and financial performance, we did better than expected. At an operational level, our profit grew by double digits, and our margins widened for -- 0.8% at EBIT level. Margin improvement was also seen at Lane, our subsidiary in the United States, for which we confirm we managed to complete an efficient turnaround. And our gross debt went down despite a few one-off cashouts. In addition, we are working on collecting some old payments that are still due to us. We are in talks to reach a settlement agreement on 3 cases, and we expect the total cash-in of about EUR 70 million by the year-end. For the full year, we confirm our outlook in line with 2019, with potential upside on order intake, financial targets and cash generation.

Slide 4 examines our new order ingredient details. As I said before, we achieved in the first part of the year more than EUR 6 billion of new orders, of which EUR 500 million are contracts to be finalized. This has allowed us to cash in a good amount of advanced payment. Furthermore, as we will discuss in further details later, our commercial pipeline includes EUR 1.3 billion as best offers. So that makes us confident about the arrival of new contracts. If you look at the last 12 rather than 6 months, the total amount of new orders reaches EUR 8 billion. This proves, once again, it is difficult to judge the trend in new orders over a short-term period because it can fluctuate. In the last 4 years, we had an average yearly order intake of EUR 6.5 billion. Thanks to our shift towards market with lower risk profiles of the United States and Australia, they have increased their weight on the total amount in a considerable way.

Since 2014, the first year of Salini Impregilo since the merger of the 2 companies, the weight of these 2 countries has grown approximately 9 and 18x, respectively. There is something important to note here. Although the United States is the group's single biggest market in terms of revenue, Australia has also become an important market. It is investing billions in the kind of infrastructure in which we excel as world leaders, water and transport. It needs our expertise to support the development of its economy, and there is no better example of that then Snowy 2.0, the hydroelectric contracts worth more than EUR 3 billion that we received in April. It is -- it will be the biggest hydroelectric power station in the country.

Snowy 2.0 is but one example how we are focusing our effort on large, complex projects. Not only that these type of projects raise our profile by recognizing our capabilities, but it also offer greater value for our group since the bidding process looks at more factor than simply the lowest bid price in selecting the winner.

On Slide 5, we can see how our revenue distribution on a geographic basis has changed since 2014. And this change has been noteworthy. In 2014, more than half of our revenue came from Africa and Europe. By the first half of 2019, it came from the Middle East and the United States. And this is despite the disposal of the Plants & Paving division of U.S. subsidiary Lane. During these last 5 years, Africa, Europe and Latin America have all reduced their respective weightings. In the case of Africa and Latin America, this is the result of our shift towards markets that have better risk profiles.

Italy, however, has increased its weighting. With the resumption of activity at COCIV and other projects, whether they renew or not, the country is becoming more important to the group. On COCIV, the client notified the consortium on June 19 that the sixth and final lot of the project has been activated. This will add some EUR 528 million to the EUR 3.8 billion of financial works and activities already underway. This is thanks to the so-called [block Cantieri decree].

Work is also expected to start on IRICAV [2]. With the publication of the government cost benefit analysis, all that is needed is the signing of a supplementary act for the Verona [bill to enhance the lot]. Estimated value of this lot with our consortium is EUR 2.2 billion. This marks the end of a period during which we suffered a slowdown of 2 of Italy's key projects.

Between 2016 and the first half of 2019, there was a missing cash generation or an estimated EUR 200 million due to the delay of Italian projects. The restart of COCIV underlines the revenue generation that we could achieve with Progetto Italia. The same kind of good news came from Ethiopia. The pouring of concrete at the main dam gate that brings suspension of the work since October 2018 and affected revenues in the first part of the year is finally resumed. Meanwhile, works on the other project areas, such as powerhouses, spillway, saddle dam, switch are progressing. We also have received part of the payment that was overdue last year.

Slide 6 shows the opportunities that we've identified on every continent of the world. If you include Canada and the Nordics, 2 markets where we were not present, say, considering and the Metro line that we have recently completed in Denmark, about 70% of the commercial pipeline is in North America, Central Europe and Australia.

We have a strong commercial pipeline with EUR 64 billion of short-term commercial activities approaching. When it comes to bidding for projects, we have become more selective. We have a process to evaluate each proposal on a geographic, technical, economic and risk basis. We have also improved the way we prepare our bids, making the most of the resources and knowledge we have on hand and involving different function of the group to better manage risk and improve cost estimates. Our preference is for large complex projects in which the bid price is only one of the factor that determines the winner.

I will now test -- let the General Manager Corporate and Finance, Massimo Ferrari, to take you through the details of our first half results. Thank you.

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Massimo Ferrari, Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate [3]

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Thank you, Pietro. Good morning to everybody. We closed the first half results with very satisfying figures in line with our expectations and better than market consensus. Let's go into further detail by starting with top line and margin performance. First of all, the adjusted figures presented in Slide 8 include lean and consolidated JVs results, and in addition, for better comparison, results for the first half '18 have been adjusted to IFRS 16.

Revenues amounted to EUR 2.7 billion, with an increase of EUR 96 million or 3.7% from the same period last year. EBITDA was about EUR 239 million, up by about 10.5%, a significant increase. EBIT was about EUR 138 million, with a significant increase of about 23%. EBITDA and EBIT margins were 8.8% and 5.1%, respectively, against 8.3% and 4.3% in the first half of 2018. This margin improvement is mainly the result of 2 factors, better operating performance related in particular, as mentioned by Pietro before, to the recovery of COCIV, the Milano-Genova high-speed railway project, and of our U.S. subsidiary, Lane. Second, the rationalization of overhead costs, both at Lane and Salini Impregilo level.

On Page 9, we have the P&L below EBIT line. The financial charges for EUR 58 million compared to EUR 57 million the prior year reflect the actualization of EUR 8 million of financial receivable required by IFRS 9. And it is related to a credit coming from Colombia. This effect was almost offset by lower interest on bond charges as a result of the repayment of the 6.125% 2018 bond that occurred in August '18. There was a positive impact for exchange rates for some EUR 9 million compared to EUR 15 million for the same period the prior year. The impact is mainly related to the appreciation of the U.S. dollar against the euro.

On this point, let me remind you that besides short-term strengths, profit and loss resulting from exchange rate fluctuation and [adapted] being neutral through the long run.

Earnings before taxes amounted to EUR 122 million compared to EUR 97 million, and with an improvement higher than 25%.

On Slide 10, we can see indicates the improvement at Lane. I would like to remind you that since the acquisition in 2015, Lane has had a strong commercial performance. Its backlog has increased by a compound annual growth rate of 19%. Lane has since adopted a new business model focused on roads, rail, water and tunneling. It is concentrating on potential projects with very high budgets, like those found in Texas, California, Florida and New York, where we have opened a regional office. One of the most important project that we are following is the Texas bullet train, high-speed rail line between Houston and Dallas. The investment is estimated at around EUR 15 billion, and it stands to be among the first high-speed train services in the country. We have completed a feasibility study, and we are waiting for a decision to be taken in the coming weeks or months. Lane adjusted revenues grow -- grew by 28% to stand at, 5-9-6, EUR 596 million. In addition, following the disposal of the Plants & Paving division, we started to rationalize overhead cost, and this brought savings of some EUR 50 million equivalent in the first half of the year. So the savings and the recovery in Lane's performance has led to a recovery in EBIT margin for about $36 million, allowing us to confirm the 3% margin -- EBIT margin target that we have set for the long run.

Turning to Slide 9. You can see the evolution of gross debt and net debt. For comparison reason, of course, we adjusted figures by adding the impact of IFRS 16. Gross debt amounted to EUR 2.4 billion, with an improvement of EUR 187 million compared to EUR 2.6 million -- EUR 2.6 billion at the end of June '18. Compared to year-end 2018, gross debt shows an improvement of around EUR 21 million.

The net financial position was EUR 1.1 billion, an improvement of around EUR 83 million compared to EUR 1.2 billion at the end of the same period last year, and compared to December '18, net debt showed an increase of around EUR 162 million. And this is attributable, among other things, to some nonrecurring events including payments made to the subsidiary GUPC for the Panama Canal for a total amount of EUR 123 million. And there was also the payment of taxes on the sale of Plants & Paving division of Lane for about EUR 60 million.

As you can see from the chart at the bottom of the slide, half year net debt was historically affected by working capital seasonality, which led to a higher net financial position of some EUR 400 million in respect to the year-end figures. In the first part of '19, operating cash flow was significantly better than typical seasonality [partressa] and the net debt increase in respect to the year-end is limited to one-off cash-out related to Panama and taxes, as mentioned before.

Moving on the slide on cash flow. You can see how operating free cash flow before dividends and investments improved from the same period last year by EUR 390 million, reaching some EUR 40 million. This was thanks to better operating results and significantly less cash absorption from net working capital of around EUR 330 million, partly due to the advanced payments derived from strong order intake. Without forgetting revenue growth, our focus for the coming years will be on cash generation, and I believe these results for the first 6 months have been a good indication of this.

Lastly, on Slide 13. You see the maturities of our corporate debt and the average cost of that debt. Thanks to the refinancing done in recent years, the average cost stands at an excellent level of 2.5%.

Thank you very much. I leave the floor to the Q&A session.

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Questions and Answers

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Operator [1]

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The first question is from Matteo Bonizzoni with Kepler Cheuvreux.

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Matteo Bonizzoni, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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I have 3 questions. First one is on the profitability improvement that we saw in this first half. 80 basis point improvement on the EBIT margin, it comes mostly from this EUR 36 million EBIT improvement at Lane that is supposed to continue in the full year. So I would like to ask you if it is fair to assume that also in the full year, we could have some profitability improvement compared to the roughly 4.1% EBIT margin of 2018.

The second question is on the seasonality of your net working capital and net debt that, as you pointed out, was much better than typical seasonality that we see in the first half. Well, if you look at the net working capital changes in the balance sheet, it seems that most of that comes not so much from advanced payments but from liability, so payables with much, I think, longer payment terms because we had around EUR 400 million of increase of the payables compared to June last year. So can you comment a little bit more on this movement in the working capital, referring to payable and advanced payment?

And then the last question is on the minorities. We had a big reversal of the minorities that in the first half of the last year were minus EUR 12 million; and this year, absorbed nonprofit by EUR 11 million. If you can comment also on this point?

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Pietro Salini, Salini Impregilo S.p.A. - CEO & Director [3]

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So while Massimo is looking at the figures, I can say -- it's Pietro Salini speaking. I can say that we expect to foresee that some the actions that we have done, especially regarding Lane, we have a confirmation and a contribution to the second part of the year. And the restart of the work, as I said in the beginning of my speech, in Italy and the restart in Ethiopia of the 2 big works we are doing there, of course, contributes to the marginality in a significant way. So we -- while we confirm the estimates we gave -- we have given at the beginning, you would think that these facts may have a confirmation into the second half of the year.

(technical difficulty)

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Operator [4]

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Excuse me, this is the operator. Maybe your line is muted.

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Massimo Ferrari, Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate [5]

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Sorry, sorry.

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Unidentified Company Representative, [6]

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Sorry. So what was the part you missed? All the responses?

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Massimo Ferrari, Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate [7]

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Sorry, we were talking about the -- we didn't have the line. Matteo, did you miss all the answer?

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Matteo Bonizzoni, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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Yes, yes. I just heard them from Pietro Salini, not as regards the working capital and the minorities.

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Massimo Ferrari, Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate [9]

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Okay. Okay. So regarding the minorities, we got the usual rate of minorities in '19, having got some losses in '18 regarding some not profitable projects. We expect a decrease in minorities for second half '19 and '20 in terms of incidence on total group profit.

Regarding the seasonality effect and the working capital, you have to remind that in the first half '18, we had the negative contribution of the Plants & Paving division that was working capital that absorbed in the first half working capital, releasing in the second half profit and cash. Second, we -- I confirm that we have a positive contribution from the advanced payment higher than expected. And you are right, there is a contribution in terms of payables, around EUR 390 million. As well, the receivables contributed positively for EUR 121 million.

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Operator [10]

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Your next question is from Alessandro Tortora with Mediobanca.

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Alessandro Tortora, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [11]

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I have, let's say, 3 question, if I may. So the first one is on if you can share with us your target on, let's say, cost savings. Let's say, mainly on the Lane side, you got this around EUR 30 million, let's say, cost reduction in the first half. So if you can remind us your target for the full year in terms of net savings.

The second question is on the CapEx, i.e., let's say, don't find the level of CapEx you spent in this first half.

And the last question is on the joint venture contribution and also on the profitability of this, let's say, EUR 100 million and something contribution on top line level because I saw a negative data, a negative EBITDA from this side. I know that is not extremely relevant, but I would like to understand if there is something specific on this side because I remember that the contribution was positive in the past years.

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Massimo Ferrari, Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate [12]

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So starting from CapEx in first half '19, the total amount of CapEx has been EUR 56 million and are mainly related to ongoing contracts in U.S., France, Ethiopia and Tajikistan. The target CapEx for 2019 is in a range between EUR 70 million, EUR 80 million.

Regarding the overheads, we expect some more opportunity to save in Lane but in a range significantly lower than what we already achieved. Probably in a 12-months horizon, we can have some other EUR 10 million. We are working much more on Salini Impregilo perimeter where we expect more saving to be achieved in 2020. Of course, we will see with Progetto Italia, but it could be a significant positive factor on these sides.

Regarding the JVs, there were some minor losses, minor contribution that are negative, but nothing material, nothing to be underlined.

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Alessandro Tortora, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [13]

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Okay. And just if I may, a follow-up on the high speed in Italy. You mentioned before that [Köseköy-Gebze] is restarting with, let's say, a good contribution at top line level. Can you also give us an update on the other high-speed line in the East, Northeast of Italy, Verona-Padua High-Speed. Do you have any update also on these things?

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Massimo Ferrari, Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate [14]

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We are still expecting the start of the projects. There are some bureaucratic steps. We are very, very positive on the Bari-Napoli and the other project in Sicily. We are going very fast. We got advance payment. We started to work on that. So the picture is significantly better than 1 year ago, than the end of 2018.

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Operator [15]

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(Operator Instructions) The next question is from Bruno Permutti with Banca IMI.

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Bruno Permutti, Banca IMI SpA, Research Division - Research Analyst [16]

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Two questions. So one related to the net debt target for year-end, if last year net debt could be a good a indication of what you expect to reach by year-end. And which are the main, if this is reasonable, which could be the main driver for the net debt reduction compared to the end of the first half?

And the second one, if you can give us an update on the high-speed railway project in Texas. So which are the steps that could be necessary to make this project really operative? And what could be the time horizon necessary to take these steps?

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Pietro Salini, Salini Impregilo S.p.A. - CEO & Director [17]

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It's Pietro responding to the questions. In terms of net debt, [we can't give] that as an indication of target, but we expect that with the extraordinary contribution I just mentioned in my speech, we could be in the range of the last year and even something better. So this is all for the net debt.

For the Texas high speed, we are very close to finalize our agreement with the clients. And the steps forward that are missing, as a usual warning, the concessionary agreement that has to be finalized by the concession, which is actually our client, and the [OD] permits, right of way, financial closures of the usual things. I think that this process is going to close before the end of the year. This is what is forecasted by the client. And our contract with them should be the -- let's say, in the -- is expected to be in the next coming weeks, if not days, so this is what we expect of that.

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Operator [18]

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(Operator Instructions) Mr. Salini, gentlemen, there are no more questions registered at this time.

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Pietro Salini, Salini Impregilo S.p.A. - CEO & Director [19]

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Okay. Thank you very much. So thank you very much, guys. All of you, have a good day and thank you for your time dedicated to us. Bye.

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Massimo Ferrari, Salini Impregilo S.p.A. - General Manager of Group Finance & Corporate [20]

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Bye-bye.

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Operator [21]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone. Thank you.