Arteche Lantegi Elkartea, S.A. (ART) Earnings Call Transcript & Summary

Good morning, and welcome to Arteche's 2022 Full Year Results. This is Paloma Indiano, Investor Relations at Arteche. In our company website, www.arteche.com, you will find available presentation that will be used as a supporting material to cover this call as well as a link to access the webcast. [Operator Instructions] I now pass the floor to Mr. Alexander Artetxe, Chairman and CEO of the company.

Good morning, everyone. Welcome, and thanks for joining us in our '22 results presentation. I'm Alexander Artetxe, Chairman and CEO of Arteche Group. And today, I'm joined by Ms. Maria Perez, one of the Directors of the company; and Ixone Vicente, CFO of Arteche. The way we are going to conduct the presentation, I will introduce the highlights of the year. And then Luis and Ixone will explain in details the numbers and the achievements of 2022. After the presentation, as Paloma said, we will have time for the Q&A. Well, let's go. Let me start with an overall look of this year. '22 has been a very intensive year, in which supply chain disruptions remain in the market and were even aggravated by the Russian-Ukraine war at the beginning of the year. This both inflation and cost pressure to the economy, negatively also affect the business. However, as you will see during the presentation, we managed to recover our margin around the year and this has been possible, thanks to our internal actions to manage our costs, solid operational performance. The benefit that comes from investment plan and [indiscernible] for our sales prices. And I want to remark that this has been made possible, thanks to the commitment and the great -- and experienced operational team, part of it is here today with us. But beyond this particular volatile year, the fundamentals of our business are solid. We keep on facing a very strong demand in the market and in all our business segments. And this is driven by the huge investment that is needed worldwide to prepare the electrical grids for the energy transmission. Investment in smart grids need to more than double until 2030. We kept on track with the net zero emissions goals in time for the 2050 scenario. And as you know, this is our core business. Well, let's go to Page 3, in which we will see the highlights of the full year 2022. As I said, we are facing a very strong demand in all our markets. And so our order book and revenues will affect this market good momentum. And we haven't seen yet the full potential of the order book. We end the year with a strong historical backlog that will contribute to our growth in 2023. We have grown in orders, growing 43% year-on-year, which is above the expected market growth. And we have grown also a double digit in all geographic regions and in all our business divisions. In terms of sales, we achieved this year revenues -- record revenues of EUR 346 million, sorry, which means 22% -- 22.6% comparing with year '21. And we have been growing quarter-by-quarter along the year. And in Q4, we reached for the first time in our history, more than EUR 100 million of revenue. Direct margin, which has been the main challenge of the year, reached -- sorry, EUR 103 million, growing by 60% versus year '21. But more important than that is a very margin improvement, improved month by month in the second half of the year, reaching at the end of the year in a stand-alone months pre-pandemic levels. And the good news is that this is the starting point for year 2023. We have a strong and a healthy backlog. Despite the impact of supply chain constraints that still there during the year, we managed also to increase our EBITDA by 15.4% in the period up to EUR 30.1 million, reaching a margin of nearly 9% of our revenues. And what is more important, showing a clear improvement trend in the second half of the year. Talking about cash flow, we have reduced the leverage rate yield down to 1.6x EBITDA versus the same ratio in December '21, that was 2x EBITDA. Earlier results reached EUR 8.3 million. This means a slight decrease comparing with 2021 because our profit was affected by EUR 1.3 million due to an accounting adjustment coming from the hyperinflation declared in Turkey. And now looking to the organic growth, other transactions that we closed since our IPO last June '21, including ESITAS, Turkey and Indonesia, smart digital optics in Australia. And the JV with Hitachi in [indiscernible], all of them that have been fully and successfully integrated. They are adding value to our group and they are contributing to the order growth for the coming years. But as you know, M&A is a key line in our local strategy, and we are active on it. Our inorganic growth strategy remains on track and with an important pipeline currently under analysis and negotiation. Well, this has been the highlight, and I will turn the word over to Luis to continue with the presentation.

Thanks, Alex, and good morning to everybody. Let me start with a quick recap of some of the financial figures already mentioned. I'll try to give a little bit more light into them, and I'm going to start from left to right, okay? First of all, order booking, we have passed -- we have exceeded the EUR 400 million mark with almost [ 50% ] year-over-year growth, as Alex mentioned. We'll have a slide later on where we will be expecting a little bit more in detail this information. In terms of revenue, EUR 346 million, 23%, well above market. And I can share with you that out of this 23%, around 12% is organic, okay, remaining being part of our inorganic objectives the year before. And just to give a little bit of a benchmark when we did our strategic planning, we are forecasting around 5% organic growth. So we have been able to beat that. That is margin, our workforce during 2022. Main focus during all the year, 16% up, okay, we have been able to improve the margin, especially in the second half of the year. We have finally reached pre-pandemic levels in December with a 31% margin. And the good news is that the trend continues positively in the first 2 months of the year, 2023. Okay. EBITDA, EUR 30.1 million, fulfilling our guidance in the low range. Original result, EUR 8.3 million, falling short a bit, 4.4% in comparison with the previous year that equal to EUR 0.15 EPS. And again, we have another slide where we will be analyzing this in detail. And finally, our net financial debt ratio over EBITDA, record low of 1.6% versus 1.95% from 2021. If we move to the next slide, back in September 2022 during the first half of the year presentation, we provided this guidance, and I'm very proud and very happy to share that we have met it. We exceeded significantly the revenue, thanks to a very strong underlying demand better-than-expected sales from our acquisitions and also our pricing actions. Regarding EBITDA, we saw the guideline between EUR 30 million to EUR 35 million, and we stood at the low range. Fortunately, raw materials and logistics costs remained high during the second half of the year. The trend is changing or we may say that it has already changed, and we are seeing better costs, better raw material costs and transportation costs in the beginning of 2023. And finally, EBITDA stood as well in the lower side of our guidance with a clear improvement in 2023. If I take you to the next slide, here, we are opening the lens a little bit in order to have a wider vision for the last 6 years, right? So we can see here that our CAGR of sales has gone up 12% over these 6 years. Thanks to an increase in demand. As Alex mentioned, thanks to our efforts in terms of geographical diversification and thanks to our new products and services. EBITDA, 6% CAGR. You can see that we were finalized back in 2021 by the crisis, COVID, raw materials and all those things. We are back to normal, I should say, back to almost normal in '22 with positive outcome for 2023. And finally, in terms of net debt, it has gone significantly down 60% over all these years. Thanks to our financial rigor and our cash flow generation. My takeaway from this slide is that Arteche has a resilient business model, which is very well kept to ride through business cycles or in other words, as we like to say, we are in the right industry at the right time. I'm going to change gears right now, and I'm going to talk a little bit about the geographical information. What is the geographical perspective, okay? What you see in this slide is you have on the right, you have order intake. On the left, we have sales, basically divided by our 4 geographies, okay? We are organized in 4 regions. Asia Pacific, South America, Latin America, North America and Europe, Middle East and Africa, right? In order that we have finally broken the EUR 400 million mark with double-digit growth across all 4 geographies. As a result of that, we have an all-time high backlog with a book-to-bill ratio of 1.18. Or in other words, we have enough volume to produce typically 4, 5 regular months of the year, right? So we have very good visibility for '23 and our focus is going to be backlog execution supported by easing of supply chain constraints. If we move now to the right side of the page. We have the sales revenues. We have already mentioned several times, a 23% increase. And out of this 23% increase, in 2022, we can say that half of it comes from volume. Let me say, 1/4 come from price and another 1/4 comes from foreign currency, okay? Or we can see it in a different way. Out of the 23%, 11.6% is basically organic, okay, inorganic, around 5.4%, and the remaining 4.7% is coming from foreign exchange variations. Markets. So which markets are -- have been good for us. So I would say Europe, Spain, U.K., Nordic and especially Middle East, Saudi Arabia is really, really booming. In North America, U.S., thanks to the renewable push, has developed an outstanding behavior into '22. Actually, the United States of America is our #1 country today in terms of volume. So U.S. is #1, Spain is #2, Mexico is #3. So 2 of the 3 biggest markets are in the North America region, and both of them have performed extremely well. In the case of Latin America, we finally have seen the recovery from the COVID in Brazil, which is our biggest market for us, probably the #4 market for us. I will still penalized by the crisis in Argentina, which still hasn't recovered completely. And finally, in Asia Pacific, the ESITAS acquisition has been the one driving incremental volume and positive results for us, opening new markets for less, medium voltage broadly. Okay. So enough geographical view. Now I'm going to show you one more slide where you can see the revenue split by quarters, okay? And one thing you can notice in this slide is that not all 4 quarters are equal. So there's a difference between our lowest which is Q1 and highest which is Q4, quarters, in terms of volume, around 30%, okay? So one of the actions or one of the initiatives that we are doing in this 2023 is increased linearity. So in other words, we are trying to make all quarters as equal as possible in order to make sure that we are mentioning properly in terms of capacity and to make sure that we are not losing any production slots. To do that, we have launched a company-wide initiative based on six sigma techniques, known as stable operations. And hopefully, in a year from now, we'll be able to show you and present you the results of this initiative. Okay. Now I'll move to another slide where we are going to be changing the geographical point of view from a product point of view. First of all, apologies for the amount of information that we are putting in the slide, but we are really excited to share with you some of the initiatives that we are taking. So this is why we have put all this kind of stuff. For those of you who know us, we are organized in 3 pillars, right? So 1 pillar is what we call Measurement and Monitoring system which is the biggest pillar that accounts for around 70% of our figures. The second pillar is what we call Grid Automation, which is around 20% of our volume and the third one is called Network Reliability, which is only 10%, okay, those were the 3 pillars. What can I tell you, well, if I go to the measurement one, the first one, you see that the all figures are significantly higher than previous year. We have finalized successfully the integration of ESITAS, our Turkish factory from [indiscernible]. And not only that, but we have also used the factory to develop a very strong base of suppliers that are going to be able to compete with our traditional base and supplier base. I would like to mention all the progress that we have done as well in terms of optical transformers, the acquisition of SDO back in last year. We can say that we are leaders in terms of optical measurement of high-voltage direct current, HVDC. HVDC is a typical technology used in interconnection between countries, is also used in offshore connection to -- for offshore windmill parks connection to the land, and we have developed a technology which is used by the, let me say, 3 key players worldwide. Also, something new, we are just starting to get introduce into nuclear fusion. So you may wonder what that has to do with nuclear fusion, but we are in order to be able to measure the amount of current used to power up the magnets in this kind of technology. Sensors able to measure up to 10 million amps of current per minute, and we are the supplier to you know these worldwide projects. So we are very excited to share that with you. So in terms of grid automation, we have finalized the new platform that we are going to launch into the market in the next weeks. We have also started a new project for railway auxiliary relays. And we have finalized the utilization of our web for really order entry, what we call Arteche Online Store. And right now, around 10% of our orders for relays are coming through this web page, okay? Finally, in terms of network reliability, we have -- as I mentioned before, we have recovered from the markets in Brazil after the COVID. We have finalized a new design for 38kVs, and we are significantly growing in some key markets like Australia and Europe in terms of power products. So lots of activities, lots of actions in terms of different programs. And with this, I'm going to pass the token, let me say to our CFO, Ixone Vicente. So over to you.

Thank you, Luis and good morning, everybody, and apologize for my voice today. On Page 10, we are going to see a little bit deeper the direct margin that has been the main focus of the management in these last 2 years. And we are very happy to show you as advancing our first half 2022 results, how the direct margin has been growing and recovery month-by-month, quarter-by-quarter, reaching 31.1% rate of our income in the last quarter of the year and growing 327 basis points versus first quarter. On absolute terms, as we see on the graph of the right hand, our direct margin has increased by 16%, up to EUR 103 million. And this has been a result of different reasons. We have first strong sales volumes that [indiscernible] explained us. We also have our sales price update and different internal measures of productivity in our plan. These results have contributed to overcome the material and logistic cost increase as shown in red. And finally, we have the strong rate effect that has been positive, mainly thanks to the U.S. dollar evolution during the year. All in, we want to remark the continuous growth and improvement of the direct margin during all quarters and reaching at the end of the year in a standalone month by business, the direct margin similar to precrisis levels. And this is very important because that is the starting point for 2023. In fact, we have the visibility of a record backlog with a better prices. On next slide, we see the evolution of our reported EBITDA that grew by 15.4%. I have mentioned before, the main reason for this growth, which is the additional sales volume, the price update and the productivity improvement. All this, in a situation of logistics and material cost increase and disruptions in our supply chain. I would like to highlight that despite the energy cost increase and the high inflection, we maintain a structural cost of income in a similar ratio than 2021. All this, EBITDA reached EUR 30.1 million in 2022, which is around 9% of sales, improving in the second half of the year comparing with the first half. And since the part of 2023, we see EBITDA margin improving and having record higher levels than in full year 2021. Turning to next page, on Page 12, we have a reach that goes [indiscernible] to the net profit. EBIT grew by 14.4% in the year, supported by the stronger sales volumes and prices. Then we have the financial results that are logically impacted by higher interest rates, and we have also the tax expenses lower than a year ago. The profit of the year amount to EUR 8.3 million that decreased slightly by EUR 7.7 million. And finally, we have to reduce it with the profit attributed to the [indiscernible], which is higher than a year ago. In addition, I have to mention that -- Alex mentioned also before that 2022 results are negatively impacted by EUR 1.4 million due to the accountancy adjustment coming from the hyperinflation in Turkey. And finally, regarding to the shareholder remuneration for 2023, the [ BOD ] Has proposed the distribution of a dividend of 30% of payout. Turning to next page. We have the final tender. This year, we managed to improve again our leverage ratio down to 1.6x EBITDA versus 2x last December 2021. On absolute terms, the net financial debt amounted at EUR 49 million. As here, we have a [indiscernible] to explain the cash flow of the year. We have been positive. They have reported EBITDA. Then we have the CapEx, that is the main cash out which is 4% of revenues, in line with our guidance. And the main investments of the year has been to increase our capacities in our factories in Mexico and Turkey and also of course in [ L&D ] and then we have the financial and cash out; and finally, the working capital requirement. Remember this last 2 years, our working capital was impacted by extraordinary inventory levels in order to guarantee the supply chain continuity. During the second half of the year, we had a strong focus on cash flow generation annual inventory management, and we have improved our working capital requirements. This was the operational cash flow. And then finally, we have the negative cash flow coming from the M&A and the dividend we paid last July to the shareholders. In the right side of the slide, we have the gross debt at December 2022 EUR 107.5 million, that is diversified among different types of financial sources. We have loan debt. We have promissory notes, and we also have institutional loans. And finally, I want to remark that we managed to hedge the 80% of our total long-term loans against the risk of the interest rate. And that's all. I will now turn over to Alex in order to continue with the ESG performance.

Thank you, Ixone. Well, after seeing the numbers, let's just start a little bit on something which is very important for us, ESG roadmap. As I have explained in several times in other presentations, ESG is deeply integrated in our values and is a key part of the company's strategy. Looking to 2022 and before going into the sustainability KPIs, I would like to remark 2 relevant milestones of this year. First one is the CDP rating. In line with our commitment, introducing our carbon footprint, we have been rated by CDP as part of our road map to reduce our Scope 3 emissions, which is one of the -- because that we have -- in this year. In this rating, we have obtained a rating of A minus by CDP Supplier Engagement report. It shows report that we [indiscernible] and involving our suppliers in our ESG commitment. We physically conducting internal and external audits to assess the level of compliance with the standards of our suppliers. And I have to say that 100% of them have been evaluated based on our environmental criteria. With regards to our CDP Score report, we stand on the average of our industry peers. And this is the guideline for the work that we have to do in the next years. Another relevant milestone for this year is related to our goal of using more sustainable financial sources. We have signed with the Inter-American Development Bank, the first sustainable reverse factory in line amounting USD 20 million. The IDB is committed, as you know, with economic growth and social and environmental development in the region. Going to the KPIs. Last year, the [ VOD ] of the company approved the strategic sustainability plan for the period, 2020, 2030, in which we define several growth for the group. On this slide, you can see a summary of our ESG scorecard. And I'm not going to go into all of them. But I want to remark our focus in 4 things. First is new designs with sustainable installation. Second is the reduction in our Scope 3 emissions. So on diversity in our team and of course, the improvement of our corporate governance. You can find more detail of our performance in ESG in our annual sustainability report that we may put today this morning in our website. And just to finish, before time for the Q&A, let me wrap up the presentation with a brief summary with 3 main conclusions of the year. First, a strong growth. We experienced during 2022, some growth in orders. You remember 43% year-on-year. Part of it has been already reflected in our increase in revenue, which grew by 23% versus 2021. In a context marked by a strong demand and commercial discipline and position. As [indiscernible] mentioned, our top line is supported by strong energy industry growth trends, which will continue and are continuing in 2023. And most of this growth impact is just beginning to show up in our revenues. Second, margin has come back to normal levels. The focus of this year has been the direct margin recovery. And as we have explained, I'm glad to tell you that we have done it. We managed to recover our [ multi ] margin, growing quarter asset quarter and ending 2022 with already normalized margin in our other lines. But we are focused not only in margin recovery, which has a very clear target of delivering high growth and with the margin through new products and opening new markets. As a result of our R&D and inorganic decisions, we have opened new business segments and opportunities, in particular around optical sensors and digital platforms with a lot of potential in sales and margin improvement. I'm talking about direct current applications that [ Luis ] mentioned, grid automation and why not looking at fusion reactors, which could be the energy for the future. And third, cash flow. After months in which the focus was to assure supply to our factories in the second half of the year, we turned the focus and work in recovering the normal levels of inventory with a clear focus on cash flow generation. In order to reinforce the balance sheet to face a disciplined approach to the M&A, which is already adding value to the company as we have seen in the presentation. And to finish, I would like to have a look briefly to our expectation to 2023. As shared several times today, we see the market demand at very strong levels, and we started 2023 with record high order backlogs, which provides business visibility, and it is a source of strength and resilience. One, direct margin, which has been, as I already mentioned, the focus of the company during almost the last 11 months or so months -- has come back to normal levels. We expect that operating margin EBITDA should continue improving, supported by the margin recovery, with the strong demand with higher sales as well as the continuous work in internal efficiency. I don't want to end without remarking that M&A plan is on track. And although it's always difficult to forecast, we are optimistic about being -- about the potential of this pipeline. And that's following the presentation and now we will be happy to address your questions. Thank you very much for your attention, and we are ready to answer your questions.

[Operator Instructions] So our first question comes from Alberto Espelosín from JB Capital.

First of all, congratulations on the results. My first question is on profitability. Direct margin has been progressively improving quarter-on-quarter. So I understand that the price effect should already compensating for cost pressures. Is this correct? Also this sense and regarding guidance from what I can see in your guidance, you should be at around 32%, 33% direct margin in 2023, which is a prefunding margin. What do you expect from overhead costs? Just trying to understand EBITDA margin guidance for full year '23? Also, I know visibility is low, but what should we expect for organic sales growth in 2023? My other question is that you mentioned that you're at the end of the test for the new protection and control platform, just trying to understand, are we going to see sales from this platform already coming in, in the first half of 2023? And my last question is on capital allocation. You are doubling production capacity in Turkey and increasing capacity in North America. And you did say that there is an important pipeline coming under negotiation. I would just like to know if you could provide a bit more visibility on what should we expect from CapEx next year as well as what to expect from M&A in terms of business divisions and geographies.

Let me start from the back because I forgot what's in the first one. So the last one was about the capacity in Turkey and North America, okay? So different stories. Turkey, if you recall, we acquired this -- we had a very good outcome in terms of cost but it was not really well known except some countries. So basically, we have combined that platform together with Arteche brand and reputation. And as a result of that, we have seen an increase on customers, traditional customers and [indiscernible] right now, and we are about to finalize is that we are moving to a new factory, which is going to be open in the month of probably first week of June, and we are doubling capacity, okay? So this is incremental business that we are now being able to access to it because of the cost positioning of the Turkish platform in comparison with the platform we have here in Spain. So that's about Turkey, okay? And the markets that we are basically addressing with Turkey is Asia Pacific and some countries in Europe, and Middle East. North America. In the case of North America, Mexico, Basically, it's all about covering U.S. from Mexico. As I mentioned in the presentation, U.S. is our #1 country in terms of volume. And Mexico is our #3, so we have 2 huge countries for us, being run out of a factory in Mexico. We have increased the capacity of our medium voltage well, and we have increased the capacity of our high-voltage plant as well. Actually, we are building a new laboratory similar to the one that you can see in the first page of our presentation. And it's a high-voltage laboratory in order to be able to increase the level of testing in our factory. So a very positive outcome for those 2 factories, markets, whatever you want to call it, okay? Second question you were mentioning was about the protection and control platform, right? So what we're doing with this platform is we are replacing some of the old platforms that we already have in our portfolio and also replacing some products that we are buying from other companies, let me say, do it, integrate vertically. So are we going to be seeing sales from these products this year? The answer is yes. And the first product that we have developed is the protection for every closure that we currently have in our portfolio. So we are -- you are going to be seeing or we are going to be seeing a margin improvement in our network reliability product line as a result of replacing these products that we are currently outsourcing from a product that is being developed on manufacturing at home. After that, we have a long-term plan, a road map to keep on adding elements to this platform. But this year, the only product we are going to be launching into the market is this recloser protection. And then at the beginning of next year, we will follow with other products in terms of control or transformer or either protection. So what were the other questions? I forgot really.

They asking for a bit more color about maybe 2023 guidance...

That's a tricky question, right?

I think that Alberto was asking direct margin, should it stay around 32%, 33%.

Okay. I'll kick it off and then you guys...

Yes. Yes, it was right -- the only guidance is...

You want to go...

As explained in the final outlook of the year. We have seen 2023 with some positive things. First of all, is the backlog. The backlog is already with a healthy margin in the backlog. So this is going to be seen during 2023. And that means that we are expecting that the margin continue to improves that we have seen in the last 2 quarters of the year. So we are expecting -- as I said, that the margin will come back to normal levels from portfolio. And then we will be normal. So that means that if anything happens in the economy, which is, as I said, we are seeing a strong market position, and we are seeing that the investment and the need for good results continue in the year but we expect that both together, the volume and the margin recovery will end in operational margin, EBITDA margin also recovered to what we had in the past. We will see along the year this quarter and so on as things moving. I will probably have more visibility. But up to now, what we expect is an increase in both margin and operational margin, helped by the better margin recovery and the volume.

Now just to add a little bit more. We have results from month -- for January. We have results for February, and they are completely aligned with the trend we described in the second half of 2022. So it is 2 months only in the year, but it looks well.

We have a second question from Robert Jackson from Banco Santander.

So first of all, looking at the costs and pricing during the second half of last year, which was continue to be demanding, are there any still significant cost lagging impacts to be seen during this first quarter or maybe second quarter, such as for example, energy. Could that continue to be have an impact on results? I'll take my questions one by one, please. So it's the -- that was the first question.

I'm sure we completely follow the question. I think you're asking the cost that has been affected to the company [indiscernible]

Yes. I think he said that if there are any costs in the second half that are going to be impacting us in 2023.

Is that right? Robert.

Yes, yes, that's correct. So you've been suffering from cost inflation during the second half of -- in 2022? That's been improving in the second half. But I just wanted to know whether there's still lagging impacts to be seen in the first quarter or first half of this year, such as energy costs or such as other raw materials, which haven't been fully passed on to the pricing? And that could be still reflected in margins.

So let me answer with a couple of examples. So cost of energy. We've high energy here in Arteche, I think it was probably March, April 2022. And then it remained flat for a few months, and then it started to decrease. What we've seen in January, February, March is that the cost keeps on decreasing, right? And we are not at the pre-pandemic levels, but it's looking very good in terms of our production. So that probably one half from what it was last year just speaking in general. We have frame agreements and all those things. So that's one aspect. Another one that maybe it's interesting to say is the cost of transportation, logistics that has fully recovered from -- after the crisis. Just to give you an example, I keep on using the same example, but the 40-feet container from China to Europe that we were paying like $1,800 back in 2021 that went all the way up to $18,000, 10x that during the peak of the pandemic. Now it's back to $2000. So it's almost normal. So we are seeing a little bit of improvement as well in logistics and transportation costs, right? So overall, the trend is positive. So we are not seeing any major hiccup from second half coming our way.

Yes. Robert, adding few things to Luis explanation. I would add that the energy cost -- we have to also to take into account that beside the movement of the price of energy, where investment both in order to [indiscernible] the commitment and the efficiency we're investing in the economy of the transit solar panels and so on. And we are going to see consumer reduction in the second half of the year in some of the plants that we have. So energy is going to move down. And second comment is the logistic cost reduction that Luis mentioned coming from China, also makes China, in fact, in China. But as you know, it's not just for China but also for the export activity in the surrounding area. Now the Chinese factory is again ready to export. So we have also an increase of volume of the factory and the competitiveness that has in this last year with the cost of logistics was very difficult to compete from China. So those things are going to be seen in this year.

Okay. My questions, you mentioned backlog execution risks. What sort of -- what the risks could that be in execution of -- during the next 6 months or so, if any?

Yes. So I think that your question is about backlog execution risks in 2023?

Yes.

Okay. Well, I think I love to have backlog. So I love backlog. So that's the kind of risk I lake. So I'll take as much as you want. Now seriously, you know that our product lines are very little. So we have some products that we are basically delivering in weeks, and we have products that we are delivering in months, right? So execution risk, what we are seeing in the market, and this is a trend that everybody is following is that there is an increase in the delivery time of anything, components, subcomponents or complete products in general. So all manufacturers, including ourselves, were extending a little bit our delivery cycle because we have a lot of work. Ourselves, the risk is to make sure that we have enough capacity. And I can confirm that we have enough capacity with the actions that we have taken in Turkey, U.S. and even in [ EMEA ] to have enough capacity to execute the volume we have. Probably the biggest risk is -- we can see that we are selecting suppliers that able to follow us. And as an example, on trying to reduce that supply chain risk is that we are developing new suppliers, for example, in Turkey, as an alternative to Asia. During the peak of the pandemic, some of our Asian suppliers providing -- were giving trouble because of the land, from time it takes for the boats to arrive and do that. So we have been able to create a new supply base in Turkey at this back -- right now competing in terms of delivery time on price with the Chinese one. So there's risk, it's little risk, but I don't think any significant at this point in time that we should be sharing or measuring. So we are in good shape.

Okay. And the other question is you mentioned a number of new products. Is there any -- could you give us any idea of, for example, the optical, the margin difference versus the sort of standard products, is it 5x, 10x higher? Or just have an idea like what's the products we're talking about or services that we're talking about and the contribution in the future.

Okay. So let me, example -- you probably -- we try to speak by the 3 pillars. In the case of network liability, I was talking about 2 different products. There's a new 15kV, 15 kilowatts recloser and there's a new 38 kV recloser, okay? In the case of 38 kV recloser, I cannot mention any cost or any margin improvement because this is a product that we have before. It's a new product, but it is going to be addressing a market that we were not present, okay? So we cannot compare. In the case of the 15kV, this is a new design that replaces the previous design, and there is definitely a margin improvement. How much is the margin going to be improved? I would say around 5%, okay? Because of the new design, which is smaller or compact, less weight. So we're going to be able to see that. So that's about the [indiscernible]. In terms of grid automation, we are launching this platform for protection and control. There's going to be a saving, as I mentioned, because we are replacing a competitive product with our own. How much is going to be 30%, 40% in a particular piece, okay? The new railway relay platforms, too early to tell. We are right now in the sign concept. We haven't decide to get from suppliers and manufacturing strategy. So it's too early. And in the case of the high voltage transformers, it's not so much about margin improvement. It's probably about sustainability. We are trying to replace mineral oil with some, let me say, more eco-friendly fluids. Unfortunately, more special that's going to have a cost increase. But people -- like when you go to a supermarket and you buy groceries, which are fresh and from sustainable places, the price is higher. So this is going to be something similar and customers are willing to pay for that. So I think that's pretty much around. Robert.

Okay. Just going back to the railway relay activity, what sort of growth levels or how much does that represent today? As it has been not that relevant over the last couple of years? And any idea -- can we have an idea of how it's growing and what's the rating as in terms of sales to date?

Yes. Well, I'm going to take this one, Robert. Railway, segment is one of the best that we have. We have been opening this segment as in the last 4 or 5 years, have been approved by most of the most important railroad manufacturers in the world. And now we are collecting the this effort with sales. The sales of this relays, in this field is really faster than the global business of relays, is growing in a double-digit number. It's -- we're growing in the main markets, let's say, Europe and China mainly. And with this new line that we are now developing, we're going to have more comfort relays, more [indiscernible] to the different applications and also the margin is going to be higher. So the line is growing well. I mean it's growing on ack on what we expected in our business plan. But still, we are continuing to being approved into new [indiscernible] India, in some of the places.

Okay. And my final question, you mentioned that North America is your strongest market or your biggest market. Has the inflation reduction had any or started to have any impact in the underlying growth yet? Or is that still yet to be seen in the -- during 2023?

Okay. So I think the question is about U.S. and how strong the market is and the impact on renewables and that, right? Yes. Well, I think that the trend remains the same. So what we have seen in '23 is the same as what we saw in '22, huge increases of investment, especially in brownfield projects, upgrades and also some renewable greenfield projects. That's not going to change. As you know, we are supplying everything out of Mexico. We are not seeing any issue in terms of not manufacturing in U.S. soil, sectors and it's okay. And I think we are very, very optimistic and very positive about the outcome of U.S. this year.

And adding to Luis in particular, in the renewables investment that we are seeing huge in the U.S. And as you know, one of the other line is connected with the integration of renewals in the group which is a poor quality business. And now in this business, which is one of the business that we want to grow. We are growing faster in the U.S. Last year was a good year in terms of new customers, new products, and we are facing 2023 of a year in which we will collect this customer investment, and then we will see growth also in this industry. The other business like measurement and transformers is doing well, as what Luis mentioned. But the power quality business is going to grow faster this year.

Okay. So Robert, I think that's all from your side. So there are no further questions from the conference call. We will try to wrap up a bit because we're receiving several written questions, some of them are quite similar. Some of them asking for -- given that we were able in 2022 to demonstrate a quite strong organic growth versus what we said in our strategic plan. Could we give a bit more detail of what we expect for 2023? How this organic growth will come in terms of basing on our current backlog?

Okay. So just a reminder, we were talking about in terms of sales, we're about 23% increase, and I think we're like 12% coming from organic, right, where our strategic plan was around 4%, 5%. So where we are, it's too early to tell. But I think that the growth this year is going to be probably more aligned with the strategic plan, right? It's going to be more aligned with the high single digits than what we were doing last year. But this is the plan. Reality in the first 2 months is more similar to previous year. So I think it's a little bit early to make a compromise here. But the trend is, I would say, I'm optimistic -- I'm realistically optimistic.

Okay. And maybe another one. Maybe this one for Ixone, CapEx around 4% of sales in 2022, what should we expect for 2023, at a similar level or...

Yes, similar level. It's was in line with the guidance with the market and it's going to be more or less EUR 14 million.

And in terms of working capital, you already said that we are improving inventory management. Should we expect the cash outflow or cash inflow for 2023?

We have explained before that the last 2 years we have had an extraordinary inventory levels, and we started in the second half of the year, putting the focus on this inventory management. And then we really think that we still have thinks to do in this point. So we are positive in that -- with the working capital.

Okay. So I think more or less, we've covered all the written questions. And I will now pass the work to Alex for him to finish.

Well, thanks, Paloma. Thank you, again, everybody for your time this morning. These next days we are going to be [indiscernible] and the Investor Relations team will be available to address your follow-up questions. So hopefully, we see you very soon. And thank you for your trust and your support. Thank you and see you soon.