Talgo, S.A. (XTG.DU) Earnings Call Transcript & Summary

Hello, good morning. Thank you very much for joining us for the conference [ containing financials ] obtained in the first quarter of 2020. First of all, we wish you and your family, [ hope you are all well ]. For the families affected, all our support from Talgo. Regarding the results, who will present today, José María de Oriol, Talgo's CEO; Alvaro Segura, CFO, who will then go through the presentation. At the end, we will open a Q&A session and to clarify all questions you may have. [Operator Instructions]

Okay. Thank you, Javier, and good morning, ladies and gentlemen. Due to the current situation, we'll firstly highlight the impacts of the outbreak of the company activity and the mitigation actions taken into place, aiming to provide you with visibility over the current status. Then we will proceed with the results of the first quarter of the year. COVID-19 is affecting Talgo's business performance during the first months of the year mainly within the maintenance business line where a significant part of our trains are currently out of service. Resume of operations will be driven by return to normality in the countries with presence so that railway operators are able to reactivate their commercial activity. Aiming mitigate outbreak's impacts, Talgo has implemented strong packages of safety, operational and financial measures throughout the different business units and has implemented remote working systems. On top of this, it is worth noting that Talgo's business enjoys exceptional scene from economic temporary downturns, due to the existence of our recently reinforced order book with new projects that ensure a high level of industrial activity for the coming years and that, together with a leveraged balance sheet, guaranteed an adequate performance of the business in the long term. Regarding manufacturing activity, outbreak reflected impact in certain slowdown due to supply chain disruptions in the main manufacturing projects and lowered productivity ratio registered during March. On top of this, factories remained closed from March 30 to April 13, driven by the measures implemented by the Spanish government. Such disruptions are being closely monitored and different protocols implemented to minimize their impacts. In addition, while clients are already notified and reported with expected impact on execution with schedules, and so Talgo is also working on implementing actions aimed to recover normal manufacturing pace. Hence, we believe that the recently awarded manufacturing contracts, together with the adequate package of measures implemented, will secure the company industrial performance. On the other hand, the maintenance activity has been strongly impacted since mid-March, given the temporary freeze of commercial activity registered by our clients. As a result, maintenance activity in Spain has decreased by 77%, while other significant markets, as Saudi Arabia or Kazakhstan, stopped all operations. Only Deutsche Bahn in Germany maintains a normal level of activity for the moment. As a result, Talgo has implemented a temporary suspension of employment for up to 313 employees in Spain and is currently analyzing alternatives for international employees. Unlike the manufacturing activity, the visibility we have as of today is quite limited as maintenance recovery will totally depend on the capacity of our clients to resume commercial operations. Overhaul projects currently registering similar performance to manufacturing projects. And therefore, we are already working in order to reschedule projects. Lastly, engineering activity, of great significance for the initial phases of recent awarded manufacturing projects as Deutsche Bahn, Denmark or Egypt are performing well as remote working measures were successfully implemented all through the company. Besides the aforementioned, it is remarkable the good position of the company due to its recently awarded backlog amounting EUR 3.4 billion, out of which manufacturing scope reaches over EUR 1.2 billion, representing stand-alone almost 3x the total revenues of the last 12 months revenues of the company. On top of this, maintenance activity currently being adapted to clients' requirements should presumably raise revenue visibility in the medium term. Last but not least, a strong package of cost-cutting measures, together with an appropriate financial profile of the company, ensures an adequate execution of order book in compliance with clients' expectations. Getting through the quarterly results, revenues amounted EUR 112.8 million, stepping back from the revenue growth trend expected at the beginning of the year, mainly due to the aforementioned outbreak impact. Activity slowdown resulted on an adjusted EBITDA margin of EUR 14.8 million, representing 13.1% margin and adjusted net profit amounting EUR 5.3 million. Regarding the balance sheet and cash flow evolution, we do not disclose detailed information on a quarterly basis. However, we must highlight the normal working capital evolution in the period in line with manufacturing project's expected degree of progress. In addition to this, the company has increased its financial capacity by refinancing 2020 maturities and increasing credit lines aimed to ensure liquidity to deal with any adverse outlook. Share buyback program was successfully executed in the period, reaching in March the maximum limit established in the agreements of 9.5% of the capital prior to undertaking the service redemption expected for the following weeks. In addition to this, in the Board meeting celebrated yesterday, we decided to declare the program expired and fully executed. As a result, through the program, we have acquired EUR 73 million and 30 million shares, representative of 9.6% of the capital. Lastly, commercial activity continued to yield good results in the first quarter, delivering new awards amounting EUR 141 million, highlighting a new framework agreement awarded in Denmark for the manufacture of new Talgo 230 train sets for a total maximum value of EUR 500 million and closing our first order for 8 train sets for EUR 134 million. This new significant award strengthened Talgo's position in European core markets. As a result, backlog amounted close to EUR 3.4 billion at the end of the period, at the highest historical levels, thus providing certain comfort to overcome the current situation successfully. All-in, first quarter results shows a reliable business performance on a hostile context where the company is focusing on 3 main areas: first, consolidation of measures to enhance the manufacturing pace of ongoing projects; second, strict cost watching; and third, strengthened financial capacity securing liquidity. Nevertheless, we see a strong uncertainty over the market outlook and its impact on the business performance in the short and medium term and therefore, we must remain cautious with our expectation over the full year 2020. We look forward to gain clarity and perform a specific outlook for 2020 as soon as possible. Going to the commercial activity, the company monitors closely all potential opportunities in pipeline. In this regard, a number of tenders processes continue their normal track while others are expected to resume on schedule once public administrative activity gets back on track. Based on the most recent interaction with customers, we feel comfortable regarding the high probability to happen of the main target opportunities. In this sense, we continue working actively in a potential pipeline amounting EUR 8.5 billion, among them Europe states as the main source of opportunities, highlighting Spain and U.K. On top of this, we believe that Talgo is well positioned to take advantage of the current railway growth expectations, driven by environmental concerns, cost efficiency, and its impact on final prices and final customer convenience. This trend is reflected on an increasing willingness of governments to continue investing on [ urban ] and long distance trains, while private operators try to penetrate into previously monopolized high speed markets. Now I will hand over to Alvaro to explain you more in detail the financial highlights.

Thank you, José María. Going to the financial highlights for the period, Talgo delivered consistent revenues in the first months due to stronger execution of manufacturing projects leading revenues to EUR 112.8 million in the quarter at the highest quarterly levels in recent years. First quarter, however, was impacted by the first outbreak symptoms from the end February with certain supply chain disruptions to subsequently slow down the manufacturing activity pace on to stop a great part of the maintenance activity from mid-March onwards. Hence, and in the light of what José María commented, the manufacturing activity is expected to recover and generate revenue visibility in the medium term. The maintenance activity, however, should provide certain uncertainty and therefore, lead us to be cautious on revenue forecasts for the year-end. Below the top line, adjusted EBITDA reached EUR 14.8 million in the first quarter of the year, resulting on 13.1% margin. This amount excludes nonrecurring items and fees related to credit bonds considered to be financial expenses amounting EUR 1.6 million as well as IFRS 16 negative impact amounting EUR 0.7 million. Underlying José María's intervention, the company has designed and is currently implementing deep cost-cutting measures in all the company areas, supporting the efforts made by the company Chairman, CEO and the rest of the Board, whom, as you may know, have renounced 50% of their 2020 salaries. On top of this, Talgo's management has intensified its cost-watching action aiming to enhance efficiencies and [ profit ] margins. At the bottom line, financial expenses dropped in the period mainly due to the lower debt cost and less warranties in shipment. In this regard, during the last weeks and due to the uncertain situation, we have refinanced EUR 32 million of senior debt maturities expected for 2020, and we have increased availability credit line from EUR 90 million by the year-end 2019 to EUR 135 million in May 2020. Thus, we feel confident with the company financial capacity to ensure the adequate company performance even in an adverse outlook. As a result, net profit of the period reached EUR 5.3 million with 4.7% margins. Now in line with Javier commented at the beginning of the presentation, we will be pleased to answer any questions you may have.

[Operator Instructions] The first question comes from Bosco Ojeda from UBS.

I have a couple of questions. One on the maintenance area. If you could give us some details on how would you expect them -- that to recover, do you expect that to go -- align with the opening of the market in terms of the number of trains that go on? Could you see some scenario that maybe the -- some of the train utilizations could come down materially, and that's not going to recover for a period of time? Or how would you expect that to recover? And on the production area, I also wonder if you could give us a bit of detail on whether you could experience some slowdown there from materials that might be delayed or maybe your clients could ask for some delays or any details?

Your next question comes from Alex Nieberding from Conduction Capital Advisers.

I have 2 questions. First of all, could you provide more detail on the procurement costs which increased by 124% in Q1 from EUR 28 million to EUR 63 million on just 30% higher sales? I suspect that has to do with supply chain problems, but I'd be interested in more detail. And my second question is regarding the order book. You talked about EUR 3.4 billion in total. But how much of that would you describe as committed orders versus framework agreements?

The next question comes from Jaime Escribano from Banco Santander.

I think the previous questions are not being answered. So I don't know if there is any problem with the conference call. Or are we going to make all the questions...

Yes. Javier, can you answer to that?

Yes, Jaime, this is Javier. As we have mentioned at the beginning of the conference and also the moderator just explained, the way we are going to do this today, according to [indiscernible] situation is just please perform all the questions -- all at the -- previous to our answers. So the way we are going to do it is just make all the questions, please. Then we would take a few minutes off-line -- or not off-line, but in mute in order to organize internally the answers, okay?

Okay. Okay. Sorry about that because I missed that part. So very briefly, yes, on top of Bosco's question, yes, I would like to understand how is the maintenance business recovery going to happen. So for example, I would like to understand if RENFE, for example, starts operating on the trains, even if they are not fully loaded of people, do you have to do the recurring maintenance that you used to do before? Or until all the traffic has been restored, you will not see your maintenance revenues restored? So this would be one question. Second question regarding the rolling stock. I would like to know if you are at cruising speed, probably not, not yet, but my question would be if you can catch up the revenues that you are missing right now in the second half of the year by including more growth loans, more hours. Third question regarding share buyback. If after COVID, will you expect or do you think that you can do the second phase or this is completely out of the table? And final, fourth question is regarding the tender bids in the pipeline. So if you can give us any visibility or have you heard about RENFE on when the tender bids of RENFE can be resumed and going back, the same for other tender bids that you were bidding in, in other countries?

The next question comes from [ Rainer Pferffelein ] from [ R+V Insurers Germany ].

This is [ Rainer ]. Maybe a question, even I know this might be early in the corona discussions but do you have any kind of first indication, if you speak with your clients, [ Adif ], Deutsche Bahn, other clients in U.K. will they change their way going forward doing business? [ Adif ] if any kind of first indications that they're asking for different kind of equipments because of social distancing and stuff like this.

The next question comes from Alfred Glaser from ODDO.

Alfred from ODDO BHF. I was wondering on the recovery in train manufacturing. Could you give us a bit more indications of when do you expect exactly to recover 100% of your manufacturing capacity, at least compared to the beginning of the year now that your factories have restarted? And then second, I wanted to ask you, you said that working cash evolution in the first quarter was in line with your expectations and the ramp-up in manufacturing. Could you give us a kind of sense where you are at the end of Q1 in terms of net cash available in your balance sheet? Even though you don't disclose many details. And third, on order intake and clients. Could you give us a bit more flavor on when the clients could actually get back to ordering the large projects you're working on? Don't you think that there will still be kind of delays on the number of projects because clients are short of cash and also need to reassess their whole programs?

And the last question on the queue at the moment comes from Jose Maria Canovas from JB Capital Markets.

Just a few. First of all, I wanted to know if you have received the payment, EUR 20 million, if I recall correctly, from the Mecca-Medina project. And secondly, I mean prior to the COVID outbreak, you provided a guidance, a CapEx guidance for the year of around EUR 40 million. I would like to know -- I know you are not providing a new guidance. However, maybe some color on how much of those EUR 40 million is already committed. Basically by how much could you reduce this CapEx given the current situation?

[Operator Instructions]

Okay. So I'll start. This is José María. I'll start with the different questions. So first question was related to the maintenance area, the scenarios, recovery, the information we just provided you in the presentation is the information that we have today. As we mentioned, we don't have clear visibility when this recovery when -- will go back to normality. We know that trains will start what -- whenever the trains start running again, most trains will have a cap on the maximum capacity, but we don't have a clear view today when we expect trains to start operation and when trains -- number of trains will go back to normality. Regarding the production slowdown. There was a specific question, also the first one, why we see that in the first Q. Well, first, we have noticed certain impact on the supply chains since February as we do have certain supplies coming from -- producing in those areas that has been impacted previously, like China and Italy. It's true that productivity level has slowed down as well, in this case was from mid-March. As you know, we have shut down the factory for 10 days roughly. And it's also some cost to recover to back to work. We have also implemented, which has been very important for us, all kind of sanitary measures in order to protect our employees. Second question was regarding the comparison of the cost of production, comparing first Q '19 to first Q 2020. Compared to the level of revenues of first Q of 2020, I have to say that it's difficult to compare first Q '19 to first Q '20, is 1 year difference. We have different -- as you know, we have different phases on the manufacturing process, starting first with the engineering phase in which we consume less materials and less working hours. While in first Q of 2020, we are much more involved on the assembly phase in which we have less engineering work and much more assembly work in the factories with much more consumables and working hours. Okay. There was a question related to the order book, whether the EUR 3.4 billion were committed versus framework. We say that this EUR 3.4 billion are all committed. So framework agreements are not considered in this order book. Those will be on top of that. Third question was related to the maintenance recovery, when we expect to see this recovery. Very important to state, as we mentioned during the presentation, that we have implemented and published an ERTE, which is a temporary layoff, for up to 313 employees. And this layoff will last until we have almost full recovery of the trains on services. As I mentioned before, we have no clear visibility today, and the level of revenues will highly depend on the kilometers run by these trains. Second of this in person, which I don't remember who was it. Regarding rolling stock, by when do we expect to recover full speeds -- full speed, sorry. Again, we are now catching up. With just only 1 month -- less than 1 month since we opened our factories, we still have difficulties with the supply chains and the same with the productivity level. Of course, we expect to do all our best in order to try to catch up on the second part of the year. It's also important to state that we have declared to our main customers, and they understood, a force majeure due to this COVID situation, and we have declared certain weeks of delays on the final delivery. Third was related to the share buyback and whether there's going to be a second phase. We just announced that yesterday, we have our Board meeting, and the decision was that this first initial phase will expire by May 19, and there is no decision whether it will continue or whether we will open a new share buyback program or not. That has not been discussed yet. And regarding the tenders in the pipeline, do we expect any delay? Well, as of today, with all the customers that we have discussed and talked with, especially RENFE, we do expect a delay on the evaluation for those offers that has been submitted already and also delay for the offers that have to be submitted. So due to the fact that RENFE, as many other companies, did have difficulties with the -- with their managing, with their directors and officials, they have announced a frozen period for about 1 month. But also they have already announced us that they will continue starting this week with the evaluation criteria for the different offers that we have submitted and that they will reopen and send to us back the new dates for the delivery of the tenders that were in the phase of elaboration. Okay. There was another question, whether do we expect any kind of different approach, any kind of different material rolling stock coming from our customers due to this new post-COVID area, well, we haven't received any hint from customer. It might be the case that some changes have to be applied but not any clue as of today. There was another question which I think I just answered regarding the recovery of the manufacturing and when we expect to recover back to normality. Again, I insist on the dependency on the supply chain, productivity and that we'll do our best in order to recover as soon as possible. There was another question related to the working capital evolution. Alvaro, can you answer that?

Yes. As you know, normally we don't disclose information in a quarterly presentation. But in any case, as we mentioned, at the beginning of the year, the 2020 year is an intensive year -- consumption year of cash due to the phase of project that we are involved, and we are in line with the working capital provisions.

Okay. Next was related to the order intake. What we can say is that the actual pipeline of -- that we mentioned of EUR 8.5 billion is more or less the same than in the pre-COVID area, so a couple of months ago. We haven't seen or we haven't received any notice from customers that they will cancel those projects, so all of them are on track. But of course, we'll have certain delays. I just mentioned delays on the award and the evaluation criteria by RENFE, similar case in High Speed in which we have to present a new best and final offer by June this year. But the rest of the pipeline, we haven't received any notice of potential cancellation, only slight delays. And the last 2 questions were related to the payment in Saudi on the CapEx. Alvaro?

Yes. In the case of the first question about the cash collection of Saudi, we are planning to collect the money. And in case of the second question, regarding the CapEx of the company, we are reviewing all the CapEx in the company. And we are executing only the essential one. But in any case, we consider that we are not going to execute all the CapEx, all the EUR 40 million.

I think that we managed to answer all these questions.

Dear speakers, we have no other questions over the phone. So we can now switch to the written Q&A. [Operator Instructions]

Yes. Thank you very much. There are a couple of questions coming from -- that has been brought into the platform. I'm going to read them and as just commented, we will again take a few minutes to coordinate the answers. The first question comes from [ Jaime Casarina ] from [indiscernible]. The question says as follows, why has the margin decreased that much? Is it due to the COVID or due to the Very High Speed contract with RENFE? This question comes from [ Miguel Toribias ], Horos Asset Management. And the question says, are you concerned about the additional expense of the countries due to the coronavirus, being the public servicer of the main bidders? For example, could RENFE's or other countries' award be delayed? The following question comes from [ Nicolas Des ] [indiscernible] from [indiscernible]. The question says, does the execution of the share buyback mean that the full buyback of the 16.5% will not be completed? Do you still -- and the second question is, do you still expect the RENFE standards in the coming months for all the commissioned trains to happen given the COVID-19 situation? And the last question comes from [ Ignacio Martinez ], [indiscernible]. It says, again, if the EUR 20 million from Mecca were already collected. I think that some of these questions have been already answered. However, please give us a couple of minutes, and we will be back.

Okay. Answering the first question about the reduction of margins, the reason of the reduction of margins is due to the COVID, even in manufacturing and also in maintenance projects, in both cases.

Okay. Regarding the second question, basically 2 questions, whether we expect a late award from our customers. I already answered that question that basically, yes, especially with RENFE and High Speed and some others. We expect some slight delay. But as of today, we haven't received any notification there would be a cancellation of those orders. And there was an additional question in parallel, whether we expect additional public expenditure in many of the governments or states related to rail? I think that you have been -- also have access to different media releases in which, over these couple of past months, in which there was a discussion whether train or rail will be favored compared to -- or versus to the airline industry. We are quite optimistic on that sense. And we see there will be a high support from all different governments and markets to try to somehow favor rail versus airline companies for many reasons, not only this COVID, not only the space of the train, not only the capacity of these trains, but also to this eco-friendly more and more claim by the different states. Regarding the third question, again, the share buyback. I think that we have answered that question already in which the expiry date, we will conclude that share buyback by May '19, and there is no decision whether we'll be opening a new one or not. And the fourth question, Alvaro?

Yes. So the fourth question, as we already answered before, the money is pending to be collected from Saudi Arabia client.

I think that's all, Javier.

Okay. I think we had -- there are no more questions. However, if there are no more questions, thank you very much to everyone. And -- well, if in any case, if there are more questions, any other clarification you may have, as you know, we have opened a communication channel with you. You can just contact us through the Investors or directly to me. And thanks again to joining the call, and we look forward to speaking with you again shortly. Bye.

Okay. Thank you very much.

Thank you very much. Bye.