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

Well, good morning, everyone. Thank you very much for joining us in the call to present the first half 2021 results of Talgo. Today, Gonzalo Urquijo, CEO, will go through the presentation. And after the call, we will open a Q&A session in order to clarify any question you may have. Thanks.

Thank you very much, Javier. Good morning to all of you. I hope you and all your families are doing well. Thank you very much for attending this call. I'm here with the financial team with Alvaro, with Javier, Julio, Maria, [ Jose Louis ]. So we have all the [ backup ], all the financial and IR [indiscernible]. Now we go to the first page. You see the key highlights. Now we go fast to that page because we go through them one by one during the adequate breakdown. Health and safety, we start by that. You know that's a #1 priority. And we are improving, and that is key. Second, COVID. We've generated strong measures in order to maintain COVID. Even though our figures in the last weeks, I would say, have been like everywhere lease for the Spanish factories have been somewhat deteriorated. Labor agreement. We were able to sign a 5-year labor agreement, which is linked to productivity, which we think it's a good and important success and necessary in order not to lose competitiveness. I go to a green balloon. Let's say, organization. We've strengthened the organization in terms of operations, commercial by reinforcing it. The second green balloon is maintenance, and has got a good recovery there in terms of maintenance, and we are above 70% now. Commercial activity. We have EUR 462 million of new orders and a book-to-bill -- sorry, to the book is a old point. Profitability. You see that EBITDA has improved. We do have an average of 10.5% as a percentage, but the Q2 was 11.7%. And we are prudently optimistic with this financial results working capital. It has increased. But in terms of revenues, it's the same percentage. Big efforts in net financial debt. And we've achieved, I would say, 2 things: increasing liquidity, we have extended the maturity and important cost decrease. Shareholders' remuneration. The Board of Directors yesterday decided that we can bring in back the program of remuneration for shareholders for 2022. Last and not least, we are reviewing our strategy, which should be ready to present to the board by this fall. I go to the next page. Workforce management. Okay. Let's speak here. In terms of health and safety, as I said before, it's our #1 priority. We have severity rates that are 0.19. They have decreased, and we're well below the industry. But we have to be extremely careful and continue working, especially with the weakest point, I would say we have here that are the subcontractors. Second point in this page would be COVID. We have protected our facilities, but let me give you some figures, which are interesting on a [ mirror ]. 4 weeks ago, we had only one case in Spain and 3 people in quarantine. And as of this week, we have 14 positives with 49 in quarantine. And if we go to the extent, we have all our subsidiaries outside of Spain. We have gone from 1 to 14 cases. That means we have seen when we are reading every day in the news, it is reflected here. But unfortunately, it is not affecting our production to be that clear. Last and not least in this page, productivity. You know we are very concerned. I mean this is key going forward. We have to be in terms of efficiency, productivity better than our competitors, and we have been able to sign a 5-year agreement. But we do believe it has 2 enormous advantages. One of them is stability going forward because there's 13 representatives in the workforce committee and 12 of them have signed off on this. And the 2 major unions have signed off on this. So it's a question of stability time lines; and second, linking it to productivity, which we think is something new. That is key to this company going forward. I go to the next page, business performance. We have changed the organization in order to improve it. We have improved it and basically strengthened the bidding processes. We're optimizing the project design, improved project's execution in terms of productivity and efficiency. We have simplified the organization and adding transparency. And accountability, of course. So at the end, we are pushing the organization. That's what we've been doing, and that's for the organization. Second, that is maintenance. Well, maintenance, and we see it in various stages. I think these are good and changed to the positive or very positive. I would say there's good news here. Let's put it this way. If we take from, let's say, June because it has not been like that on the first semester as well. We have had -- at present now in Spain, we are at around 70%. In Kazakhstan, it's 88%. In Russia, 100%. Uzbekistan, the same 100%. U.S.A., we still at 20%. And Saudi Arabia, we are back, and we are at a 100%. That means now for Q1. So it has increasing. And in the case of Saudi Arabia from April onwards. In terms of manufacturing, I have to tell you in the high-speed train for Spain, we peaked in terms of calendar manufacturing wise. So we see that we will -- at the end, we'll have less manufacturing from this project. And other ones that are picking up now is the German one, DB. It is a Danish one. It is Egypt. So that is where we are now. So very good and better and better performance for maintenance. And what we are doing is changing the manufacturing to the new projects that are coming in now. In terms of backlog, it's EUR 3.1 billion and it's EUR 3.3 billion, if we include the awards have not been signed, that is approximately EUR 224 million. And as you can see practically, 70% of it is maintenance. Next page. So it's business performance 2 out of 2. In terms of order intake, we have, as I said, amounted already EUR 238 million plus the ones we have not signed that we believe we are going to sign. It will be EUR 224 million. So in total, we would be speaking about EUR 463 million, I would say, more or less. Now this EUR 238 million have been signed. It's the maintenance of the 15 high the variable gauge high-speed trains. That is at 30 years around above EUR 110 million. Second, in the Saudi Arabia, it's a 12 years and just above a EUR 100 million. And this maintenance for other equipment that amount around EUR 22 million. So in total, we are talking of with the pending design that we have already been awarded about EUR 463 million. Now what else can I take? In terms of -- okay, we've also had the other ones that are part of this EUR 224 million. It is the power heads have been the EUR 173 million. Modernization of the [ S30 ] -- EUR 130 million, sorry, it's EUR 35 million, another ones of Danish. But if you remember, we had a 104 coaches and they have increased it in 16 coaches, additional ones. That is around EUR 16 million. In terms of our pipeline, we shared EUR 6.5 billion. Okay. 55% is intercity passenger coaches, and practically 20% is high speed, another 20% of commute. That is where we are. We go to the next page. This is financial results. I'll start with the P&L. Revenues. Okay, you can see that in this page and the diagrams we put in the lower part are quite clear to see. We've had a 35% increase versus the same period of last year. Of course, it's a period where we had a normal first quarter and a second quarter, which we had COVID. And we do see that we have stability here, and we are around just below a EUR 150 million, and this is historical high. Second, we are having a strong industrial activity. As we said, we have, as I said before, peaking with a high speed of Spain. That is for maintenance. The performance is good and looks better going forward clearly. What else can I share with you here? I think EBITDA here in this page. I think it's important. You see the increase we had since the low sellers of the COVID. That was second quarter 2020, and we have been increasing on a strong increase third quarter, fourth quarter, first quarter and second quarter. I think this is very positive. And in terms of percentage of the EBITDA, our margin, it has been -- the first quarter is 9.1%, and this quarter has been 11.7%. So we do see that it's positive. We are positive going forward, and there's been an important progress. Next page. It's in the financial results. It's the first one of the balance sheet. I think major changes have been done here in the balance sheet. First of all, the working capital has increased, but it has increased as an absolute value. In relative terms, it's the same in terms of revenue. It's a 31% over the full year 2020. So that is -- so it makes sense. If we look at the last 12 months, that is where we were at the 31%, and we still are at a 31%. Additionally to that, we've worked with the -- for the Deutsche Bahn project, the acknowledged abstract debt structure. What is that? It's a factoring mechanism with nonrecourse. And it's basically equivalent to advanced payments. So it's the same sort of -- it's a parallel mechanism. And we use it in function of the degree of progress we are having with this project. Last and not least, if you see in the lower part in the right part, where are we in terms of free cash flow. Well, it's our EBITDA. Then we've had this working capital consumption of EUR 23.2 million. Then the EUR 16.5 million is basically CapEx, which is around EUR 12 million. The rest is taxes, and we have had a negative free cash flow practically 0 by the speed minus EUR 9 million. Following page. I think this is a very interesting page because a lot of work has also been done in terms of our banks and in terms of liquidity. We have extended the maturity of our debt. Remember on '19, we are 3 years. Now we are practically at 4. It's 3.74. Last year, we were at 3.12%. We have a total gross debt of practically EUR 280 million. And with a second, I would say, success would be a decrease in costs from 1.6% as an average. It's come down to 1.04%. And 2 years ago, it was at 1.7%. So major work has done -- been done here by all the financial team. Additionally to that, we are now -- we are importing liquidity. We are standing now at EUR 218 million in cash, EUR 125 million of nonutilized credit lines, plus the mechanism of acknowledged abstract that we can use going forward once we advance with the project. Outlook, and this would be our last page. I think we have a lot of green arrows. That's what we like here. And where are we in terms of profitability? Through our profitability, we have adjusted our -- the guidance we had given to the market. If you will remember, it was between 10% and 12%. Now we've increased it to between 11% and 12%. If we go to -- let's not forget that in Q1, we were around 13.4%, that's a 9.1%. And in Q2, we were 17.1%, and it's what, 11.7%. And we do believe that for this going forward with what we've seen, and there was no specific changes or COVID doesn't hit us again or whatever. There's no -- we should continue this improvement going forward. That's why we have narrowed the guidance in terms of profitability from 11% -- from 10% to 12% to a 11% to 12%. Second, capital structure. Okay, we have been containing the cash consumption supported by working capital action plan. We've launched a working capital action plan in terms of improving the rotation of our inventories, the days receivable and this payments. That has already been launched. We've given it a year. We are already starting to see the results in order to improve our working capital position and our net cash position. Clearly, this is a cash generator. Additionally to that, there's -- we have come with a new guidance that is in terms of debt. We are placing it between 1.2% and 1.5% of adjusted EBITDA. That is -- additionally to that, I do want to share with you we have launched a cost-cutting plan, which will amount to around 15%. It will take a year to achieve all of it. We have already achieved 1/3 of that. Backlog execution. We are the same as where we were here. So that's why you see an equal. It's between 35% and 37%. Average book-to-bill. For that, we have a yellow equal because we are somewhat more prudent and conservative area. Some, as we have seen, rental has been delayed. Now they've come up with the news yesterday that we are more prudent with that one. In terms of strategy, we are reviewing our strategic plan, and we will present into this board to the Board of Directors this fall. Additionally to that, the Board of Directors yesterday decided to launch a new shareholder remuneration program in the first half of 2022. If there's any questions on this, look, -- it wasn't decided in what way. But I do think when it was discussed that it could contemplate those things. That would be dividends on one side and buy back on the other side. So thank you very much for your attention. And now we are open for questions. Thank you once more to you and all the team and all the company [indiscernible] has been done in the second quarter.

Okay. Thank you. Now we will open the Q&A sessions, please.

[Operator Instructions] So we have our first question from Jose Maria Canovas from JB Capital.

Two from my side. First of all, could you be a bit more specific regarding the working capital action plan that you were stating? I don't know if you could provide us with the factoring figure or at least the figure that you have disposed through the AAD for the Deutsche Bahn project? And secondly and also regarding the Deutsche Bahn project, if I'm not wrong, you can have access to almost 60% of total financing of the project. So I would like to know in which stage you believe you are in terms of working capital consumption for the project? So what should we expect in the coming quarters in this regard?

[Foreign Language] Jose Maria and to come back. Look, in the working capital, we cannot and you may -- and you'll understand that have specific details. What we've done is the following. That is on one hand, we've looked at the inventory and stock we have. We've done an action plan to reduce that in terms of the values for the normal stock. And for the stock, we have also for maintenance, which has a higher one. In terms with our customers, what we are trying is to get paid before and we've put a series of numbers of dates. But this is all under negotiation. And with our suppliers, well, we've also reviewing the numbers of days. That's what I can tell you. But I do want to be more specific at least point by point. In terms of the -- this acknowledged abstract, that we are not going to give the exact figure. But you are right in the third question that the total amount you can get is 60% of the project. And as I said, our idea, Jose Maria is consume it while we are at the end. While we go advancing in the project, we'll go consuming that. But as I said before, for me, that is like when we receive and we have to put a big bond, the bond and you receive the advance payments from -- it's the sort of the same sort of consideration. Thank you, Jose Maria.

If I may, a follow-up question very quick. We saw an significant increase in net financial expenses during the quarter. Is this somehow related to the abstract and I would want to say of debt?

Yes, the financial expenses, I'll tell you. The financial expenses are going to go down, especially what we've renegotiated. But we've had 2 issues. We've renegotiated with our banks. So we have canceled on one side and open new lines. And second, we've done the AAD structure. So what we've had is one-offs, and that's why you see that increase. Going forward, you should see a considerable decrease as we have cheapened or decreased our cost of funds, okay?

Okay. So we have another question from [ Jaime Silvano ] from Banco Santander.

So a couple of questions from my side. The first one is you have revised upwards your margins to 11% - 12% on average this year. How should we think about Q4 and next year in terms of target margins? So where should we think about the margin going back? So to 14%, 15%, 16%? I think this would be helpful. And also in terms of sales, top line sales, you have reached a run rate of around EUR 150 million per quarter. And again, same question. How should we think about this figure because obviously, maintenance is recovering little by little. But then I don't know if in terms of rolling stock activity, it's going to slow down a little bit and the top line is going to be maintained around EUR 150 million? Or should we expect a little bit more or less?

[ Jaime ], thank you very much. [Foreign Language] So look, there's 2 things. First of all, as you understand, and you know, we give guidance once a year. It's normally in the first 2 months and approximately in February. So we cannot give you guidance now on what is 2022. Second, we have to be prudent. We have to see how the evolution is, [Foreign Language] or no [Foreign Language] in that sense. So in terms of COVID. Now it is true, you have 2 questions. One of them is on the margin. The other one is on the sales. Even though I can generalize that answer for 2. Look, it is true that our margins have increased in the second quarter. Now we are going to see more maintenance. So you can run your own numbers and that's why we've increased from 11% to 12%. But don't ask me to give you a guidance for the end of the year or for next year. You'll have to run your numbers. We do see it in a positive way. That's why we've moved up our guidance. And in terms of sales, look, I do think it's -- we are at approximately EUR 150 million. But if things continue going as they should go, we could see an improvement. But I have to say that we want to be prudent and we'll see. Look, with this guidance, we've done review. At the end, we are somewhat telling you it's an optimistic message. But look, there is still a lot of uncertainties, and we have to be prudent on that side. So look, you run your numbers. I'm sure you did than -- better than we do. But I think we were given you an orientation with what we said with the target, the new target on the EBITDA margin. Okay?

So we have no more question. [Operator Instructions] And we have another question from [ Jaime Silvano ] from Banco Santander.

Again, I thought there was more questions, and that's why I put myself in the queue, but I will do a couple of more questions. And on Page 11, you talk about the backlog. And you mentioned that you are upgrade -- not upgraded, but [Foreign Language] actualizing, I don't know how to say it in English, the pricing for the maintenance at Saudi Arabia. My question would be what does this means? Are you increasing prices? Or are you reducing the size of this contract? This would be our first question.

Can you ask me all of them, please?

Okay. Yes. The second question would be regarding the guidance of book-to-bill, which is in yellow. What does -- I mean, I know you explained what yellow means, but going a little bit deeper. Does this mean that you are going to revise it downwards from 1 to 1.2x or upwards? Or what does the -- does the yellow has any negative connotation or not really? And the third question would be regarding remuneration. You said that in the first half of next year, you will be setting up the remuneration plan. I don't know if you can give us any hint of whether this is going to be to resume a dividend in cash? Or are you going to do another share buyback? Or just to have an idea.

Thank you, [ Jaime ]. Look, to your 3 questions. With Saudi Arabia, we will see an increase because we have the index, the consumer price index, which is, as you were saying, it's updated or qualified as you will say. So you will see that effect going forward. Definitely don't forget that for Saudi Arabia, it only started in April. So you'll see more of that. As for your second question, when we put that equal sign in yellow, we're just saying that we are prudent. We are not revising the figure today, but that is a figure that is somewhat of a challenge as of today. So that's why we're putting that one. We are there, but we are prudent about this figure. In terms of the remuneration, the board, as I said during my presentation has agreed to do it. They want to bring it back. And what we discussed and maybe probably, it could be a combination of dividend and share buyback, okay?

Okay. And just a follow-up, and I finish myself with the questions. As I always like to ask you in this calls, a little bit of the short-term pipeline. So you mentioned you are working on more than EUR 6 billion potential tender bids. Maybe you can highlight any particular that is maybe a little bit more short term in the following 6 months that could be interesting? Just to have a qualitatively an idea of what are the short-term pipelines in this?

No, no, I have to be prudent on that. But I do see we are looking at different things in Spain, in Germany, in Uzbekistan, also in Canada, in Egypt. So we are looking at -- I'm looking here the pipeline in front of me, in U.S. also. So we do have in Norway. We do have many and different contracts that we are looking into [indiscernible] for a moment, that is a potential. There's other ones that are closer than that. So we are working on that. Okay, [ Jaime ]?

Okay. That's fine. And in commuters, do you have tenders also in commuter trains?

Yes, yes. We also have tenders for -- the answer is yes.

So we have another question from Alfred Glaser from ODDO.

Alfred here. First, I was wondering regarding the pipeline and the book-to-bill. You said that it's somewhat of a challenge today. If I understand you properly, that means that, in fact, other orders to be awarded are delayed most of all. If I understand properly, this probably includes the change in specs by Renfe on the dual-fuel trains. Are there other specific projects that are being delayed right now due to changes in specs or whatever reasons? That's my first question. And the other question relates to the shareholder remuneration. Gonzalo, you said before, it might be dividends or share buyback. What might be the order of magnitude of cash to be returned to shareholders, please?

Thank you very much, Alfred. Look, in terms of the pipeline, I think, yes, we were -- Renfe had this bid and they postponed it. Now they've come up and they decided just when the Board of Directors that come up with a new bid that is for [indiscernible], what it -- it's 57 trains. But additionally, we have postponed and its maintenance also. We have postponed the one which has the hydrogen or batteries. So we were referring to that. That's for your first question. And then your second question. Yes, we said that -- I did say that I think it could be that's a board decision, and they will take it about probably, it could be an amount for dividends, an amount for buyback. Now I couldn't give you now the amount because that was not discussed by the Board of Directors. And it's too early, and we have to see how the year continues. And in function of that, yes, the board will be able to take the adequate decision. Okay?

Okay. So we have another question from Jose Maria Canovas from JB Capital.

A few follow-ups. First of all, regarding again the shareholder remuneration. So I just wanted to understand your thoughts. Why launching a new plan, a share buyback instead of using that cash to finance working capital, for example, for your Deutsche Bahn project and avoid financial expenses? Just wanted to know your thoughts on this. Secondly, when I previously asked, I didn't quite get the answer. I don't know if it's because you cannot give it to us. But would it be possible for you to provide us with a factoring figure for the first half, not the specific one for the Deutsche Bahn project, but just an overall factoring figure? Thirdly, following up on a question of [ Jaime ], correct me if I'm wrong, but you were saying that you are not downgrading for the moment the book-to-bill ratio. But if I'm not wrong, the last guidance you provided was to be above 1.2x. Now you are saying you will be in between 1% to 1.2%. Just to confirm if this is correct. Finally, maybe if you could give us some color on your view as regards to your positioning towards any awards or any tenders with alternative fuels, hydrogen, electric? So how are you positioned in the market? How do you see yourselves versus main competitors?

Okay. Let's see because I had many questions. Okay. In factoring, we are not giving guidance, but I can only tell you the exact amount. The amount has not been very -- it's important. That is as for number one. Tell me, in question of dividends, what was your exact because when I have the downgrading -- and what was your question exactly on the dividend, Jose Maria?

Sorry, on the dividends and share buyback. Just wondering why to launch a share buyback program if you can use the cash to finance working capital and avoid financial expenses there?

Sure. Sure. That's a question you could ask to everybody. To [indiscernible], to everybody unless they have -- that is true. But at the end, the board will have to take a decision, what do they think is a priority, Jose Maria, in terms. And I think with this balance sheet, if we are at a debt of 1x EBITDA, the board, I do think wants to support also all the stakeholders amongst all of them. It is also the dividend. But of course, it's a very good point and a very good discussion and probably, yes, everybody can come to a different solution. Would you use everything to have a cash-free, debt-free company? I think that's very interesting. Intellectually, a very good question and great discussion to have. Or do you want to at the end, if you believe that you have onetime EBITDA, you want to pay a dividend unless different days, if you have a growth project, then you may see it in a different way suddenly and there is an acquisition. I think you have to mix all these things and put them in your mug and tend to mix them. But yes, that's a good point. I think the Board feels with 1x EBITDA or a bit above that. That's a good debt ratio. And I too believe that stakeholders like our shareholders do deserve a part of that remuneration, maybe more than using it in order to pay back debt or on working capital. Now you had -- are we downgrading, I would say the answers. Well, we are not, I would say, downgrading. We are between 1 and 1.2%. But as I said before, this does look, Jose Maria, challenging at some moment. That's why we've given it that different color. And we are working hard on it. In terms of hydrogen, look, we are working on a hydrogen. It should be for testing in November, and that is what we are working and we are working very hard. We have reached an agreement with Repsol in order to help us in all the infrastructure and many things of the hydrogen projects. And that's where we are now. And that has not changed in terms of the targets we have as a company. Okay?

So there are no more question in the conference call. We will now proceed to the question received in the webcast platform.

Okay. There are some questions in the webcast. I will read them. The first one comes from [ Tim Jack ]. It says, can you provide more information regarding the new shareholders' compensation plan? I believe this has been already answered. So...

Then, yes, look, what we said. We cannot give an amount in this moment. It's too soon, and the board has to see how the evolution of the year as for #1. And it could be partially in dividends, partially in share buyback. That's what I can answer at this stage and there will be a board decision going forward.

The second question comes from [ Javier Marias ] as follows: can you give us some details on the EUR 6.5 billion of pipeline? At what stage of price you included in potential pipeline?

Look, let me explain this pipeline. It's projects we see for the next 24 months, which we know them, we analyze them, and we are working on them in an active way. That's what I can answer to Javier Marias.

Okay. Yes. And the last question comes from [indiscernible] from [ GVC ]. It says, when are the first phase of the very high speed tender of Renfe kind of being manufactured? When they will be delivered?

Well, I can already tell you, we are testing them. We've done a static testing. We are doing dynamic testing. And we really have -- we believe we'll have them very soon. I would be -- we are checking the dates now because it all depends in the last figures we are having. And I think we are seeing it this via Renfe. And it depends on the approval. We are taxing them now. We have this in the different runways, but we are thinking that it will be next year, and we believe as soon as possible during next year. That's what I can answer. Okay? Pineyro, thank you.

Okay. Thank you. Thank you very much. There are no more questions. So we will end the call. Thank you for dialing, for joining us in this call, and we will obviously be available for any further questions you may have by the usual contact details. Thank you.

Thank you very much and all the team, all the company and all of us. And this IR team is available for any doubt or further questions. Do not hesitate to call us. Thank you very much for attending this call. Have a safe and good day. Bye.