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

For joining us today in this conference call and to present the results of Talgo for the third Q 2021. For this, Gonzalo Urquijo, CEO of Talgo, will go through it. And at the end, we will open a Q&A session.

Thank you, Javier. Good morning to all of you, and thank you very much for attending this call. It's a call with the third quarter results. And as you know, it is a limited format in the sense that we don't review the balance sheet in this quarter. Now if we go to the first page, that is the key business highlights. In terms of our first priorities, health and safety. We are working to improve our safety measures. Our target is 0 accidents. You have seen here that our frequency rate is 8.24 and it's coming down from 8.69. And clearly, we are below industry standards. In terms of severity rate, I have to say that in June, we were at 0.19. And as of today, we are at 0.22. So it has increased somewhat. Clearly, we ask for the frequency, we are below industry standards. But that is, as you know, our #1 priority, and we'll have to continue working on that. The second point, I wanted to say in terms of COVID, we are all doing better. We hope there's no new phases. Even though we have seen is for Spain some increases now in number of people that are with COVID, but they are very minor, I would say. In terms of backlog. Where are we in backlog? At the end, we see in backlog, we are in EUR 3,013 million for the first 9 months figure. And we would have to add EUR 249 million that includes all the contracts that have been awarded but not signed. If I add up those 2 figures, it would be EUR 3,262 million. In terms of order intake, we have the same. We have the 2 figures here, signed EUR 255 million and in total with the ones that are not signed, we would -- the signing will be coming. It's a question of time, it's a question of the contracts, et cetera. And we would be at EUR 504 million. In terms of key financial figures, you've seen our revenues, we'll go through them after. And it's a higher revenue. And it is in a moment where we are finishing the very high-speed trains for Spain project. And so that train is coming down, and we have to now start increasing with the Deutsche Bahn one. In terms of maintenance, we're starting to see that recovery. I think 100% recovery and full year will be for next year. But clearly, we are in the good trend for that full recovery. Last, but not least, I would like to address the raw materials and not only raw materials and transport, I would say clearly. That has been a matter of concern with us. But clearly, we have been working for contracts that are ending like the high-speed train. The impact is nil for the new -- for the contracts we are now building, we've made it. It's gone. We've put it through our margins already. And we still continue to be very prudent that is once we have an awarded offer, we try to close as soon as possible in order not to have an open risk of raw materials. All in all, after this page, I would say, well, it's an adequate, I would say, volume of execution. The maintenance is doing better. But as Talgo, we always like to be prudent. We can go to the next page, that is the key operational figures. One of the major points there. We already spoke about the backlog. That is the [ EUR 3.3 billion ], adding the EUR 249 million that we expect to deliver the high-speed train in the first semester of 2022. We are under testing activities and that is working okay. And last and not least, we are recovering that maintenance. You have seen here where we are in maintenance in Spain 75% and in international 90%. If I go to a further breakdown, where in places like Kazakhstan, like Russia, Uzbekistan, we are around 100%. And in Saudi Arabia, also 100%. And in the U.S., 70%. So that would be the breakdown of the figures. Next page, please, that is the key operational figures and market considerations. First of all, the order intake is amount around EUR 500 million. That includes the awarded, but not -- yet not signed. The second one, we have seen delay in projects in our pipeline, the Renfe one and others. So they are there, but we do feel comfortable because we are working in over 30, I would say, active opportunities, mainly in Europe, Middle East and Africa and also other in third countries. Last and not least, very important, you see on that page, our pipeline is EUR 5.5 billion. This gives us -- and we have a positive outlook for the industry. We do believe that this industry, it's a really green industry with growth perspective, additionally to that, order liberalization. So we are quite optimistic, I would say, on that point. Now in terms of the order intake, we are at present at 0.9, which is lower than what we had given as a guidance, and we'll come back to that in the last page. In next page, key financial figures, revenues. On the revenues, as you've seen, they have increased. We are at EUR 427 million. It is clearly higher than last year. But last year, we were impacted by COVID and the previous year. In terms of we see it on a quarterly basis, you see EUR 133.7 million. I do think there's 2 impacts. The basic impact here is, we are finishing the high speed of Spain, and we are starting with the DB which will lead to the major part of the revenues in 2022. And also, I would say there has been there some seasonality, this year, effect also. Next page, key financial figures, EBITDA. Well, EBITDA, where are we in EBITDA? You see here we are at accumulated EUR 49.8 million. For the quarter, we have done EUR 19.3 million. It is a good margin. It's 14.4%, which you see in the second part of the columns in the right part. Clearly, there has been an important industrial activity and the recovery of the maintenance. Now -- but I would be prudent, I think we have had 2 issues here in the sense that we have had good margins. But as the revenues were lower, we have been somewhat impacted with that margin of 14.4%. I'll come back in the last page, but we do remain with our guidance and would like to be between 11% and 12% in terms of EBITDA. Now other issues I can talk, I do think it's important to come back to those raw materials. As I said before, we have been impacted by raw materials, not that much in the sense that finishing products were not that impacted. For the new projects, we try to close us up as soon as possible. But it's a fact that still has doubled, the aluminum has multiplied by [ 2.5 ], copper has also 50%, the freight, there has been an increase there. Now the increase we have seen there, we have put it already in the manufacturing, the one we've seen in our projects in the manufacturing of the projects we are doing now. And going forward, we will continue. I mean, the ideal would be we could do complete pass-throughs. We are trying to push that, but that's not where the industry is yet. But I would say another point here that I know what we are trying to close is, as I said before, and I want to insist, as soon as possible once we are awarded that specific project. The other page, that is key financial figures in net income. The net income is EUR 20.7 million. And that's what we have reached in the 9 months. That's a net margin of practically 5%. In addition to that, we've had good financial expenses. I would say that is for this year, and they have been positively impacted by a positive foreign exchange effect we've had on the Saudi Arabian currency, the dollar versus, sorry, the Saudi Arabian currency. In terms of our debt, you'll see what our gross debt is. You see what our average maturity and the cost of our debt. I think in terms of balance sheet or liquidity, we are satisfied because we are in a good -- we have a strong balance sheet, good liquidity, and we believe we are very competitive in our cost of debt. I go to the last page before we open turn to questions. In terms of our outlook. Well, profitability, EBITDA margin between 11% and 12%, that will remain equal, and we have not changed that guidance, and we reiterate this guidance for the end of the year. Second, in terms of capital structure. We have no major changes expected in working capital, and where we'll be in terms of guidance of the debt towards EBITDA of 1.2, and our CapEx will be aligned with the EUR 25 million we had given in our guidance. Now other point time is the backlog execution. It will be 35%, 37% of both years '21 and '22, let's say, 1/3, clearly. Now in terms of other issues, I just wanted to conclude a bit with this. In terms of the strategic plan. Look, we are moving ahead on this, and we are moving ahead adequately. We had a Board of Directors yesterday. I think it went -- at least by it went well. And we are -- we've reviewed first the financial part, then more strategic plan. This is not concluded. I do want to say that we've discussed this a lot in the Board, amongst us, it will be difficult to do disclosure because at the end, that would be given all what is our future part to our competitors. So that doesn't make much sense. But I would give you the general trend of that, I would say, it's on one side performance. What do I mean by that? Operational excellence, that's cost, quality, times, it is productivity. Second, it is remain with a strong balance sheet. And we do believe that could be going forward should be -- that could be organic or inorganic if the opportunities are there and have always an adequate balance sheet structure. So this would be it. I thank you very much, and we are open now to questions. Thank you very much.

[Operator Instructions] We already have some questions coming. And the first one comes from Jaime Escribano from Banco Santander.

A few questions from my side. The first one would be regarding margins. So you are doing [ 14.5% ] EBITDA margin in Q3. My question would be what could we expect going forward in, for example, in 2022? Where do you see that range or a target? Because it looks good, right? And you have not improved the guidance for the full year, which if you model the Q4, it looks you could be above 12%. Then my second question, which maybe would be related with this. Are you seeing any inflation, supply chain issues that maybe prevent you from being more optimistic on margin? So -- and then a third question on pipeline, if I may, which is if you can be more specific on short-term tenders that you are working right now that could happen in the next, let's say, 3, 6 months?

Thank you very much, Jaime. Now in terms of margin. Look, for the moment we said we are leaving the full year guidance between 11% and 12%. It is true for next year, we will have a full year of maintenance. That should impact. But for the moment, we are not going to come back with any figure for 2022. We'll do that as we always do in the first months of '22, we'll give you a full guidance as we've always done. But for the moment, I would say at least the expectations are good in terms of maintenance. I think there should be also good in terms of projects. But let's wait until we have our budget for the year, and we can give you figures that really are more worked upon and more reviewed and analyzed. That is as for now. In terms of inflation, you said we're optimistic about inflation. I mean we have had initial concern. We all have with raw materials. So I think we have to be prudent. We'd like to cover our risk as soon as possible. But I have to tell you one thing, when you make the offer you answer that, there's also an open gap there. And we've seen that enormous increase in raw materials and in freight. We have seen in the last weeks, it seems it has flexed somewhat that we are prudent with this. And we still have an issue there that we will have to monitor our capital. Look, when you talk about inflation, I have to say, we're also looking at going forward. Inflation of our salaries, that could be an issue. But for that, we want to answer with productivity. What we have to answer in that is, we have to be more productive. You see in the figures of inflation, we see that could increase our workforce and our salaries of the work force, but for that, we are really following our cross-cutting program that we also already announced we think they're going to meet what we said that was between 10% and 15% for '21-'22. That is clear. As for our pipeline, Jaime, tell you somewhere. Well, we have a pipeline. There's a project we are still pending to have more information for Spain. We have projects also in Europe. That is, we also have them in CIS and in North Africa. So at present, we have these projects. And that is what we are looking at now, and we do believe we should be in figures of backlog similar to the ones we've had this year. That is where we are now, Jaime. Okay? And thank you very much for the question.

We have another question coming from José Maria Cánovas, JB Capital.

Two of them, if I may? First of all, maybe a follow-up on Jaime's question regarding the margin -- the target for this year. So I just wanted to understand if you are just being conservative, and that's the reason why you are reiterating this 11%-12%? Or if we are missing something for the fourth quarter? Because if we do the math, we would get an implicit EBITDA margin significantly below the one seen in the third quarter. So just wondering if you're just being conservative here or if you're expecting any extraordinary impact to come in the fourth quarter? Secondly, you did upgrade your target for net debt and now expecting 1.2x for the end of the year. Also wondering what has happened on this line? And if you could give us some color regarding the working -- sorry, the factory levels now through the vehicle that you have for the Deutsche Bahn project. If you could give us here any update even if just qualitative and not quantitative, that will be very useful?

Look, for your 3 questions. I'll start by the last one. In terms of factoring at the end of this quarter, we have done -- we haven't done. At the end of the fourth quarter, we will have to see. In terms of the acknowledge abstract that we have not increased that, but we did say that we do plan in as the project moves ahead and we are -- we will move ahead on this and we maintain our target there of net debt, coming back to your second point, to the 1.2 between in terms of EBITDA, and that's how we keep and maintain that one. In terms of -- so in terms of the net debt, that's a little more I can tell you because that is not a published figure for this third quarter. Now in terms of margins, both quarter and do you think how we've been conservative or extraordinary? Well, no, you do know we are a prudent company. That is -- the answer is, yes, we've always been in that sense and it is continue being like that. Now I do want -- I would like to see that how is the evolution of the raw materials? What is the evolution in terms of the inflation in this country? So in that sense, that's why we have to take those things into account. And also, I would be careful with the third quarter because our revenue has been somewhat lower. So with that, you had a good margin. But when you divide it by the revenue, having a lower revenue, well then it does look higher. So that is why we are being prudent on that, and we would like to maintain between 11% and 12% that is for the second or the fourth quarter, and that would take us for the full year to high that we said in the last quarter, we would be in the higher part of EBITDA between 11% and 12%. That's what we can say for this moment. So we do have challenges, we are conservative, and let's see how the outcome is. Okay, José Maria.

We have another question coming from Alfred Glaser from ODDO BHF.

I was wondering on raw materials and transport inflation. You said in your presentation that on projects with a high degree of advance, there is no impact and you have been updating the margins on the other projects. Could you get a bit more specific how this works? And could you also explain how much of the raw material and other inflation impact, you really can offset through these measures? And I'll have another question which I might ask afterwards.

Very much for your question. Look, how does this work? Let me try to explain it, but I'll try to be and at the end give more breakdown to this. First of all, for projects that are finishing, there's no doubt it's the high-speed that is strongly stating the obvious, it has no -- little or no impact, I would say. That is clear. Now for projects you're now in -- you were just, let's say, Deutsche Bahn and things like that. I have 2 comments to this. First of all, we purchased around 70% of what we are producing and the minute we get awarded, we try to close it, not to have open positions in terms of raw materials, but not only raw materials, but other materials we may be buying, this at the end is to the freight and everything you may have inflation. Maybe it's not as big as in the steel or in the copper on in the freights or in the aluminum. But the other one, everybody has also had that impact and also trying to inflate. So my second point then, how it works, Alfred, is we try as close as much as possible, the minute we get the contract awarded. So that diminishes the risk quite about also. There always is some open positions or there always is some modifications you have to do or you couldn't at some stage. And that you could be impacted by that. What have we done? If there is any impact on this, we've passed it through the P&L on that is the margin that we have passed is I would say the impact is limited on one side, but we have passed it through the P&L in the third quarter P&L, everything that we have seen or suffered it has been already passed through the P&L. And of course, it not only impacts what we have today in P&L, but the margin going forward. That is -- that squeeze to quote it or that small squeeze you may have, it is already envisaged in the margin going forward. Okay?

All right. That helps a lot. And then I was wondering about top line revenues and the outlook. And you said before that revenues obviously have been a bit lower in Q3 than in previous quarters. And you have your guidance of billing between 35%, is it? -- 35% and 37% of the backlog in 2021 and '22. Do you think that this is in line with what the consensus is expecting now in terms of revenues this year or next year or is this somewhat a bit below?

Yes, we have confirmed this, and we are confirming it. It is true. We are in a moment that you suffer a bit when you're finishing a product and you're starting the other one and you get cruising speed. And that is what we've seen here, and you could say that in the fourth quarter somewhat because that project will be growing as time goes by, that is there, but that we have confirmed that in the guidance in terms of the top line. Okay?

We have another question from Bosco Ojeda from UBS.

I wanted to clarify on your order intake when you say around half of the EUR 500 million is pending contracts to be signed. Are those contracts that you've already made public or you would make the public once you sign them and formalize those? Wondering if you give a little bit of color on what orders you gained this year? Or this was already announced and partly the year before where there was already contracts pending to be signed?

Yes, I'll give you the answer. I think there's 1 that was made public, that was the big 1 of the locomotives because we thought that was very important in order to transparency to the market, transparency that is high. And then there's other smaller ones, which we have not made public. But now it's a question more of administration, I would say, one way or the other because in this case, the ones we make partners the most important was a public tender so at the end, there's no way back on it. So that is where we are, and that's really happening. And we do think that in the following weeks, months and we should have all this signed. And from our side, we are pushing very much. We are very interested, but our customers are our customers and are only always right. But for us, it is important to get them signed ourself. And that's where we will continue, Bosco, -- pushing for that. But only one I can tell you, this is the major one has been made public. Okay, Bosco?

We have another question from Pablo Cuadrado from Kepler.

Yes. Three questions from my side, 2 more financial and 1 more probably strategic. On the financial ones, could you just detail the tax rate, which seems to be quite low during Q3? If you can help us through to a little bit have a view going through full year results? I think accumulated 9 months was 22%. Where do you see that performing going through year-end. Also, you have mentioned in the presentation the good performance of financial expenses. And you mentioned as well a positive impact on ForEx from the currency in Saudi Arabia. I recall that in Q3, again, it was less than EUR 1 million financial expenses during the quarter on stand-on basis, similar to Q1. And if you can help us to drive how much was the impact on the ForEx on that front? And the strategic one is while we have been discussing a lot on this raw material, energy cost, transport cost for the current backlog and how this affects? So thank you very much for all the visibility. But I would like to go a step forward, probably just looking to the EUR 5.5 billion tenders that you are working right now? And how do you see this raw material is going to affect in the future tenders? Do you think that you are going to make an approach where you are going to put flexibility into the, let's say, to the tenders where you are going to share with the customer the overall value and also involving suppliers of raw materials, given the tremendous spike that we have seen there? Do you think that we can keep working like in the past where basically you put an order when you sign -- you try to cover, but you think that clients are going to accept that taken into account the tremendous increase in the cost of whatever rolling stock in just a few months. So probably any view that you can share on how you're approaching those future tenders in terms of flexibility or how you think you are going to be able to lock the margins is going to be useful?

Pablo Cuadrado. Thank you very much. Three questions, that I've understood. Customized tax rate. Our tax rate is between [ 20%, 22% ], but it depends where we have the profits. For example, this year, Kazakhstan, we have to pay [indiscernible] et cetera, et cetera, in Saudi Arabia. So that is depending on where they're coming from and the full -- once we have the year closed, we'll see what we pay in each geography. So that's basically it. That is on one side. And it is true, we are making more money than last year and first in some of these countries, so we will have to pay somewhat more taxes. In terms of financial expenses, I think there's key issues to the financial expenses. One of them, look, we have -- the cost of our debt has decreased, and we're already seeing this. We have a low cost for the bonds, and we are not using that much and we had in the foreign exchange rates, somewhat positive, that is somewhat above EUR 1.5 million in terms of the impact in positive in foreign exchange. That would be basically it. And what are the issues? Now the rest, in terms -- I think you raised a key question, if I understood correctly at the end. I think it's really a strategic issue here. Could we pass in order to not to see margin squeeze? Now margin squeeze today, if suddenly the raw materials go down, you could see there's always in a different sense. But we are not here to speculate with raw materials or anything like that. So the idea would be for us, pass-throughs. Pass-throughs, I would say, to the left and to the right. What do I mean? Pass-throughs upwards towards our customers. But that is difficult in the way you are going to a public tender, you at the end what they want us to close the full amount. And once they've closed the full amount, then what they want is, that is it, and it's up to you to negotiate. So that's not always easy because at the end, if these big tenders, we're probably -- and you cannot change the figures. So it's not easy, I would say. And for me, there's 2 issues there. That is one of the raw materials. And the second one would be an ideal pass-through, if we believe that inflation would go up in terms of HR issues. That we have to beat it with productivity. But going to the other side, that is, could be passed to our suppliers. What I have to tell you that's a big fight we are having now, and we are now opening negotiations with many of the majority of our suppliers that is we would like at the end, if we are not capable of pushing it forward what we are doing towards our customer. At the end, we are the customer what we want is at the end that our suppliers share this burden with us also. And that's what we are doing now, and that's what we are fighting. In some cases, it does work. In other ones, it depends on the leverage you have, the importance you have. And in other ones, it's more difficult. But for us, that is a clear challenge and the clear chapter where we are working. Look, maintenance, for example, we do update the CPI. So that is done, and we would like this to be transferred to others. And I think that's a day-to-day negotiation, I would be saying with our suppliers, okay?

[Operator Instructions]

Okay. I think that it seems that there are no more questions through the phone platform. In the webcast, there are 2 questions. The first 1 comes from Carlos Gutierrez. It says -- it's says as following: could you give us some information about pipeline percentages regarding the high speed -- high speed for maintenance and so on.

Yes. I would give you here that it's basically of the EUR 5.5 billion it is 50% would be in the city, passenger coaches. High-speed is around, in round figures, of 15%. And then we have commuter and local, that is around another 25%. And maintenance is included. Okay?

Okay. Thank you. The next question comes from Bruno Bessa from BPI. It says the following: could you please provide a bit more color on the Spanish Community trains contract in terms of who pays for themselves and the length of the contract and how it should be split in terms of packages?

Look, that we still don't have the final legal offer of the tender. So there's little we can say here. We are still waiting for this, what we call for [indiscernible], Bruno that is legal requirements of this tender, and that is what we're waiting for yet. So there's a little more we can tell you on this point, sadly. Thank you, both of you for the questions.

Yes, I believe there are no more questions. So thank you very much, Gonzalo. Thank you very much all the people that have joined the call. Obviously, if there are any additional questions, we have always open the channel via IR. So you can access us through that in channel. Thank you very much. I'm looking forward to hearing for you all again in the next conference call.

Thank you very much to all.