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

Hello. Good morning, everyone. Thank you very much for joining the call. The aim of this call is to present the results of the year 2021. For that aim, Gonzalo Urquijo, CEO, will go through the presentation. Thank you very much. At the end of the presentation, we will open a Q&A session in order to answer and clarify any questions you may have. Thank you very much.

Thank you very much, Javier. Good morning to all of you, and thank you for attending this call. I'm here surrounded by all the financial team. I think they've done a great job, so thank you very much. And they will help me in this presentation, as always. First of all, if I go to Page #2 of the presentation, you see that we have all those, let's call them balloons. If I start, let's say 10:00 o'clock by health and safety, that is our #1 priority. We'll enter into the figures. And we believe, even though the frequency ratio doesn't look as good, we have been improving. Still our target is 0 accidents. Second balloon would be manufacturing activity. Clearly there, we do have challenges going forward. We have had inflation going up. We have had a supplier chain disruption, material increases. So that situation has changed, and it's become tougher not only for us, for the suppliers, and for companies in general. Maintenance. We recovered this area 90%. I have to say that, we'd see afterwards the figures. That's 100% for international, and the Spanish one has been increasing. It was at 85% for the year, but at the end we were above 90%. We aim to 100% for this year, for sure. Commercial activity. New orders, in fact we did around 20 million. So it's 0.9x in book-to-bill. So at the end, our portfolio remains very similar to what we have. Profitability, EUR 66 million EBITDA, that's -- adjusted EBITDA, of course, at 11.9% or practically 12%, which was a high part of the guidance we gave. If you remember it was between 10% and 12%, and then we came back in the second quarter, I believe it was, and we said between 11% and 12%. As for working capital, EUR 155 million. We've done progress with that. At the end of the year, we were able to encash, we were able to improve that. And net financial result of that, and the free cash flow we generated. The net financial debt was EUR 36 million, with a 0.5x of -- in terms of EBITDA. Shareholders' remuneration started, I will come back to this. Our main shareholders, we started with a prudent one, EUR 10 million. We hope the results are there and everything else okay to increase in the future. And it's a dual program in the sense that it's scrip dividend, so you can choose for cash if you want, or for shares. And if you choose for shares, it will mean will not have a dilution, because we will do buyback in the same proportion. So you don't modify the capital figures. So no dilution, and I insist this too. As for the outlook, which we will see in the last page, we do expect to be above 13%. I know the analyst consensus was small, but we will try and explain it, while we said about 13%. The debt will grow in 2022 as we'll have new projects coming in, and we have the payment of those projects will be due to delays also extended to the first part of '23. But as I always say, I think it's important thing to see us in 2 or 3 years. Then is when you see where your average working capital is. I move on to the next page. As always, it is health and safety. That is, as I said, our #1 priority. The only target here is 0 accidents. That is the target we have. If you see the first figures, we have increased in frequency. But I have to tell you, we've included all now -- not only our workers, but the subcontractors also. Clearly, we do have to continue improving with our subcontractors. We do see as an issue in the difference between our own employees and subcontractors, and we have a new program to improve that. Additionally, I have to say that, fortunately this year, except for one in the severity ratio, we've only had one accident that was severe. Somebody had fell down from stairs. But for the rest, the actions have not been that -- are not very -- I would say, have been light for the moment. In terms of COVID for the health, well, we have been impacted, especially at the end of the year. At some stage in the company, we were 200 people that were hit by COVID. Now we are around less than 18. We were 18 yesterday. So I expect it is less than that today. So we've come back, and it's really gone down and its comparable to what's happened in Spain I would say. Additionally to that, we have started our collective bargaining agreement in terms of CPI, consumer price index. The workers -- the representative of workers wanted clearly inflation, which is a shift. We have said no, and so that has been -- so we're continue negotiating that. And we believe the company cannot lose its productivity, and we cannot afford those increases in salaries. In terms of productivity, you also see the ratio. It is around the average FTEs or FTEs we have 2,711 and it's around -- in terms of sales, we are -- to our revenues, we are at 205 versus 182 of the previous. Next page, please. Okay. Manufacturing. If I start with manufacturing, I think this is important. The environment has changed for Talgo and for all of us. It is a challenging environment. We have inflation. We've just spoken about what does that mean for our workers, what does that mean for all the suppliers we have in terms of their own workers. Materials. We've seen raw materials. We've seen at the end the aluminum doubling, steel like 1,500 more than 2,000. Steel going from -- let's say, coal is from 600 to 1.2 or more. I mean, the price the coal is of -- last year is the price of scrap today. So we've really think. And if we go and we are buying the seats, we are buying air condition, everything, and we are being clearly hit by that materials and inflation. Additionally to that, we have had delayed in supply chain. Supply chain has become also complex, and we've also so suffered due to that. Last and not least, since yesterday, sadly, we have this geopolitical situation in Ukraine which does not help, and that could have -- I have to say, not direct impact. We had a call today with the Russian team we have there. That's only 1% of our sales and 1% of our gross margin. So in terms of results, that is clearly not significant. But what's important is our people. We have 70 --57, sorry, employees there. I spoke with their leader this morning. They're there, they're all okay and still our business is continuing to working. But this geopolitical situation adds additional uncertainties, if I may say, because at the end what's going to happen, where the raw materials, where their prices are, energy prices with oil and gas, et cetera. So that is it. Second, maintenance. Maintenance, well, international maintenance we have to say it's about 100%, as you see here. Spanish activity has been 85%. And we can confirm that for this year will be touching for Spain 100% as for international. And this is something like a COVID-19 or something like that, which we all hope not, it should be at 100%. As for the backlog, we see we are at EUR 3.2 million. 69% of this is the part of maintenance, okay? Next -- but it clearly ensures a good future at this point. It's 3 to 5 years in the future. Now next page, please. Page 5 now, I believe, that is -- in terms of the new contract, we've signed EUR 520 million, as you very well know. That is, we've done for manufacturing. What have we done here? Basically, it's the following. Clearly, we have the locos, which were one the bigger in terms of the manufacturing. That is clearly the increase of the contract we have with Danish railways. Additionally to that, we have a big contract in maintenance, Mecca, and the Spanish maintenance contract for the high speed. So what does this mean in terms of our order intake and book-to-bill ratio? We expect it to be 0.9x. So at the end, we have not hit our order intake this year or by a very small amount I would say. In pipeline, we have a geographical pipeline that you can see here, what is Europe, as is Middle East, and the rest, and that's clearly we have about EUR 9 million. Also, I have to share with you that at this stage, I have to tell you, over the last 2 months, we've seen a change in the commercial situation, and I would say it's a positive one -- more than positive. Why? If you, first, I think the macro of the sector is good. It's a sector which is green, it is ESG compliant. We already have funding for this. Additionally, there is new operators coming in that have a project and want more trains. And this means in Spain, we have the ability to produce the variable gauge. So that is helping us also very much. And what can I see here. So we have, we believe, at present contracts that are close to be signed. We have Egypt there. We have -- we could have the Danish, which we're looking that could have an increase in there; in Germany, in Saudi Arabia. So a lot of different contracts which we have now open negotiations with more than half a dozen of them, which is completely at specific level. So commercially, we have seen -- given that this has taken a strength or more than what we had let's say 3 months ago. I go now to the next page. It's Page 6, it's the financial results. Can I share with you, in the last quarter, we've had a decrease in turnover that has been impacted in our P&L, and I think that is a very good reason. It's the -- due to products mix -- I would call it the changing product mix, we were finish in basically the very high-speed Spanish train, the Avril, and we are now getting in with the German one. We're also finishing Egypt, which will finish at least -- or part of it during this year. We are starting with a Danish one. So we are in -- we are moving from projects to other projects. And that always until you get a cruising speed, it does take some time. That's why in terms of revenue range, we've put it more between, let's say, EUR 114 million -- EUR 120 million -- EUR 125 million, let's say. Now for this year, our results were EUR 555 million in terms of revenues, EBITDA at EUR 66.2 billion, 11.9%, and the overhead will decrease the cost. We had agreed in decreasing them by 15% in 2 years. We have already achieved a 10% in that aspect. So clearly, we are committed to our target and committed to this reduction. In terms of maintenance, what we have seen in this year, the increase in international and the improvement of the Spanish one. Especially international has been in Saudi Arabia, and that has improved very much. And we see in the lower part to the right, the EBITDA -- adjusted EBITDA margin, which you see how it has increased there in the last quarter when we adapted towards -- what I spoke about the projects. We did have a Saudi impact there. Next page, that is the balance sheet. Working capital, we've been able to reduce that. Why? I think we have improved in our days payable or days receivables. Additionally, in our inventories, we have generated free cash flow. So as you can see here at the bottom to right, it's EUR 16 million. So we have a better figure of EUR 156 million, and what we have which is 28% in terms of revenues. But if I go to this figure in terms of days, it has also improved, as clearly, we've been focusing very much in the inventory and days receivable and days payable, as it's another source of cash generation. Next page, financial results, balance sheet II. Here, debt reduction, we've seen an reporting debt reduction, higher in the market consensus expectations or -- that was lower. Reduction has been higher. Clearly, as I said, it's through cash flow generation and working capital. Our net financial debt for this year is 0.5x our EBITDA. Additionally to that, as you can see here, I think the debt restructuring -- we already addressed in our previous calls that we are at EUR 268 million. It is EUR 3.4 million in terms of maturity and a 1% average cost, which puts us, as we had a very good investment here. Additionally, we do have our cash position. It's very sound, and we have EUR 253 million, so that's about EUR 109 million of undrawn credit lines. And we have EUR 20 million, which we're already negotiating the banks for 2022. So I would say a good balance sheet. Last and not least, the close of the target and especially the guidance, which is always so important for right now. In terms of performance, we had a 12%, let's say profitability EBITDA margin. Working capital, it has been due to a cash plus EUR 16 million. The debt, as I said before, 0.5x. CapEx has been EUR 25 million. Backlog execution, it's ongoing. Book-to-bill, 0.9x. Strategy, which we have already reviewed it in the Board. Now due to -- I want to leave it very clear that, I have talked in general terms at our strategy area, we reviewed the product strategy. We're satisfied with them in very high speed, high speed, regional ones, clearly. If we have good opportunities, we will enter that new profitable opportunities in new EU market. Additionally to that, in terms of geographies. We have the core ones, it's Europe, it's Middle East, it's CIS, it's U.S. Clearly, maintenance is a core business and key business for us, and we're going to continue reinforcing it, and we are looking now on being commercially very active to look for maintenance that not only for our own products, only for manufactured products, but for third parties. Additionally to that, the Board has decided there's good opportunities for M&A. We have to be there. Last and not least, if I address the part of the guidance for 2022. Look, what we are seeing in terms of EBITDA, more than 13%. Another consensus -- we know the consensus was higher than that, but we thought that we should be prudent. Why? Because I think it's in a lot of uncertainties. We have uncertainties, we spoke of inflation, of raw materials, of supply chain. Additionally to that, this geopolitical situation clearly adds instability for materials, for classes of energy, for transport. At the end, it's clearly -- so we thought it was the prudent to put that what we expect to do is more than 13%. That doesn't mean that our targets going forward are more ambitious than that. Second, in terms of -- this would be a year where we really have cash consumption. Why will we have cash consumption? Because, at the end, we're getting into the new projects. And at the end, many of the payments -- we had some payments at the end of last year, and we had other ones in '23. So at the end what's advisable is we should see this working capital and our debt that's in 2 key areas, because if not, it is, as you already well now due to the way our business works. You do have, let's say, those ups and now. So this year, in terms of -- we will consume cash, that's why we put net debt to EBITDA, 1.5x, that's where we help and expects to be CapEx reported again in EUR 25 million, unless there's a specific project of an interesting view, that makes strategic sense, and that is basically good profitability and one that could be increased, it would have to go to the Board, of course. In terms of backlog, it was at 34%. So we are comfortable with the way that this -- between around EUR 500 million and EUR 570 million or a bit lower. Now book-to-bill at 1%. That's what we expect to do with what we see now in the market strategy I spoke. Last and not least, shareholder remuneration. We started with this. I told you when we spoke of this in the second semester, I believe, result presentation. I think we've started with this. If the results allow it, and going forward -- and our balance sheet, we would like to grow this going forward. We've done this remuneration to shareholders in a dual way, that is, you can choose for cash or you can choose for shares -- the stock. Its scrip dividend, stock with shares. If somebody doesn't want shares, they can sell their rights and they get cash for it. If they want to get their shares, they would get the shares. But I think it's important to say, this will not mean any dilution, because we will, at the end, increasing capital -- but by the same amount of shares in order, so the capital will remain to end -- at the end of the dividend values. So whoever has chosen to shares will get new shares. But we need to buyback, and we'll amortize those shares. Look, thank you very much for your attending -- for your attention. And now as Javier said before, we will open your questions. Thank you very much. Thank you.

[Operator Instructions] We have a question from Pablo Cuadrado from Kepler.

I wanted to ask 2 things. The first one is on the guidance. And I reckon your comments about being cautious in 2022, and clearly there are also percentages. But I want to put that 13% EBITDA margin into context, basically versus the 16.5% EBITDA margin that was commented before COVID. So my understanding is that the business is clearly recovering from COVID. I think probably in 2022, you are still not going to be fully recovering from that, but I guess you should be very -- quite close. So that gap, let's say, from 16.5% that you guided in your past and now 13%, is something that we should expect to be maintained going forward? Is basically the current inflationary pressures, et cetera, are going to remain in place for some time? Or, on the contrary, you've think that, that 13% is a cautious figure for this year, but if everything goes right beyond 2022, you should be able to keep improving that margin reference? And the second question is on the pipeline of projects. I think there has been a jump at the end of full year when you talk about the pipeline of projects. I think you are mentioning more than EUR 9 billion when compared to the figure of first half or 9 months. So if you can provide detail a little bit more what -- which are the key projects that you are including in that pipeline or accessible pipeline in order to have in mind?

Thank you, Pablo, for your 2 questions. First of all, in terms of the 13%, I have to say, we said more than 13%. That is -- that's for number one. Second, clearly, we have been cautious, and clearly all of us and then all the companies, and I'm sure, all the companies you invest in, or you see or you analyze, there is uncertainties, and that uncertainties have become really worse. That is as number one. As for number 2, it is true there was -- before COVID, I spoke about 16.5% EBITDA margin. And clearly, as a company, and all the Board, employees of this company, we do have an internal target, and that is clearly above 13%. There's no doubt, and I can assure you. But in that terms, if you tell me when can that be achieved, when not, I do think we have those uncertainties. So at this stage, we should be, at the end prudent. It is clear we have required a maintenance too, we have been impacted in the projects, especially the new ones by this raw materials. And at the end for renewals, we are working very hard how to, at the end, not have this compression we have seen that, and that is clearly a target going forward. But to come back, look, clearly, our internal targets are clearly higher than 13%. That's what I can tell you now. And it is moving north. But I think it's -- it wouldn't be prudent if we do -- at this -- if we would have said something different at this stage. In terms of the pipeline, well, that has been moving. It is true that we've seen now new offers, so I think you were talking, but at some things we have EUR 7 billion and then we came up to EUR 9 billion, but what we've seen is small projects and new projects. But what we've seen is more projects and new projects. And we have seen that in the market and that's a good line with what, I said before. Commercially, we have seen new projects coming on our tables, nonetheless. So that's what I can say in terms of the pipeline. Okay, Pablo?

I appreciate the answer.

We have the next question from Jaime Escribano from Banco Santander.

So from my side, I would like to ask you, if you can tell us the maintenance division, RENFE, Mecca-Medina and the others? If they are fully recovered or there is a little bit of upside there still? And also, I'm sorry, because I connected a little bit late in case you have said that, I can always ask later. But what is the exposure you have to the Russian contract corridor that you operate? In terms of revenues, how much this is? And then in terms of the guidance, you say -- you aim to do sales of around 33% of the backlog in 2021-2022. If I'm not wrong, this makes around top line in 2022 of EUR 550 million. This makes a run rate per quarter of EUR 137 million. My question would be, how comfortable you are with this? So should we expect -- so you are making right now something like EUR 120 million something per quarter. So you really need to speed up to make this EUR 550 million sales in 2022. How should we think about the following quarters evolving on this regard?

Jaime, thank you very much for your questions. In terms of maintenance, look, I have to tell you, do we have a small upturn versus last year? We do have, because Saudi Arabia started after the first quarter, and RENFE started at lower levels, and it has satisfactory 90-something percent. So clearly there, when we see the full pack of the year, we have 2 new variables, 12 months on Saudi Arabia, and you have another variable that is 12 months of better business with RENFE. That is for your first. For your second question, no issue. We'll be address it. Look, this is only in terms of turnover EUR 5 million, in terms of gross margin EUR 1 million. And so it has a little impact. So I had a call with the team this morning. We have 57 people there. They are all doing fine, and the trains are running fine. If you remember now, we have trains that are running inside. We began [ Zheleznye ] to St. Petersburg and there's no issue with that. But if there was an issue, I have to tell you, the impact for us would be minor. In terms of guidance, I think you raised a good point. We have put circa 34%. So that gives us some flexibility I will tell you, Jaime. Yes. But -- yes, look, we have -- as you've seen the results here of our turnover it has been running behind and we do have to run. I do expect that, while the year advances, our way of working with the new projects starts ramping up and accelerating, and that is our expectations here. But it is true, as I said before during the presentation, as we are moving from projects that we are finishing and the new launches. You always get a ramp-up and acceleration of course, until you have that cruising speed. I hope this happens by the second quarter, but it could be delayed also. And I don't say no, and it all depends on the availability of materials or not. So that is many factors you have there. But clearly, we are looking at those figures. Look, in our range, we have put -- let's say, it's more around EUR 125 million, I would say, EUR 130 million to EUR 140 million. That's where we would be and what I can tell you up to now, okay? And let's see if we achieve it, and we are able to, at the end manufacture in that speed. Okay, Jaime.

We have a next question from Jose Maria Canovas from JB Capital.

Two, if I may. First of all, in -- well, in your targets and the guidance, you said that this year, you committed kind of EUR 25 million for CapEx. However, when we look in the cash flow statement, I only see EUR 11 million. So should we expect the remaining EUR 14 million cash outflow for 2022? And will this come on top of the EUR 25 million CapEx that you've guided? So should we expect around EUR 39 million cash outflow in 2022 relating to CapEx? And the second question is, I know that you do not disclose the figure, but could you guide us a little bit, maybe provide a range or maybe a figure that could give us a hint on how much have you accessed through the AAD, the abstract and acknowledge of debt?

Jose Maria, thank you very much. In terms of CapEx, I think we've shown it in Page 7, and we are showing EUR 25 million. I don't know if in the accounts, what is the question of classification. That is -- or may have it done in another chapter. But it is EUR 25 million for last year '21, and we are expecting the same for '22, unless it's a specific project, which at the end of sale and acquired? No. That is where we are. In terms of your second question, was the guidance on the AAD, the acknowledge outstanding debt. Look, we have used it. We try to use it in parallel with what we are doing in terms of advancing in the project, and we haven't given figures. Just as we don't give figures or what are the payments we get when we signed the contract, or what other payments we get while you're having the contract, but we have used it. But clearly, it is linked, okay, to the way we are advancing in the project of DB.

We have no further questions for the moment. [Operator Instructions]

Okay. Meanwhile, we are going to read a couple of questions. We have waiting questions. The first one comes from Carlos Gutierrez. It is just as follows. Regarding German contract is it at fixed price? Sorry, did you close the price of procurement? Has it got passed through clauses?

Thank you, Carlos. Look, the German contract was at fixed price. That is as for the first part. And the second part, does it have pass-through clauses? The answer is no. And see, this is where we've had some deviations, which have impacted in our P&L in the last quarter. Going forward, I think you raised a big issue, that is the positive. I think that's a concept that we hope all the sector, given at the end we should be really thinking of this concept. So no, it's a contract at fixed price. That's the number one. It does not have pass-through. But the impact, we've already -- that we've had up to now, I have already gone through our P&L for what is already passed, and for the rest, we'll see it in the profitability of the project going forward.

There's a follow-up question also from Carlos. It says, how do you see the industry pricing power for new contracts? So I understand how far can we move to our future clients, the increases in price?

Great question, and not an easy answer, I would say. First of all, I think at present now, and I hope the producers will improve our pricing power. Why? I think we're in an industry which we are starting to get more and more buyers. So I hope this becomes and mix to sellers that we are the OEMs who are stronger. I think the macro is improving, as I said, and we're seeing more and more movement and demand, I would say. So I do think this help us. That is as for number one. 2, we do have an issue with state-owned companies or operators, because at the end, when they do -- they come for the offer, it's state owned and it's -- at the end, that can go against the budget of the government of that state-owned company. At the end, it's difficult to do pass-through there. With private operators, it could -- I think it is going to be easier. That is as for number 2. But clearly, in the offers going forward, especially with this new situation, we have of inflationary well, let's call it, the increases in volatility in raw materials. I think more and more there's one -- or we go to pass-through or at the end, we have to reflect that in the offers and the prices have to be different taking this into account. And that's at least -- I don't know what our competitors will do. It's up to them. That's what we have decided to do, that is. In that sense, we have to reduce the risk of that. And we are fine to play at as pass-through. We have no issue. And if not, at the end, we have to put it in the margin we quote in the project once we're quoting a project. Unless, there is further questions?

Okay. It looks like there are no more questions. So thank you very much for everyone for joining the call. In any case, as we usually do, we are pretty open channel for attending any questions, additional questions you may have. Thank you very much, Gonzalo. Thank you very much, everyone, for the call. And looking forward to see you soon.

Thank you to all the team, and thank you to all the -- that came in the call, all of you. So thank you very much and have a good and safe day. Thank you.