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

Hello. Good morning, everyone. First of all, sorry for the delay. We had some technical issues. In any case, good morning. Thank you very much for connecting to this results presentation of the Talgo first quarter 2022 results. For this presentation, Gonzalo Urquijo, CEO of the company will go through the presentation of the results. And at the end, we will open a Q&A session in order to answer and solve any questions you may have.

Good morning to all of you. Sorry for that delay, and thank you very much for joining the call. First of all, as always, we talk of health and safety. It's our #1 priority as you can see from the figures comparing last quarter of 2021 with the first quarter of 2022. [Technical Difficulty]. I think that's a good news, and we have continued. That doesn't mean we had some minor accidents, but as I said, minor ones. And we have to continue working. We're working very much with our subcontractors. And you know our target is 0 accidents. As for the backlog, as you can see, remains high and with visibility as it has a long term. In terms of commercial activity, as we see it now, we see the market more active now than what it was a few months ago. In the sense, we've had at least 3 extensions of our existing contracts on one side. We have another very possible one coming from North Africa, which we hope to see in the short term; additionally, different commercial movements in Europe or offers that we are analyzing and reviewing. In terms of revenues, figures and profitability, even though we go into it a few pages -- 2 pages ahead from now. But I do have to tell you that clearly, we have been, I would say, practically all companies impacted by the actual macro situation and geopolitical situation. In terms of tensions in the supply chain, we have seen aggravated lately with the geopolitical situation, increased cost of raw materials, materials costs and labor effects. I do have to say and I said later, we've already put this into our accounts and in our projects going forward. So it's already been reflected there. Additionally to that maintenance, we do have a recovery, and we are back to what was, I would say, approximately 2019, for maintenance. Additionally, to that, I think it's important and in this first page, I would like to share with you, I think the sector is living and is going for a new paradigm. And in that paradigm, I think it has key essential stakeholders. One of them is the supplies. I think we have to review our policies with suppliers. First of all, globalization is there. But additionally, now, we're very fortunate that you have suppliers that are around you. I mean all what's coming from China. For us, that is only 6% is very important because we are not blocked like all the ports are in China. We have mainly around 65% of Spanish ones and now 20% of European. That doesn't mean -- it could also be somewhat affected our supplies by Chinese supplies. But I think we have to review and we are reviewing at present all that, what does it mean in terms of supplies, having more supplies, where they're going to be geographical located? How at the end, what are we going to do and negotiate with them in terms of contracts going forward? And how we can become more efficient in that. Additionally to that, as a company, we also have to review internally what we do in order -- we are living now scenarios which have high inflations, higher energy costs, how we can, at the end, hedge this one way or the other. Third and very important with our customers. And clearly, for us, it is a key that in all new tenders, we want to have price adjustment mechanism, that is clear one way or the other. We can have many ways of building it, but we cannot take a long-term industrial contract and have a close market -- close price when you have this volatility in the prices, unless we put it in the pricing, the impact when you consider the full increases you may have in the next 2 years and then you could. But any case, I think the idea is, I believe other companies in the results presentations of works already announced that this requires this price adjustments going forward. In terms of materials, raw materials and additional inflation that could also include -- has also to include labor costs. In terms of outlook, we'll see this in the last page. Clearly, we have uncertainties. But for the moment, we decided not to change our outlook, and we have to see how the situation this year evolves going forward. Last but not least, we've had -- even though it's not part of the first quarter, we have had an important event. There has been determination for default of the Los Angeles Metro project. This was an overhauling project signed in 2016, October 2016, was for $53 million. It had different additions to it and became $90 million. In 2020, Los Angeles Metro tried to stop it because they had some internal issues, and there was a negotiation there that didn't go forward. Then we had COVID. But since then, we've been working close to them and hard. And at the end, the requirements they've been asking for, we believe we'll be fulfilling all of them. But they notified us last Friday the 6th, that termination for default. We believe this is completely unfounded. There's no reason, and we've put in the hands of our lawyers as we believe we have a very strong case. Now this is all privileged and confidential information. So at the end, we cannot give much more information than what we just said. Additionally to that, if we go to the next page, in terms of manufacturing and overhaul, I would say it's a year, first as I said, impacted by all this difficult execution in terms of inflation, in terms of increasing costs and in terms of supply chain, that is clear. But it's also a year of transition. We are finishing the high-speed train for Spain. We are doing, as you know, all the dynamic testings. We're already having in the rails 2 of them, 2 that have fixed gauge and one of them that is variable gauge. That is moving forward. But that's a project that's coming to its end. On the other hand, in terms of manufacturing, we do have now the German one that is going to become more and more -- has become more and more important, and that's going to occupy a big part of our production. Additionally, Egypt, we've sent train. It's the first one to Egypt. It's already there in the capital of Egypt last year. And we are now -- in the following months, we'll be finishing the following trains. Additionally to that, we have Denmark, which is also getting on track. And last but not least, we have the power hedge of ramps. So that's the high-speed power hedge for ramp. In terms of maintenance, look, maintenance, as I said, I would say in Spain we are at around 90% and in the other major countries, that is Kazakhstan, Uzbekistan and Saudi, we're around 100%. That doesn't mean we are not working. We have ambitions in maintenance and to improve our cost base, improve our margin. And additionally, we are having an active commercial policy in order to try and attract third-party customers. And so backlog, as I said, is 3.1%. It's a healthy one, 70% of its maintenance. In terms of the pipeline, we see it's 9.8%. I think it's an important pipeline with more than 30 opportunities. And as I said before, we have -- we are very close and looking at many of those opportunities, and we are close to many of them, and we think we will succeed. And this should be at least an amount that is equal to our sales. That's how we see it. In terms of the key financial figures, where revenues have decreased from last quarter last year from EUR 147 million to EUR 118 million clearly. It's basically due to the manufacturing activity. That is, as I said before, this change of mix in the projects and all these disruptions we've had in the supply chain. I think that this and all these increase matters. In terms of the disruptions, I have to tell you I'm less concerned. We do have less sales today, but they will come in the next quarter and the following quarters. So I would say it's a temporary measure of impact. And the other one, as I said, we are trying also -- I didn't say before -- to pass on to our existing customers all the increases and we are now in open negotiations with them and we are passing the increases we've had in raw materials. As I said also, this has already passed through our P&L. That is for all the parts that we've already executed has gone through P&L. And for the future projects we have, this has also been -- our projects have been adapted, modified to this, that is all the salary increases we've had, the raw materials and the materials in general. That's why we see an EBITDA that's 12.6%. In terms of absolute terms, it's lower and in relative terms, it's higher than last year. That is not the 30% target we had set. The last page, one thing we are clearly -- for the moment, we are confirming the outlook. We'll see how the world is progressing in terms of macro and in terms of geopolitical situation. And so for the moment, we do confirm the outlook. Additionally to that, clearly, there is uncertainties, but as I said, we can confirm. Last but not least, we did start our shareholder remuneration. And as you've seen, of our shareholders, 83% chose to receive the dividend in shares through the scrip dividend and 17% chose to receive the dividend in cash. As a result of that, we will be issuing just below 2 million shares, 1,997,506 new shares and additional to that, we will be in the market at the end buying in order to amortize. So the total number of shares will not change going forward. Last and not least, I want to remind you that we are presenting our summarized report. As you know, the -- in Spain, the regulator changed the way of reporting. So that's why we are only reporting up to EBITDA and with now balance sheet figures. With this, thank you very much, and we are glad and happy to answer the questions. Thank you very much.

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

I want to ask a couple of questions. The first one on your margin guidance. I mean you made 11% first quarter, but you're guiding for 13%. I mean, what makes you think that the margin can improve? Is it a maintenance activity moving to higher levels or on the production side, if you could give some color on both businesses? And second question is on the -- I think you mentioned earlier on the call that you were working or you did already some contract extensions. If you could give some color on that.

Thank you, Bosco. I'll start with your second one. We are working a few of our contracts, have the possibility of expansion, and that is what why we have not closed those extensions. We are just working because we have been approached clearly with 2 firms already. The third, as said, they've expressed there's interest but has not given any date. And with 2 of them, they have already sent us letter expressing the interest to extend. So that is Bosco what we are working. In terms of margin guidance, I have to tell you yes, we put circa 13%. I do think that in the first quarter, we've seen, first of all, the impact of the cost -- and with this new scenario of increases in salaries. In Spain, we've increased 5% for the last year, 4% for this year with all the raw materials, with all the materials. That has been fully impacted in our P&L. So that has affected our maintenance. Now we do think that going forward, this impact of the manufacturing won't be there. Additionally, we will at least to say the least maintaining maintenance. If not, we do have an internal target to make progress. And costs are contained, and we're looking at cost, we can even make progress on that. So that's why, for the moment, we have maintained the margin of 13%.

[Operator Instructions] Next question comes from Jaime Escribano from Banco Santander.

So a couple of questions from my side. One is regarding some news flow saying that in the hybrid tender bid of Renfe, there is only cash billing. I just wanted to understand if this is the case? Or if you still see opportunities at Renfe tender bids in the following months or this year. I have a second question regarding your prototype of commuters, just to have an update on that one. I remember it was quite promising. You managed to win 1 contract that in the end it was given to Skoda in Lithuania or one of these contracts in Estonia, if I recall well. But since then, we haven't heard on that. So maybe you can tell us out of the pipeline, if there is anything interesting where you can start selling this or commercializing this commuter prototype? Maybe another question on the termination of the contract. I understand you cannot give us a lot of information, but just for us to understand and being able to explain to investors. So what is exactly what they are alleging to terminate the contract? And what is your view of the -- your version of the story? And finally, just on the business plan to know if you are going to give us some Capital Markets Day or some info on the new business plan anytime soon?

Well, in the tender of the EMU of Renfe, we did not go to that offer. We know that there was at least 5 companies have been analyzed. Only one company has gone to that tender, and they know why didn't we go. Clearly, it was a contract that had a price based, what, 9 months ago. It was a fixed price when you had all the increase of raw materials, all the increase in materials, all the inflation. You had labor, so the cost of what it will. So at the end, that was taking you into a contract. We had a fixed price, a price fixed 1 year ago with different prices of all the elements we are using. And now that's why we decided not to go. We thought it did not meet our standards in terms of profitability. Look, the majority of the players did not go either and who other - a competitor went; I'm sure he has good reasons for that. And we don't know. But clearly, for us, it didn't make sense when it was a fixed price, a close price 1 year ago and the increase we have seen in all the materials. As for the prototype, Jaime, [ that is a possibility ]. And for the prototype, we do have it ready. I mean we are looking now at other offers, which would have the prototype of EMU. So we are looking now at other offers. So we are fine and we are open to that, and we will be bidding in other contracts, which have EMU offers clearly. In terms of the termination contract, well, look it said it's for default. Now they have not given us -- from a legal perspective, this is all privileged and confidential. So we have to -- we are very restricted here. And we can only talk to our lawyers now. But I can only tell you we don't know the reasons at this moment why they have taken. We know that what we are done, and we are convinced everything has done -- been done in time and in an adequate manner. So that's about a little more we can tell you that they say that. We still don't have the breakdown of what are the exact reasons for this. So I'm sure we'll have them in the following days. Additionally to that in terms of our capital markets, yes, we did. And we've been since the beginning of the year we're saying that we would have one. But on the other hand, the volatility in the market at this moment has pushed that, let's say. We've delayed it, I would say, like the supply chain has delayed us also. So that's what I say. But I do think we should have one. And give us your feedback all of you. I mean when do you think we should have it? When is the adequate moment that we should go with Capital Markets Day? We are open to that. That is what we are living now, we thought it didn't make that much sense and the best was to postpone it some more and we were thinking of doing it next fall.

One further follow-up question, if I may. Regarding the 3 extensions. You said that one -- just confirming to see if I understood correctly. The one that you think that could happen in North Africa, I guess, is the one in Egypt mainly. And I don't know if you can confirm that the other interest letter is the one in Germany or the one in Denmark because obviously, the German one is much bigger than the Denmark one. So I think it would be relevant if you can give us a little bit more insight on which of the 2 is.

Yes, the extension is I wasn't referring to Egypt, clearly. So was that is as for #1. That wouldn't be an extension, and it is public and then some Egyptian newspapers are quoted. We're looking here at a new contract, and we hope that is signed soon, and we'll announce it to the market. There's 3 extensions. The other 3 contracts, not Egypt. And of course, we know that one of them we have is Germany, other one is the Danish one. Another one is the Saudi Arabian one. So that's what we are looking at now. And that is where we are now okay.

The next question comes from Beltran Palazuelo from DLTV.

I have 2 questions. First one is regarding the margins. If you could go a little bit more in detail on Talgo, what has had to happen in order to achieve, let's say, the target of 30%. And then regarding next year, seeing current backlog, is there a possibility, let's say, of improving this 30% or at the moment with the current backlog and with the current costs, it's complex? And then second, regarding working capital. Seeing your guidance and seeing your EBITDA, your working capital investment around the end of this year should be, let's say to EUR 240 million, EUR 250 million, which is more than 0.5% of the market cap. With the current backlog, what would be the say the profile of the working capital next year?

I'll start with the last one. In terms of working capital, we have not given exact guidance. I do tell it's going to be a year of working capital where we do have -- we are going to have, as we've already said, in consuming cash. Now we are doing all our efforts to try and do cash-ins from here to the end of the year. So manage that most diligent and efficient way we can. That is where we are pushing very much our customers so we get paid before and our suppliers to at the end extent wherever we can in the payment period in that. Beltran, thank you for your question. That's for the first one. But we do see it as a year and we do see it in our outlook that is going to be difficult in that sense, and we will consume cash this year. That is for #1. In terms of your first question, it was the margin of the 13%. I do think that margin in the first quarter reflects what we've done in the first quarter, and we've had all the increase in salaries, the increase in raw materials, there's increase in materials has all been passed in the first quarter. So that's why we are maintaining it. And that's why we think that going forward it should be better. But based on the uncertainties we have, that means additionally we are working even to improve our margin in the manufacturing and also in maintenance basically to cost and cost cutting, which we are continuing. And additionally to the third question was in terms of the backlog and the profitability of our projects going forward. Is that it? Was that the question?

Yes. My question is, let's say the cost inflation were to be, let's say, not as high as it is currently. If there is a possibility of, let's say, of having a margin of 14% or 15% next year or with current contracts, it's complex? Just to see if it's -- let's say, a difficult year and will the next year better if things stay as they are, or it's complex to improve the margins if things are as they are now next year?

Beltran, I think with the existing contracts, it is complex, even though I want to tell you we've opened negotiations with all our customers in that sense, but it's not going to be an easy task. Now going forward, I think the new contracts clearly are going to continue in a different gross margin for sure. So that's what I can answer you now that it's not easy with what we have. We are really negotiating it. And for the future, clearly, it will have different margins in terms of my manufacturing for sure.

And if I may, last question, one follow-up of course, when we see aluminum when we see, let's say, steel, we see copper, of course, it's volatile. Are you already closing, let's say, as much as cost as possible for, let's say, current contracts or at current levels you're not hedging as much as possible because maybe there's a possibility when we see steel, aluminum and all that is coming down. So maybe next year, it's under what is now? So maybe what is the policy of the company hedging as much as possible and closing, let's say, this 13% margin? Or where you're now you're now getting a risk of maybe the sort of these roll down and you have better margin next here?

Look, I think the policy of the company is always to be prudent and is hedging as much as possible. That is as for #1. Now for the orders we have now, a big part of the raw materials have already been acquired or have been hedged in that sense. And going forward, as I said at the beginning, clearly, we want to go to an open book or we want to go to a price escalation or call it to price adjustment in our tenders. So that means we're open with our customers. We are not willing to take the risk of having, because you say, it may come down. It is -- steel is 1,200, cold rolled steel and it was half of that 1 year ago. We've seen where aluminum is, we've seen where copper is. So clearly, we want to at the end, transfer this risk to the customer because we think that's how it should work going forward. And you see in Spain and you know it went well. Even the state has accepted that for the civil contracts, you're able to renegotiate cement, steel, et cetera. So that is what we are looking at now and what we are pushing. And we're also pushing it with the government and to our association, et cetera. I think that is a movement we are in now.

[Operator Instructions]

It looks like there are no additional questions. So we will bring this call to a close. Thank you very much, everyone. Of course, as we usually do, there's an open line through the Investor Relations team to clarify any additional questions. Thanks again, and looking forward to hearing from you for the following call. Thank you to all, and all the best. Bye.