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

Hello. Good morning, everyone. Thank you for joining the call. This call is aimed to present the results of Talgo the first half 2022. For that aim, Gonzalo Urquijo, CEO of Talgo will go through the presentation.

Good morning to all of you, and thank you very much for joining this call. As you may see in the first page, as part of our DNA, we have highest health and safety standards and ESG practice. And the results have been good, and we are very proud and happy. Second, let's talk about the new pricing. We'll go into it in more detail in the next pages, but I think rather is a key, we have seen, in recent months, a tremendous -- a big import and cost increase in raw materials and supply chain disruptions and costs increase due to inflation. What are we doing to that? What are -- we have, under implementation, to protect our margins of ongoing projects as we'll see and renegotiating them. On the other hand, new offers will be submitted, and also submitted now were the indexation process and it required a fixed price. It will be with the price that we'll take into account the inflation expectations for the following years. And last and not least in terms of maintenance, activity is good. Remember, last year's first quarter wasn't. We had a recuperation, and now we are at full speed with maintenance. Additionally, from commercial point of view, I think the momentum is good. There has been some delays in some projects. And we have different opportunities, extension of the existing projects and other projects we'll talk about after. In terms of our financial figures, when you see, our balance sheet is strong, even though the liquidity, it's a tough year in terms of liquidity and due to results, as what we said in the -- just a few minutes here ago. Last but not least, we'll see the review of our guidance. Next page, in terms of health and safety, highest standards and our target is 0 accident, and you've seen our frequency rate and severity rates have improved. Additionally to that, we've seen a strong increase in our training hours. And of course, in personnel, we're enhancing diversity and a lot of local training, clearly. Last and not least, in terms of environment. Our trains are 100% electrical, the lights and all the energy we consume in our plants is renewable energy, and we continue with the hydrogen technology as an ongoing project, and it's under testing. Next page, what do we have in the next page? This is basically what we call, this part here, first of all, in terms of salaries, our salaries have increased 9.2%. It was 5% for '21 and 4% for this year. I mean, that was clearly a bet we took at the beginning of the year. But if you see the inflation we're having in the figures appear today in Spain. Fortunately, we were on the right side. Additionally to that, in the existing contracts, 70% of our backlog has indexations. It's all the maintenance contract. And for manufacturing, we are on a dual track negotiation. That means we are negotiating with customers, all these inflation and cost increases. And on the other hand, with our suppliers, we are also negotiating in order to try and reduce, as much as possible, all possible increase in prices. As for new contracts, it's important, 2 things. We are working clearly with our customers in 2 sort of approaches to the customers in terms of the offers. One of them is through our pass-through mechanism of the raw materials, materials in general. Inflation, that is as for #1. And as for #2, we want fully locked price. We include all our expectations for inflation for the following years. And if we go to this, we hedge, we're looking at hedging structures also as to have a close the gap. So we have no gap between the cost, and that is our target and the sale. In terms of supply chain, clearly, we have seen delays in the outcome of our projects we have negotiated with customers and in many of them, new dates. Clearly, what is our main argument, our main argument is force majeure or the COVID-19. That is clear. And additionally here, we continue working on cost-cutting measures. Now as for LACMTA, I can only say that there's 2 parts of it. One is a legal part of it. But on the other hand, we are under negotiations. And there's little more I can tell you due to confidentiality reasons. Russia, we have a limited exposure. You know we canceled and stopped the contract we had at the beginning of March. That is clear. Additionally to that, the Russians did not recognize the sanctions, but we did. Clearly, that's taken us to court in Russia. And clearly, we say, "I know." We should go to court in France. That's where the contract is, and we'll end up in French arbitration with that. But the amount of this is not -- it was 1% of our sales. So that is not very significant. Additionally to that, what's most important for us is our workers and the wellbeing of our workers. We have 55 workers with negotiating with all of them. 53 of them are already out of -- 52, sorry, and we have to finish all the different issues we may have there, okay? The next page, business performance. If we'd look at our backlog. Before that, I would like to say in the first half of the year, we've had no new order intake. We've been looking at a lot of projects. We are close to closing at least one of them, but we believe there's been delays for different reasons in that. And in terms of the backlog, as you very well know, practically 70% of it is maintenance. This, as you well know and I've just said, has indexations. And for the other 900, we are working with DB, a German project, the high-speed -- finishing the high speed in Spain, additionally to the Danish. And the elaborate new train we have for Spain, okay? Now going forward, as you see, then the outlook is good. We believe the market is there. The market is strong, and we have a lot of offers that are -- that we are looking at now. We have 3 extensions, possible extensions, and we're looking at different contracts close to North Africa, close to contract there. And for the rest of Europe, we are looking at other possible contracts. If we go to the financial figures, we see a revenue drop. It is an important one versus last year. In the first half we did EUR 293 million, this year it's EUR 218 million in round figures. Why? I think it's a twofold reason. On one side, we were very full blast last year with the year 70, with Avril, with the Renfe project. And this year, we are now with the start of the German project. So at the end, that takes a ramp-up, I would say. And on the other hand, we've had a decrease in sales due to the supply chain disruptions we have had and material disruptions we have had. This has not only had an impact on revenues, but also on our adjusted EBITDA that you see in terms of absolute terms. Last year, it was EUR 30.5 million and this year it's EUR 23.4 million, even though the margin has remained at 10.7%. Here, you see the weight of the maintenance business, okay? Now in terms of financial expenses, you have seen they are lower. And we did good negotiations last year, and we've had some positive impact in foreign exchange. Next page, in terms of the balance sheet. We did say since the beginning that this year was going to be a tough year in terms of working capital. But I do think we have to see this not in 1 year, you have to see it during the cycle of the projects. But it is at the end of the year where we're then to consume cash due to working capital requirements. Additionally to that, as some projects have been delayed. So we thought it was going to use some cash at the end of the year and probably they will come at the beginning of next year, those collections of these manufacturing projects. Additionally to that, we have not used AAD. We acknowledged, abstract that for the German project during the beginning of this year. We will use it in the second part of the year as -- I'm here, looking through the -- as we go advancing in the German project, we will use again, in the second semester, the AAD. Our cash position was around EUR 140 million. Additionally, we have undrawn credit lines and we have all the AADs, so that gives us a very comfortable business or -- sorry, liquidity of around EUR 400 million. Additionally to that, 74% of our current debt is at fixed cost. We believe it's a very competitive cost, 1.1%, and -- which were -- good renegotiations were done last year. And this year, we have already done some renegotiations with the bank in order to extend the debt. And we've done them already to increase the -- to avoid the increase in interest rates. And we are still closing some other ones in order to have a very comfortable position going forward. But as you can see there, where is our -- now or -- we can tell you now, the gross debt at the end of the quarter has an average maturity of practically 3 years and a cost of around 1.1%. Next page, which is the outlook and our guidance, let's say, and we wanted to reflect what we see in the real situation. And we've been hit with 3 things, delays in raw materials and materials coming into our warehouses, and also increase in cost. That has been fully put. That is for the existing projects and what we have done in -- through the P&L. And we have it in our backlog already internally. That's already reflect that. But we do think it's more prudent with this situation we are living now is in terms of 11% EBITDA versus the 13%. Additionally to that, we did say since the beginning, we would have cash consumption. We had estimated 1.5, we have the multiple of EBITDA, now we are at 2.5. It's better than the first semester, but it's clearly above what our expectations were when we did the guidance. CapEx remains constant. And in terms of the backlog execution, it has changed somewhat to 32%. And the average book-to-bill, for the moment, we leave it at 1. And little to say on the scrip dividend, if you remember, it was EUR 10 million. And if I'm not mistaken, 83%, we decided to go for new shares and only 70% to cash. Now I would like to add, as we've seen in the press, many issues on the penalties. It is to -- we signed a contract, we are ramping in 2017. The penalties could go up to 20% of the contract. That is as for number one. Ramping claims that we have been delayed. I have to tell you, for the first year delay, there was a first year that the projects should have been -- or the trains should have been handed in at the beginning of January 2020, but then there were some modifications that led to January '21. Now we are in full dynamic testing. And I have to tell you that the delays before '21, clearly, in our view, it's a question of force majeure. That means all the COVID and what all that bring with that, even with [ tenure ]. But I think we are very well placed and -- there has been delays that we believe -- force majeure has been accepted with many other customers and our lawyers feel very comfortable that is a clear case of force majeure and -- with all the COVID. I would say that is basically it. And happy to take your questions. As I said before, thank you very much for attending.

[Operator Instructions] And we already have some questions coming. And the first 1 comes from Bosco Ojeda from UBS.

I would like to ask a few questions. The first 1 on the provisioning for these legal claims. I wonder why you have not provisioned. If I'm not wrong, anything or much on the P&L, we saw some news report saying that the Renfe was claiming more than EUR 100 million. Also wanted to ask if there is -- if you expect a cash outflow at some point from these legal claims, or you can, for the time being, until there's a legal solution, you can still -- I mean you're not going to have any cash outflows on those 3 things. Second question on your production. I wanted to ask if you have reached a low level in Q2 on the production? Or you still expect that to continue to come down, depending on the -- will this German contract and where that's going to see an improvement there? Or with your current backlog, where that could still go down or you would expect a recovery? And those were my questions.

Thanks very much, Bosco. Look, in terms of the provision for the legal claims, we believe we've looped it with our auditors, with our lawyers. We don't need to do any -- because for the moment, we have no legal claim here with Renfe. Yes, it is a 20% of the contract. That is around EUR 150 million. But this, in Spain, call it, [Foreign Language]. It is not, still, a legal claim. But this initiated a procedure and for that, they sent us a letter. And we now have to answer to that letter. And clearly, for the legal case offer, we believe that we have the clearest case, I would say, legal cases we'll work through. I mean, with force majeure. When have we seen another situation of force majeure like the one we've seen with COVID-19? And good example is that many other customers have allowed this. So we are very, I don't know, tranquil, as I would say that. We are very sure that we have a very good legal case -- if we reach a legal case, which up to now, it's not there. That we would be -- clearly, we have very good arguments in order to defend this force majeure. And we have a big file on August in all what has happened. And as for your second question in terms of production in Q2. Now I think from here to the end of the year, of course, in Spain, you have to be careful because Q3 has a summer, et cetera, and that we are positive in the sense that production should clearly increase. Why? Because we are waiting for many of these suppliers that have not come, but should be coming. And now we should see a ramp-up of the German project. So clearly, in the last 4 months of the year, we should see, clearly, a ramp up. Thank you, Bosco.

We have other questions coming. And the second 1 comes from Jaime Escribano from Banco Santander.

A few questions from my side. So the first one, regarding the guidance, just to understand how should we calculate the sales guidance. So you said 32% of execution of backlog '21, '22, should we take the starting point of the backlog in '21? So EUR 3.2 billion times 32%, then we deduct the 2021 sales, and we end up with around EUR 450 million sales for 2022? Would that be a fair assumption? Second question on margins. Just for my understanding, so you guided 11%. And going forward, for example, for next year, how should we think about margins? Has all this inflation and supply chain created, like, a bad backlog that is going to take 2 or 3 years' time to clean it up? Or if we see some normalization of supply chain and inflation, according to your accounting methodology, can we see margins recovering again to, I don't know, 12%, 13%, 14% the initial targets before all this inflation turmoil? And maybe a third question on working capital. Just to understand if we have seen the peak, for example, in terms of working capital over sales and then the net debt by year-end is going to decline a little bit from previous levels? Or is this going to stay, the full year, at current levels and then you will start cashing part of all these receivables in following years?

Thank you, Jaime. I'll start by the end. In terms of working capital and net debt, I'll start with your third question, I do believe we should be, unless there are surprises in the peak. And as you can see, our guidance is better than the debt we have at the end of the first semester. So we do think we've seen that peaking and that should improve. In terms of the margins of 11% going forward. When I think, there's 2 businesses. We are very confident on the business on maintenance, and we continue rendering a good margin. But as for manufacturing, we do think we'll pass through P&L everything. And going forward, we are going to see new projects, which have a different profitability, so I don't think we have what has been in some of our projects now. We've had to review our margin. So we've had an increase in margin, and that has had a direct impact on our P&L. That is as for number one. So going forward, you shouldn't see that for '23, as you were saying. But additionally to that, if we have new projects with different margins and higher margins, that should also improve your weighted average and your margin in terms of that, okay? So that is where we sit. And for your first question, if you remember, the backlog was the actually EUR 3.2 billion -- practically, 3.2 billion in 2020. So with this, what we do is what has been the '21 and '22 sales in this case, and it's 32% of that. That would be around EUR 1.2 billion. If you take away the revenues of '21, you are left with some revenues for this year of approx. EUR 470 million. So that would give you the exact figure, Jaime, okay?

Very good. And maybe just a couple of follow-up questions. You said that you are close to -- to close a contract. I don't know if you can provide us further information on that. And also on the backlog, which is EUR 2.9 billion, it was EUR 3.2 billion in Q1. If you do the maths and you deduct the sales, you end up with a negative order intake of around EUR 150 million. I don't know if it's because you have removed the contract in the U.S. or something that you have modified in the backlog?

I think to come back, in terms of these 2 questions, the closure of the contract, let us be prudent. We prefer not saying, but we do hope in the following weeks, we have a good news on this, but let us be prudent and stay in terms of not mentioning names. In the second one, where you see a reduction in our backlog, the basic reason has been Russia. At the end, we have part of our Russian maintenance, and we've taken that out, okay, Jaime?

[Operator Instructions] We have another question from Beltran Palazuelo from DLTV.

Gonzalo, I have 3 questions, if I may. First of all, if you could give us a little bit more color on the supply chain. We have seen, well, -- of course, during the, let's say, the last 18 months, a lot of inflation in the supply chain and -- but -- and difficulty. But we're also seeing since, let's say, 2, 3 months, a lot of deflation, zinc, aluminum, copper, iron ore. So if you could give us a little bit more color on the supply chain, what you're seeing. And then regarding the margins, if I may. Once you, let's say, you clear this year and next year of manufacturing, let's say, with all the inflation exactly, regarding, let's say, maybe '24, '25 when you analyze exactly the contracts that you're negotiating, what would be, let's say, the pro forma profile of this company? And then regarding opportunities, you have said you're have, let's say, some clients can exercise options and you are negotiating and you said you were quite optimistic. Regarding the size of the opportunities, if -- let's say, if all these 3 clients were to exercise, let's say, the options and then you say you have more opportunities, is there a possibility that maybe in the future, these too, let's say, strong order intake, you're analyzing on increasing, let's say, your manufacturing facilities?

Thank you, Beltran. Look, in terms of opportunities, I'll start with your last question. In terms of opportunities. Let's say, if all the contracts come together, Beltran, where we have -- it'll be a sacred and a great problem to have. But if it's true, we could have a problem of capacity. I do have to tell you, before to go into a new plant, we would increase the shifts. We are working with 3 shifts. We could always go to 5 shifts. So that is -- it's even better than that. And we have good orders to have a new plant. We would always review that. But let's say, let's fill what we have for the next years, and let's move the shifts upwards if requested. But it is true, we have the extension of 3 contracts, and we have other contracts that are now -- we see them as moving forward. So we'll take that decision when it comes, and it will be a great discussion to have and a great conversation. But I think we should have the maneuverability from 3 to 5. In terms of more opportunities going forward, and clearly, you spoke of '24, '25, clearly, once I think we are over this situation, we believe -- and the way we are quoting now the now the contracts with the offers, with indexations, et cetera, I do think we should come back to close to the margins we've shown in the past. Because at the end, the maintenance of very stable business, it is there. And in terms of manufacturing, we should improve in that and -- going forward, and especially we have indexation. We should not have margins, at least as we've had now going forward. Your first question was in terms of supply chain and what is going to -- first of all, I would like to figure out that in terms for us, raw material is only at 20%. It is -- 10% there is aluminum and 5% is steel and another 5% is others, which is chemicals, which is copper, et cetera. So again, our biggest concern here now is other materials, I would say, and inflation. And it's not easy because you cannot hedge those, because it's not like hedging another raw material or whatever. It is -- when you buy sheets or you buy the roof of the train, or you buy the box forming the train, at the end, if not -- at the end, that means hours. In terms of inflation, I would say it's more -- have more correlation or larger correlation with inflation, clearly. Because at the end, we have a lot of labor into it, and that is what we are trying to hedge also going forward. But we do think that this situation should not -- and we hope it doesn't last, although we've suffered in the last months and since in terms of cost and in terms of the delay. I don't know which is worst, to be honest. Because at the end, the delays are also -- delays means money, and not by guaranty. Delays means money, but I just -- at the end, the cost that brings with it. And I do think this going forward should clearly work in a different way, and we are optimistic in that sense. And especially, if we go now with clauses of indexation with our contracts or we've not -- we are going to fully include what we believe is inflation for the next 3, 4 years. Again, we should have -- we should be able to marry that or to, at the end, balance out with our shipments. Okay, Beltran?

Okay. One follow-up, if I may, a little question regarding opportunities, I was willing to hear. But well, in the past days, we saw that you are were in conversations or something in India for -- to -- if you could give us more color if you can. Or maybe if you cannot talk about what opportunities does India have for Talgo to -- let's say, to focus more on the long term. Because clearly, now everybody is focusing in, in the short term. So let's if you could have a couple of words for India and what opportunities does India have for Talgo.

Yes. We signed an LOE with this future bond that we have for a moment. And we've seen now in India, this new contracts have come up. Some of them suit us well. It's not easy. As you all know, India is a complex country. You have to produce a part there, then you have the exchange rate. But I think there is an opportunity in terms of real demand for a couple of hundred trains there. Trains that could fit very well to ones we produced, and we are looking into that entirely. That's what I could say now. And I would be prudent with this, Beltran, and let's see if we can drive it in the correct way, and we're working hard on that. Okay?

[Operator Instructions]

I believe there are some written questions. If you could tell us well the question on, Javier?

Yes. Okay. There are also, we think, we're seeing some on the webcast. I will read them now. The first one comes from Iñigo Recio. It says as follows. "Which projects have been most affected by supply chain disruptions? This issue has affected second quarter 2022 sales by more or less EUR 20 million, according to the presentation. Which components have had the most impact on the delay? When do you see a return to normality?" Also a second question that says...

Well, let me go for the first one, if you want.

Okay.

First of all, as you see that we have the famous EUR 28 million that we see, I believe, is in Page 12. This is the impact of supply chain delay. That is as for the first one. In terms of materials, well, you did see the raw materials increased very much in the first quarter. And at the end, they have decreased somewhat. But what we have seen is, I couldn't define exactly. I mean, I think all the rest of our materials are impacted, and impacted by inflation. Look at inflation. Today, you have the figures strained, more than 10%. That is what has been hitting us and hitting us badly, and it's been in many of our products. In many of our products, we do have closed contracts and they have been respected. In other words, we have smaller supplies, which is difficult and we've had to renegotiate some of that. So I couldn't tell you specifically it is this or that. I would say I would generalize it as it's due to inflation. What is the other question?

The other question is, in first half 2022, we see EBITDA adjustment of EUR 4 million. What is the breakdown of this volume and if they are recurring for the second half of the year?

Well, the adjustment is the Russia, which already played some layoffs we've done in Russia and some -- we have some pending bills, which we're not sure of the recovery of those bills of our customer at this chain. But this was for one, so it is Russia. Another one is some layoffs we've had in Spain. Those are the major chapters for this adjustment. Okay?

Okay. Thank you. The next question, also from Iñigo, is according to expansion. "Talgo's Indian subsidiary has signed an agreement with a multinational buyer for the manufacture of trains. Is this true? Can you give us an update on this?"

Yes. As I said before, I think Beltran's question has already answered, and I tried to answer. We have signed an LOE with a [indiscernible]. It is an LOE, and we want to work together to close a structure in which we could, at the end -- but we have to see what is our final road. It could be -- if we produce in India, maybe it's produced by a third party and we will be engineering with a logical partner, clearly. That's how we see it in this moment, okay? And we have to get this done in the following months because we have given us a short time to work with it. But for the moment. I see it more. And coming back to your question and Beltran's, that it could be more at that. There's 2 ways of doing it. Do we want to really enter into production there? To be honest, we're not there. And the idea is more of a support, logically, and as I said, engineering and design to the project. We think that de-risks the project also.

Okay. The last question from Iñigo is about Los Angeles contract, which is the worst case happening.

Okay. Look, I have to be very prudent. In terms of everything in U.S., you are bound to [ what's ] called privilege and confidentiality. So I can say what the lawyers have allowed us to say that is there's a legal case. But on the other hand, we are negotiating. And we hope there will be a negotiated solution. That is what I can say. And for the moment, there's no quantification. There's no -- we would have had a provision. And we reviewed it with our auditors, and we found it was not necessary as there was an ongoing negotiation. Okay? Thank you, Iñigo.

Next question comes from César Sánchez-Grande. It says, "What percentage of the manufacturing contracts are covering indexation clauses? And in particular, in the case of the BD project?"

Let me tell you, we have to be confidential. Of the existing ones, we did not have indexation clauses. But we did have it in maintenance, of course, not in the manufacturing ones. And now what we are negotiating is not only for new ones, for the existing ones. And in some of them, we have achieved that. We are bound to confidentiality there. Yes. So what little more I can tell you this, and we are positive. At least in North Europe, we are quite positive with all this, okay?

Okay. Thank you very much. There are no more questions on the webcast and neither on the audio platform. So thank you very much, everyone, for your time and for joining the call. As you know, the Investor Relations channel is still open for any additional questions you may have. And we're looking forward to hearing you on the next investors call. Thank you very much.

Thank you very much, too, and have a great day. Bye.