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

Hello. Good morning, everyone. Thank you very much for joining us in this conference aimed to present the results from the third quarter 2022. For the same, Gonzalo Urquijo, CEO of Talgo, will go through the presentation. And at the end of it, we will open a Q&A session and to clarify any questions you may have.

Thank you very much. Good morning to all of you, and thank you for joining the call. First of all, if we go to the first -- as you know, and just as a reminder, the results for first quarter and third quarter are summarized results. That means we don't go into balance sheet according to the change of law the CNMV did in Spain. In the first page, as you'll be able to see, we start with health and safety. That is our #1 priority. We had -- the frequency rate is practically 9, severity 0.22. We've had no severe accidents, and we're still working very hard on that. Additionally to that, in all this ESG chapter, we will be installing in the 2 main plants that [indiscernible] and Madrid solar panels in order to clearly 2 objectives. That is one of them is to cheapen the price of electricity, which has gone up, even though we are not a big consumer, but clearly, it has doubled, I would say. And on the other hand, from an ESG point of view, it makes a lot of sense because we would be producing the own energy, and it will be all solar energy. Second, as you can see in terms of the reshaping of Talgo's segment, clearly, we are still in an environment that has a lot of uncertainty. We have the macro situation, the geopolitical situation, and that has impacted all the industries in terms of raw materials, cost of labor, supply chain disruptions, clearly. And we've continued with working with our customers, with our suppliers, in order to improve this. I'll come back to this point. Additionally, in terms of commercial, we believe, the momentum, the situation and the sector has gained a big momentum. I would say, InnoTrans was a game changer for us, and I would say, for the sector. And we have -- we'll go back to it. But we have -- at this moment, we're reviewing 35 different offers. In terms of results, that is a key point, you see our revenues. Our revenues have been EUR 352 million. It is clear, we have seen an increase in the third quarter. As for EBITDA, it is the same. We have seen an improvement and the margins are just below 11%. We will be, in the last page, confirming the outlook, even though this environment does have uncertainties. Page #2, in terms of manufacturing, we passed from the big AVRIL high-speed train in Spain. That we are in the tests for this. Tests are going well. I have to -- we have seen delays due to the COVID, that is clear. But now in the testing, we have seen them, but it's also due to the infrastructures and to the operator. The train is performing well in the testing. But in terms of manufacturing, we have seen now, the new projects have come in and there will be more and more. That, is Germany, the DB; it is Egypt with the first train. Additionally to that, it is Denmark, okay? Maintenance business is fully recuperating. And as always, it has a constant and a stable performance in terms of revenues and of margins. The commercial activity. The commercial activity is becoming more and more -- we're seeing more and more -- as I was saying in the previous page, more and more activity and more and more demand of trains in this moment. Additionally, we are very fortunate because we have 2 new trains. That is the new high speed, the AVRIL; and we have the Deutsche Bahn train, the ICE L train. So we are here with 2 new, very good products. You see, our backlog is practically EUR 2.9 billion. This does not include Egypt. As for Egypt, we hope to sign it. It was just pending the financial okay. We've spoken with the ministry. That's advancing well, and we don't foresee any issue, and we will sign it in the next months. Additionally to that, in the pipeline, our pipeline is -- well, let me come back, sorry, in terms of the backlog, as you see, practically 70% is maintenance. And this, as you know, does have indexation. In terms of the pipeline, you see what is the geography breakdown. It's Europe, that's a bit above 60%; it's MENA that is 28%; and others, 9%. Clearly, what we are working here is this new paradigm, as we call it, that is in terms that all new offers will have 2 things or we will put in the offer if somebody needs a fixed price. The full inflation we estimate for the following years or what we are doing more and more is going for indexation. Next page. In the first part, you've seen we did have a salary increase for -- that was for '21 and '22. Both years, we have been below inflation for '21, clearly, and for '22, we expect it also to be, as you know, it was 4%. So with -- it's probably half what the inflation is. Additionally, to that backlog, as I said before, 70% has indexation clauses, that's for the maintenance. And in terms of materials -- raw materials, as I was saying before, our strategy is clear in terms of passing it on to our customers through this indexation. Additionally, with some of our customers, we're already close to closing the review of prices due to the inflations we've had in the past and that the laws allow you to change it, and that is what we are doing. Going forward through this indexation of the hedging mechanism, we want to be fully covered as we are selling products that we will be handing in 3 years from now, 4 years from now. So clearly, our strategy is to preserve our margins and have this adequately hedged. In terms of the supply chain, clearly, the situation is better in terms of delay in the supply chain, but we still have delays. Clearly, we are working on 3 areas with our suppliers. That is basically we are diversifying the number of suppliers. We have relocated some of them. These prices have proved that some of the countries that were good suppliers in the past now have become extremely difficult. That is clear. And additionally to that, having adequate long-term contracts and maintaining our contracts. Clearly, with our customers, we're also telling them that we -- it's a force majeure situation for us. In the last point of this Page #3, Russia, our activities are completely stopped since March '22, and we've done the layoff of the 55 people we had in our payroll. So that is done and finished. In terms of the U.S.A., the Los Angeles L.A. Metro, clearly, as Metro filed a lawsuit on September 15. We responded in October 21, denying all Metro allegations held, and we have also filed a countersuit against Metro seeking damages, mainly for the wrongful termination of the contract in the amount of $48.9 million in round figures. Now we are involved in initial discussions of information and documentation to be provided to the court. Last and not least, in terms of RENFE. RENFE had told us we had penalties wherein the end of July. We launched in the 15th of September, we say that there is no adequate vision to -- that those penalties are not justified. Why? Basically, we had COVID and that's clearly, a force majeure. Additionally to that, RENFE had changed the specifications of the contract. So that also meant a loss of time. And third, the law in Spain had changed, and we had to do other requirements for the homologation. So clearly, for us, there's no justification for that, and that's what we told RENFE, and they have not answered back. In terms of key financial figures, where our turnover is lower than last year, it is EUR 352 million. But if we see the progress quarter-by-quarter, we did -- the first quarter was EUR 118.5 million, second quarter was EUR 100 million and the third quarter, in terms of revenues, has been EUR 137 million. In terms of EBITDA, we've also seen an improvement. We had 12.7%, down to 10.7%, now up in third quarter to 15.1%. So we have seen progress. We have seen progress, as we say, as we've been -- the maintenance has performed well. And in terms of the manufacturing, we've been able to stabilize the situation, and we start to see an improvement clearly. Last and not least, in terms of our outlook, we maintain our EBITDA for the end of the year, 11%. It will be a year we will consume cash as we'll have basically 2 major projects, that is the first 1 in Egypt and especially RENFE, which we will get the payments in 2023. Our EBITDA target remains the same, 2.5x EBITDA for debt. In CapEx, EUR 25 million of CapEx. Backlog at 32%. Now in terms of average book-to-bill, Clearly, for this year, if we book this year Egypt, it would be EUR 280 million. So clearly, we would be below our sales. But -- and what we think is -- what we are going to see it is during this year and next year. As I said, commercial situation has been changed, has changed for the good. It is strong this situation. And we have -- and I think, it's important now to share it with you, we have a -- as you know, we are having an extension of 3 of our contracts, that is DP, DSB; that is Germany, Denmark and Saudi Arabia. They are not signed, but we are negotiating now with the customers. We do believe Uzbekistan could also -- and they've already -- we've started negotiating with their [ government ] because they want more high speeds for Uzbekistan. Additionally to that, we have deals in the north of Europe, in Portugal and more in Saudi Arabia and North Africa. So at present, we're seeing the market is hot in terms of commercial activity. Last, just to conclude, the summary of the summary would be in terms of ESG, safety, environment. Clearly, it's part of the DNA. The new paradigm or new this operational strategy, we are working with suppliers in terms of diversifying geographies, long-term contracts with customers, review the actual pricings and going for indexation, taking into account inflation going forward. And when I mean inflation, it means for labor, it means for raw materials, it means for materials. And in the commercial, as I said before, we have a lot of deals on the table, and we are always prudent in this company, but we are optimistic with future months in terms of our commercial deals that we will be able to close. Thank you very much. And now we're all -- the team is here. We're all open to answer your questions if you have them. Thank you.

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

I would like to ask a couple of questions. The first one is on your margins. Looking into next year, I would assume, you can pass on the inflation on maintenance and where that would allow the margins to expand or inflation on your cost is so high that maybe that would not be the case. So question on maintenance margins. And also on the mix of sales for production, where next year, the mix of sales is favorable or maybe it's getting worse than this year. And second question I wanted to ask is on the Saudi Arabian possibility of expansion. What is the timing for that? And what do you think about that possibility? And also, on the timing for the negotiation of the German contract if -- do you think that that's possible for coming months? Is there maybe a matter for more in a year or any color on timing?

Sorry, thank you very much, Bosco. First, in terms of margins. For maintenance, it is clear, our maintenance are indexed. So they have indexation. So at the end, in that sense, we will not lose margin. And this enable us to maintain our margins. Second, in terms of the manufacturing, we do expect that when new products -- sorry, new deals come in, clearly, that have not been affected by this situation of supply chain or increase in raw materials. That should mean that in manufacturing, we should see a progress in terms of margins in manufacturing. Now in terms of the deals you are saying, look, if you asked us, we believe that Saudi Arabia with the negotiations and the conversations we are having could be and what we expect is signing it in the second semester. In terms of Deutsche Bahn and DSB in the first semester, in the first 4, 5 months. Those are the calendar we have now. But things could always vary, could become before or later, but that's the present calendar we have now, okay?

The next question comes from Jaime Escribano from Banco Santander.

So a couple of questions from my side. So just a follow-up on Bosco one. It's just if you can be a little bit more specific on the margin evolution, and I explain myself. So we are -- you guys are making an EBITDA margin of close to 11%, a little bit more in Q3. So with the new projects, you say margins should improve in 2023. But just thinking out loud, they will take time to kick in, no, to start contributing to the margin. So how should we think about the margin increase? So is it going to be the following quarter just a small increase and suddenly, at the end of 2023, like a more substantial increase? Or is it going to be linear? Any color you can provide us to better estimate our models would be much appreciated. And the second question is regarding the RENFE contract. My question would be, what do you need to finish the homologation? So to better understand, what is exactly where you are? Is it that you are missing some components? Or is it that you -- as you explained the last time, you are -- you need to roll the trains more hours and you don't have the availability of drivers? Or what is exactly -- what is missing to finish the homologation? And when do you expect to finish it?

Thank you, Jaime, for your questions. The first one, we have to be prudent today. We are not giving a guidance on 2023. That is first. But I could tell you, in terms of the margin evolution, clearly, the portfolio that will come in will be different in margins than the one we have today. That is clear. Having said this, we will, in any case -- now how much should you put in your model? Well, it depends when they enter. We will start with those projects once you will have them, once we sign those projects, we will start with engineering, et cetera. So it all depends when you sign them and what is the amount you can do during that year 2023. But as I said, the margin will be different than the ones we have today in our portfolio. Now coming to your second question, in terms of the homologation, where are we? Look, I believe, we are touching to an end. All our trains have been -- as you know very well, have been already manufactured. All our trains have been running around the different rails in Spain. First, we went with the fixed gauge, now after with a variable gauge, then you start with a normal high-speed, then you're straight lines, then you're start into curves, then you started into up and down hills, then [ close ]. So it all is a long process. Now we are very -- we believe we are very advanced with that. We hope to finish this in the following months, I would say. Then it has to go to the agency, who has to look at all the information we've given, and then they would give the final okay. And the agency, as you know, it's a [indiscernible] agency that is the Spanish one, who certifies that all these testing we've done is adequate. But up to now, the testing has gone very well. We've had issues because we have not have availability sometimes of drivers, the availabilities of different rails. So there has been -- especially we've seen new competitors coming to Spain, and that has made everything more complex. That's a question of the infrastructure on one side and the operators on other side. But up to now, the trains have rode very well, and all the testings have proven to be successful.

[Operator Instructions]

I believe there's 2 questions that have been sent to us written. One was cash flows on RENFE and Egypt. Yes, we will have the cash flows next year, but we have not advanced the quantities. They will be important. Clearly, they will at the end. So it will be a big cash ins, important cash ins next year, but we have not given the amount. And the other question was?

The other one is regarding RENFE conflict and the...

Yes. Okay. In terms of RENFE conflict, where we are now. We've answered RENFE. We believe there's no justification to pay these penalties. And it would be -- the ball is in RENFE's court. They have to decide what they want to do this. But we fully justified that force majeure that we took, legal part and the change in the train specifications. So that is where we are now, okay?

There's a third question regarding the corporate strategy in terms of M&A candidates.

Well, as always, and we've said, we are open to M&A deals. If they come to our table or they come or we look for them. We are analyzing permanently different deals. And if they make strategic sense, and this means they make financial, commercial, I mean, in every sense, we will go ahead. I mean, we are open to that and to do M&A clearly. Thank you.

Okay. There's a new question coming in through the platform, it's regarding the maintenance contracts completely today indexation inflation. So if all the maintenance contracts are linked to inflation, and if also the latest AVRIL contract has those -- that link, that inflation.

The contracts we have now, the contracts do have this indexations. And the ones we are negotiating now with the extensions we set, et cetera, we're always also negotiating indexations. We have, at the end, imitated or we've taken that to our manufacturing. So the answer is yes, they are indexed. And the new ones, we expect them also to be indexed, not only the manufacturing, but also the ones that are for maintenance. And in the AVRIL, the last one, in AVRIL, it is also included for the new train.

We do have further questions by phone coming from the line from Beltran Palazuelo from DLTV.

I would like to ask a question regarding margins. Of course, you commented, Gonzalo, that until new contracts do not come in, well, it is difficult to reach, let's say, that at least 15% margin of medium to long term that this company has always targeted. But in your presentation, you mentioned that supply chain is better, that more or less, things are starting to be under control. So just to try and pencil the next quarters, let's say, until the end of 2023, until, let's say, new contract really, really take a big amount of the manufacturing, what can happen in order to make margins lower than 11%? Or you think 11% margins more or less is the minimum, nothing should happen that will make margins go lower than 11% until we get to, let's say, a full margin in manufacturing that takes us to 15%?

Look, in terms of margin, I think there's 2 things. We do have the actual portfolio, it has the margin that it has. And at the end, the way of improving this is to, let's say, we can improve industrially. That is -- well, let me say, first of all, there's external factors who still remain challenging, Beltran, that is there, that is inflation, that is the supply chain. Even though things, as we said, and you very well quoted, that they are looking better. That is clear, but there still is uncertainties out there. But coming back, we do think that the portfolio we have now, especially in manufacturing, is what it is. It has been under the margin, let's say, squeeze or margin pressure due to the increase of raw materials, materials and labor. So that is there and that is the margin. Now every deal we'll sign now going forward should have a better margin. And clearly, and once we start working on it, we see that impacting in our margins. So your question was, are we at the valley? Clearly, we're not. We could be today with the situation we have today, but we don't know. We don't have the crystal ball, as was said, on the -- what's going to happen in the future in terms of the macro, in terms of the environment. But clearly, with the new deals, these margins in manufacturing should improve, clearly.

Maybe I did not make my question entirely clear. You know what materials and what pieces you need in order to, let's say, to end your -- let's say, to go from here to 2023. What worries you that might -- because theoretically, everything should be more or less close to -- for the end of next year and the supply chains when we see freight rates and everything is getting better and better. So of course, things can get worse. But if things were to stay where they are now, what can happen to make margins go lower than 11%? What worries the company currently?

What worries us is, suddenly, we see again that the world becomes -- geopolitically becomes more difficult. That any prices, energy prices go up, we have an increase. I mean, we have -- we see things if they stay how they are, shouldn't be and was -- now what all -- well, we have many macro things. What is it? There's a strike in the transport. Or if we see at the end, the sea shipping going up as it went in the past. Those things, there is open questions there. But for the moment, we don't foresee that. But if not, we would come back to where we were, let's say, a few months ago. That's what I could tell you, Beltran. And we have those things. We believe, we are going away from that risk situation, but it's always there. And then suddenly something happens in the war, suddenly inflations go up to 15%, then we are in a different scenario. But if we continue the trend we are now, it's -- we -- I think, we're in a better situation and there shouldn't be deviations. Now what worries us was, at the end, its energy, as you were telling me, it is the raw materials, it is materials, in [ January ], it is inflation with the labor cost. That is the worries. But I think we have it now -- that we expect that things should -- we hope, they'll continue improving.

There's a last question in the platform regarding the backlog or asking for our estimates on the backlog execution in 2023, which at the end are the expected revenues for 2023.

[indiscernible]

The expected backlog execution in 2023. So revenues expected for 2023.

But I think we'll have to say that in the next meeting we have when we speak of the guidance. I mean, if not, we would be giving guidance on 2023. So I think we should be prudent. We have to see how is the development of this last quarter and then I think it makes more sense. Okay. Any further questions?

There are no further questions. Thank you very much for the call.

Good day, and thank you for your support. Thank you very, very much. Have a good day to all. Take care. Bye.

Thank you very much. Bye.