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

Everyone, thank you very much for joining us on the call. The aim of the call is to present the results of the year 2022. And for that aim, Gonzalo Urquijo, CEO of Talgo will go through the executive summary of the presentation published yesterday afternoon.

Good morning to all of you, and thank you very much for attending this call and once more, it's a pleasure being here. I'd start with the same page. First point of this executive summary and the key highlights is ESG. In terms of ESG, that is part, as I always say, our DNA. We have an enormous commitment with our teams. That is in terms of health and safety and employee engagement. And as we see after, we'll go through the frequency index that we have to say, sadly to say, we have not improved there. Yes, in severity. CO2 emissions that you see in environment in general, clearly, the environment, we've just started with a big new report that you will be able to see on sustainability, which I really recommend a lot of work and pleasure has been put into that. Additionally to that, as we see after 90% is eligible of what we do on sustainability standards for taxonomy. In terms of corporate governance, there's 2 things. We decreased the Board to have a Board that was more aligned with the size of this company. And as I'll say after we've created as part of the strategy committee, it will also be a strategy and sustainability committee. Go to the second point that is business performance. First of all, 2022 for us has been a challenging year. Why? Clearly, it's due to raw materials, inflation, supply chain, basically our negotiations with our suppliers and not has been that we have had due to supply chain disruptions. So in that sense, it has been from a manufacturing point of view, it has been challenging. On the other hand, in terms of maintenance, we believe we have recuperated, and we are now at pre-COVID levels. We believe technologically, we are really highly in the -- very high in that aspect. In terms of financial results, we have been very conscious of our costs. We've been especially trying to compensate deviations we have on the suppliers side, working very hard with our suppliers in order to contain that clearly. Although our backlog still reflects the contracts that will close some years ago. And now we've had the impact on inflation. As I said in some of them, we've been able to renegotiate them. That has not been the case. Additionally to that, in terms of our balance sheet that we'll see after, we've anticipated what could happen fortunately and this increase in interest rates, this difficulties in liquidity that the market in general has versus 1 year ago and we've issued EUR 90 million of new debt. And as you'll see after, we have a very strong balance sheet. Last and not least, in the financials, I think the press has picked it up today sadly, but I think that doesn't reflect. The whole reality in the sense that our net income has been clearly impacted by extraordinaries. Orders in terms we have seen somewhat of an increase in interest rates for the parts that are in variable at the end of the year, but above all 2 extraordinary items. One of them is the Russia closure that I'll go into after. And it is the tax situation. Where have we done part of the income and how we are tax and second and very important, the NOLs we had in the U.S. who have been reversed. Now what I think is key here is the future that lies ahead of us. And I think it's a completely different future and there has been, we believe, since [indiscernible], maybe in [indiscernible]. First, industry-wise, we do think that our industry has become clear ESG, and we see many countries, companies more and more for trips that are less than 500, 600 kilometers, asking everybody to use the trains on one side. Two, we have these newcomers that are the private operators. We signed an LOE with 1 that is in France, LE TRAIN. So that's a new customer, clearly. So we do think that the momentum from a commercial perspective is positive. I would say very positive. Some of the old industry experts say that since 1996, we have not live the situation like this. Additionally, in the specific case of Talgo, we have 2 other very good news is that we have extensions that could amount the totality of them to around EUR 2 billion. And additionally to that, we have 2 new trains that is the AVRIL or the high speed -- very high speed train for Spain, the AVRIL and the German one, the ICE L, it's low at 230 kilometer -- 230, as it goes at 230. Additionally to this, that for us means that we're going to see a repeating orders, which is very important also terms of manufacturing. We pass to the next page, that is ESG. Look, in terms of health and safety and our standards, you know our target is 0 accidents. Clearly, we have not improved in the frequency rate. Why have we not improved? We still have small little things, but they are repetitive, it's a fall, it's somebody slipping, it's cut, it's affecting the eyes, and we're really working on that. But I think what's important here at the end that we've had in terms of severity, we have decreased, and we have not had any severe accidents, so we have to continue like that. And that's something, as you all know, we value enormously. Additionally to that, in terms of our teams, we've been working very much in talent. We all have a big talent, I would say, managing talent in terms of attracting and retaining talent. I think that's a common denominator. As of today, we've worked very hard on that in terms of, first of all, having salaries at market price, in terms of career developments, learning, hybrid, in terms of work at home and then sustainability. We've become very close to many universities and technical colleges, which for us is very important, the welders, the painters, et cetera. This is a very big source of importance of us -- for us in terms of recruiting. And clearly, this is challenging, we believe we are in the good track on that. In terms of corporate governance, first of all, as I said before, the Board have been reduced to -- from 15 to 10. Second one, we've created with the strategy, we unified the industry strategy and sustainability. Third, we've approved 2022, 2024 ESG plan, which has 29 strategic projects and 94 goals. And as I said before, you have the sustainability report. And in Talgo's economic activity, which 90% are eligible. We think that is clearly extremely important, no? Last and not least, in terms of environment. Look, if we look at the new AVRIL, 94% of this train will be -- is on a product recyclability, so that is very important to us. Additionally, to us, there will be a train with the lower CO2 emissions as a much lighter than our competitors. Clearly, we are working hard on smart factories in terms of energy consumption. Even though now we are buying renewable by the end of the year, we should have all our panels. And going forward next year, we should 100% be independent by producing our own energy and all solar through the solar panels, clearly. At the end, we are also working hard on all the reducing waste generation and of course, recyclability of that always. Last and not least, in terms of R&D, and operational efficiency. Clearly, we continue with our past, and that's a part of our CapEx for this year. That is all digitalization. I think in the maintenance, we're extremely digitalized in terms of manufacturing corporate, we are behind what we are getting there. The hydrogen, what can I tell you, we are in the commission in process, that is the internal tryout. And we hope to be on the tracks we expect by June. Next page, please, Javier. Business performance. First of all, you know that this year was -- we had increase in salaries that were increase of 9.2%, but that included '21 and '22 clearly, but that has changed. And now we are living in an environment that has inflation and salaries have to be reviewed. Second, that is in terms of the backlog, well, we have EUR 2.7 billion and 70% of that backlog has indexation closes. I'll come back to the concept of the indexation after. Now we are working back-to-back with many client suppliers, reducing our exposure and volatility. Additionally to that, I would say, a big part of our new contracts, we are passing them. Clearly, they have to have, it's a must or they have indexation we are inserting and applies what we believe inflation can be the next 4 years from now. We cannot have that. And additionally, when we are taking the second part, that is including inflation, the R&D is to hedge immediately. And of course, it's not only the raw materials, I would say, it's energy. It is hedging through the financial system, that is inflation and energy. Supply chain. Look, we have increased our supplier base. We like to have -- we're trying to get 3 suppliers per product. Clearly, additionally to that, we've seen relocation. I think Far East has become a myth since COVID, more and more, but fortunately, we are doing in Europe, at least more than 80% of our total suppliers at this point. And clearly, we are strengthening the requirements from a legal perspective and from guarantees perspective. In terms of industrial capacity, we've rescheduled with our customers the dates of the manufacturing of our trains, clearly. With the majority of our customers, we've been able to do it except for 1 for the moment, which is our stock about penalties, as you all know, that were Renfe. But for the rest, we've been able to renegotiate that in an adequate manner. And in terms of manufacturing, clearly, we're fully reviewing this, and we are really working hard in terms of becoming leaner, more efficient and increasing capacity. We believe there's a great opportunity now from a commercial perspective. And this increase, we have to benefit from this opportunity. so we need to push forward our capacity. Additionally to that, we do have 2 new trains, as I said before. So we'll be repeating orders. When we go to LE TRAIN, it's the AVRIL when we're talking of that market, ICE L, et cetera. So clearly, we are at this stage with 2 new products, which is a great moment to have that. In other challenges, working capital, you know that going forward. Our idea is to mitigate that, and we're looking every single project we have to. What we are looking for and our target is to look at positive in terms of free cash flow. Second, that is in Russia. We canceled all our operations since March, sadly due to the sanctions our customer had. But with this very sad and awful all, we're living, but that's where we are, and we have had to lay off all our teams, and that has impacted our P&L in the strong results, as we'll see after. In terms of LACMA, the Metro Los Angeles, this is all under this contract. Do you know the customer decided to terminate the contract? Now they sued us, we sued them back, and this is under litigation at this moment. Last and not least, we talk about penalties. So the majority of the customers we agreed and where we haven't, we believe this is a clear case of measure, and that's what we wanted to the customer that were Renfe, who had centers the later on this topic. Go to the next page, that is business performance too. In terms of the backlog, our backlog here, we include Egypt, we're talking of EUR 3 billion, or we will be manufacturing this year is basically it's going to be Germany. It's going to be Denmark. It's going to be the power heads, the high -- very high speed, sorry. We will be finishing as we are finishing now Egypt, and we hope to start the new one or Egypt or that one or it would be another one. In terms of maintenance, we already said, that is all -- we see all our new contracts we have now in the pipeline we do include maintenance. For us, that is key, and it's a business we believe we are very knowledgeable, and it has -- and it's an interesting -- good business, I would say, for us to say the least. Now the -- as I say here, the industry has really is in a different and new momentum. For us, this momentum becomes better not only because we have the -- sorry, we have there, first of all, an extension of orders, we are above EUR 2 billion, that is Germany. It is Denmark, it is Saudi Arabia, it is Uzbekistan, clearly. And so that is extension of newness. And additionally, we have many new other projects that are on the table at this moment. So that looks clearly positively or very positive, I would say. In terms of the next page, the financial results. For this year, we've done approximately EUR 170 million of revenues. At the end, we suffered due to supply, due to inflation due to -- of course, it was also a year of change for us in the sense we were going out of some projects and going into other ones. And that always has a ramp-up period. So we have suffered in that aspect, as we said before. Clearly, we are going from the VHS and there was a very high speed in Egypt to the German and the Danish one and the second part of the Spanish ones. Our EBITDA has been EUR 52.5 million, 11.2% margin. And our net income, EUR 1.4 million. Our net income, clearly does not -- at the end -- sorry, it has been clearly impacted by too big, as I said before, clearly, the financial impact has affected somewhat at the end of the year. But the 2 basic reasons are EUR 5 million in Russia. That is due to layoffs and due to -- we've done a full provision of all the material we had in Russia. That is as for number one. And in terms of taxes, it has -- we have -- we are most efficient in taxes in Spain. So what we are making in some of our countries. It is not as efficient on one side. But I think the big extra has been the reverse of NOL that has been around EUR 4 million. That's why we've been clearly impact in the net income. If not, it would have been much higher, approximately 10x more, or it should have been more around EUR 12 million or EUR 14 million, if we wouldn't have had this extraordinary impact. In terms of the balance sheet, clearly, as you can see here, this year, we had already said that they would be in terms of working capital, the difficult year. You remember, last year, we were at EUR 156 million, if I'm not mistaken, but this year, we are in 200 -- sorry, in '21, I mean in '22, it's EUR 217 million clearly, that we have been impacted, renew to year we were going to consume working capital because at the end, we have not cashed in projects like, for example, Spain and that is the most important. We are starting to cash in Egypt, and we will see this during this year. On the other hand, we won new projects where we had no cash in for 2022 that was Germany and that was Denmark in some way also. So clearly in terms of the acknowledge abstract debt at this stage, we are very close at what is the development of the project, clearly. Now we are with a strong liquidity that means between AAD, between credit lines and the -- well, the cash we have or the treasury we have in our balance sheet, we are talking of around EUR 400 million in terms of liquidity. We have renegotiated, as we said, we have EUR 90 million of new debt. But our debt now is at fixed interest rate is practically 65% or 64%, to be exact and our cost is 1.7%, which we believe it's a very competitive cost, and the maturity is 2.5 years, clearly. It is clear that we continue being very prudent here. We continue renegotiating with banks but we know prices are not the same. Liquidity is not the same in the system, and the prices are not the same as going forward. EBITDA at a multiple of our debt. That is it's EUR 1.9 billion. That has been the closing of the year. Now last and not least, we go to the outlook, and I think, and I have to start with, we believe this is a new momentum for the industry. So we do expect strong revenue as strong -- to reinforce very much our pipeline clearly and clearly and our backlog clearly. And additional to that, we will see going forward margin improvements. But those projects will be entering '23, '24. So that margin improvement, we will see it not that much in this year, even though we are giving a target here of 12%, which is better than last year, that going forward, we'll see more of that in '24 and '25, especially when we start getting in the new projects. We see a stable in working capital, we see in terms of EBITDA, very similar multiple to that, very similar to this year too. We have increased part of the CapEx. Part of it is digitalization, part of it is R&D. So that -- in terms of the backlog execution, from 32%, we are at 40%. And that is -- where we also -- that is an improvement. Book-to-bill, I think we've talked about 2. I think it's going to be at least -- I think it's going to be higher than 2, clearly. That is where we are. And last and not least, in terms of the shareholder remuneration, 3 things. It has been increased at 20%, which I think is a good news for everybody from EUR 10 million. It will be done through a flexible dividend. That's a scrip dividend. And as a net income is what it is. We'll do it with at the end, end up distributing reserves that can be distributing. So last and not least, we do think '22 was not an easy year, and we are positive, very positive, I would say, towards the year 2023, where the market is. and where we are in terms of the products we have in terms of the extension of contracts and other contracts we have on top of the table. So thank you very much and open to questions.

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

So my first question is regarding the guidance '23, bearing in mind that you are already making, correct me if I'm wrong, an EBITDA margin of 11.8% in Q4 '22, are you just being conservative? Or do you see upside to this margin? Shall I do more questions? Or let's go maybe one by one.

Maybe go ahead. [Foreign Language]

Okay. Yes. No, are quick ones. Yes, just to have a little bit more color on how the negotiation although you have commented a little bit about the negotiation with the potential Deutsche Bahn extension and also if any news on LE TRAIN contract. And then something that was a positive surprise, at least on my estimate was the net debt, which was better than expected. Maybe if you can dig deeper on that and how should we think about 2023 where you were saying that there could be some reversal from working capital?

Thank you, Jaime for your 4 questions. In terms of guidance, it is true what you said in terms of Q4. Are we being prudent? Look, we put 20% circa. So I do think for the moment, that's our estimate here. And clearly, that's where we are. We do think that when we really see the improvement, could we see an improvement during the year? Well, let's see how I think we have unknowns. That is all in terms of supply chain, suppliers, et cetera, where are we at inflation. I think that we are seeing there as you saw the figures of inflation yesterday here in Spain, et cetera. So we prefer to be prudent in that side. But on the other side, I do think that going forward, we should see clearly a good improvement because when we start incorporating those, and we start working on because even though if we close the deals this year, at the end, you won't see it or you'll see very little in the P&L. You'll only see the engineering part, the starting part. So you will see this in the near -- in our P&L going forward in '24, '25 and '26. That is as on because still you have to finish the actual projects we have. That's for your first question. Negotiations with DB are going well. We're in the middle of those negotiations. I think the good news is they've told us they do want to increase. Now we are looking at the figures, the conditions, how we're going to do -- how is the indexation going to be incorporated, and that is what we are now. But I think the key thing is that they're happy with the train we've built, and they have already confirmed this that they want to, at the end, go for an extension. And I would say it's a considerable amount in terms of number of trends. The second one, that is LE TRAIN. A little new than what we made public the other day on one side, we are still working on the contract negotiation. On the other hand, they are working hard in order to close the situation in terms of equity, in terms of funding. Now in terms of net debt, what we've given you is to multiple. This year, we should have cash in. On the other hand, we will have cash out for some of the projects. That's why we've told that we would be around that to the discount multiple of 2. And we will continue, but you ask what happened. And it is true when I saw your analysts, whether your consensus and especially yours and amongst others and in general in the market, also we are going to have a higher debt. I think first of all, we worked very hard in terms, and we're working extremely hard now in terms to improve our working capital and to cash in as much as possible. That has to continue. But I do think that going forward, I think the key part is that we have at the end, we are able to pass through customers positive in the projects, positive cash flow. I think that is a must going forward. And that will reduce also the volatility of our balance sheet going forward. So I think those are 2 big changes that are indexation on one side and cash flow positive or at least neutral going forward also. I mean, that doesn't mean we're going to succeed with 100%, but I think with many years and that is clear. That's where we are. Okay, Jaime. Thank you.

There are no more questions in the conference call. We will now proceed to the questions received in the webcast platform.

Okay. The following questions asked through the webcast. The first one comes from Alberto Espelosín, JB Capital. He says as follows: are you using cost hedging strategies in new tenders? And how should we think on manufacturing margins once current backlog is depleted? So essentially, what is the target EBITDA margin in new tenders?

Two questions. One I can answer and one I can't because it goes forward than the guidance. Thank you, Alberto, for the question. In terms of cost hedging, we are -- and first of all, we are trying to get the contracts with indexation. So we have an indexation. At the end, what we are doing is transfer it, and it's a pass-through. If it's not the case, with some state-owned entities cannot do that because for terms of budget, they have to have. Then we are including inflation there and we are using hedging. Hedging that is not only for raw materials. Raw materials at the end account for us were 20%, 10% would be aluminum, 5% steel and 5% other products like chemicals like copper and things like that. So at the end, we are looking at the hedging also in terms of hedge the other costs, et cetera. In terms of the target EBITDA going forward, look, we've given you 1 for 2012. But I mean your assumption is correct. Once the backlog that we have is out, we finish the existing projects where you have had in some of the margin squeezes, but at the end, the EBITDA clearly should go up going forward. That is -- that works like that clearly. Yes.Thank you, Alberto.

Next question also from Alberto. He says, could you please provide a bit more visibility regarding expected timings of deliveries of every trains to Renfe, do you expect any penalization for the delay? What is the current relationship with the Renfe?

Okay. Let me see on the current relationship. I'll start by the end, current relationship with Renfe is good. I would say more than good on day-to-day. I speak with CEO. I don't know on a daily basis, but every other day. And then all the, let's say, the team speak with their counterparts at Renfe and I think this has not affected the day-to-day of the relation. That is why the relation with Renfe is good or very good, I would say. Second, in terms of your second question was penalization, we got 70 letter of penalization. We answered to that letter thing that it didn't proceed for 3 reasons. Those were our arguments were we had a situation with COVID or force majeure. Second, they had changed the contract and they wanted new and they had changed orders to the contract. So that had an impact on delays. And third, the law has changed some requirements and with those changes in requirements that also impacted the delay. How can that and/or not will look at the end, I think at the end, there will be 2 issues. It will be oil go through a legal part. That is -- will be currently a legal case. We hope that is not the case. And the second one, as we've done in the past, we've negotiated. So I don't know if that links with your second -- your first question. So that we think that at the end, we'll end up negotiating. Now in terms of the calendar, the calendar, I can tell you, we finished all homologation. So I think they're very positive legal homologation aspect. Now we are with our certifying company that we are looking and recollecting all the documents for the certification and 3 weeks from now, we presented to the state agency, [indiscernible], which does all the valuation and then look at all the homologation trial out, trials we've done and in function of that, that'll give you a view. And I think the trend -- that can take 4 months. So at the end, we will be talking from March, another plus 4 months. And then at the end, we would have to see what are the details on all that going forward because the agency could ask for a specific new trial I want to redo it or something. But if not, it would take 4 other months. That would take us to July approx. That is the calendar we foresee as of today, if there's no other new things, so okay. Thank you, Alberto again.

Yes. Last question from Alberto. Regarding the guidance, how should we think of backlog execution in 2023 stand-alone? Can we assume 20%? And also in CapEx, why are you guiding 50% hike?

In terms of the 50% hike, I do think we've included new elements that is first, we are putting the panels, for example, and let me tell you some of the details. Additionally to that, we are putting CapEx, the digitalization. That is another element. Second or third we have some delay from the previous year. So that is why we have put that in the CapEx. Now additionally, to the backlog execution, I believe that's a question of the 40%. What we have estimated is at 40%. So we will do an average of year '21 and '22 that is what you're doing for '23, '24, you're putting what is it, EUR 1.1 billion or something like that and you do your mathematics, and it will give you EUR 550 million, something like that, approximately. And I'm sure you're better meeting those maths.

Okay. Thank you very much. From a follow-on question from Alfredo del Cerro. He says, could you provide some color on the calendar for extensions?

Calendar for extensions, yes, I'll try. Look, it all depends that we have 2 parties that are requested there. As we see it, we see the ones that should come in the short term should be probably Denmark and Germany. That is in the following months. We see Saudi, it could come maybe by the end of the year. In terms of -- we have a question mark on Uzbekistan. Now if I go to other ones like LE TRAIN, if they have the funding, that would be a short calendar also clearly. And Egypt, also I see as a short calendar, that's what I could give you now.

The next question come from Javier [indiscernible]. Could you split the shareholder remuneration between a scrip dividend and share buybacks? Could you put some more color on the benefits of the scrip dividend?

Yes. I'll try and put the benefits on the scrip dividend. I think the scrip dividend gives you flexibility. It gives you flexibility in what sense, that at the end, you get a free auction. You get a free auction in the sense that share -- some of the shareholders, and we have practically 8,000 physical people as shareholders, so they can get their cash if they want the cash. Now if they don't need the cash or an institution wants who at the end, it's efficient because at the end, what you can do is you get new shares, so you postpone your tax situation. You're getting new shares. And then you're not diluting because the company will use this cash to buy back and to do treasury stock. It's the same we did last year. So there will be no dilution. If you are going for shares and you're able to get cash that is your choice. So it is, I think, a great instrument because you're getting a free auction on this, okay? Any other questions, Javier?

Yes. Next question from [indiscernible]. He says what is the installed base in the aftermarket right now? And how will...

What is this, sorry?

Installed base in the aftermarket right now and how will the installed base develop over the next few years?

Let me check on the first the exact -- to give you an exact figure on that. Now I do think we'll see an increase, clearly going forward because with all the -- look with the AVRIL, you're going to see 30 new trains. With the Germans, you're going to see another 23, with the Danish, you're going to see another 8, if I'm not mistaken, with the 6 for the ones of Germany. And then you have all the other new ones. Then you're going to have the power heads and the ones we are going to be. So clearly, it is growing. That is in terms of trains. That's all the coaches and that means also a growth for us in maintenance, clearly. Around -- today, our factor figures around fall....

We get to close to 4,000 vehicles, more or less.

A bit above 4,000 vehicles. That's our expectation, okay?

Yes. Next question from Emmanuel Remon. He says, did you say raw materials account for 20% of your total cost of your revenues. Neither, it's total. 20% of cost of material.

Yes. To the cost of materials, it's 20% is the raw materials. That is the exact. Maybe I didn't explain it correctly. Or might understand, I wasn't complete. Okay.

Also from Emmanuel, the follow-up question. He says, in the P&L, you have EUR 3.2 million of other adjustments between adjusted EBITDA and reported EBITDA. What are these charges and how much of these are or will be cash out?

The cash out, wait, I think in the adjustments we had what has been the layoffs and the bonds, those are the 2 that are nonrecurring. That is why we have it in adjusted, okay?

Okay. I think that there is a question on the audio side, if you -- we can go through that.

The next question comes from Antonio Manzano from Santalucia.

I wanted just a clarification that I might actually have missed. It's in terms of the guidance for a stable working capital in 2023, can you clarify what that means? Should we expect it to stay at the 46% level of revenues? Or do you mean more EUR 217 million?

Yes. First of all, Antonio, [Foreign Language] and thank you for the question. What we are talking is in principle that the working capital is in terms of absolute amount that is the guidance to be clear. When we said it would be stable, it's an absolute amount, okay?

There are no more questions through the conference call.

Yes. There's another question on the webcast prior to finalize. Last question from Emmanuel Remon. He says, a question over the net financial expenses, how come did they -- how did they reach EUR 11.5 million in 2022, EUR 11.5 million, while we are saying that 1.68% is the cost of the gross debt, long-term debt?

But I think there's 2 things or various factors too. on one side, that is the fix that we have the cost of the bonds on one side, then we have -- we renegotiated quite a lot as you have seen of loans. So we always have an opening fee to that. Part of the AAD instruments are variable instruments additionally to that, and we did have...