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

Hello. Good morning, everyone. Thank you very much for joining us in the call. The aim of the call is to present the results of Talgo for the first quarter of 2023. For that end, Gonzalo Urquijo, CEO of the company, will go through the presentation that was released yesterday afternoon.

Good morning to all and thank you very much for joining this call. I think it's important as a reminder, remember this presentation is a summarized one because in Q1 and Q3 we always present summarized one and it goes down to the net income, but we don't enter any balance sheet or cash position. If you agree and you can see the first page. Let's go to the first page. So the first part is health and safety, we continue working on health and safety. Our frequency ratios and severity have improved and we continue working hard on that. That is our #1 priority. And I have to tell you more than accidents, we had I would say incidents or very light accidents. In terms of ESG, that's our #1 and also #2 priority I would say. Safety is part of ESG. And working additionally environmentally and you know we are putting solar plants. Additionally, we are working also always in how we can make our trains more efficient energy-wise, et cetera. Now manufacturing, I think this is a clear challenge for us and it's very important. As the market, that is the third point, is sweet and we see now and we have to really boost our manufacturing and that's what we're working very hard on. In terms of the figures of the third balloon, the green one where we have revenues, I think they are line with consensus so is EBITDA and our margins. In terms of net income, we will have to explain it now because we've had higher financial expenses and corporate taxes. Last, but not least, in terms of the outlook, we are confirming the outlook in terms of revenues, EBITDA and order intake clearly and we continue working already now in our new plan. Now next page in terms of our key operating figures and backlog. In terms of manufacturing for this year, we finished last year the Renfe. As for Renfe, we have certainly just to tell you that is finished. We've done all the homologation, testing, certification. Additionally to that, the 13th of April in the state agency -- railway state agency, we put all the documentation. There were 68 questions. We've answered to 64 as of now. By the end of the day the 68 will be answered and we have 4 months to review all the homologation process and all the doubts they may have. So that means that we should have 3 months from now, more so 2.5 months from now, everything should be up and running I would say. In terms of production, we've been finishing Egypt. That has been finished. We have 4 trains in Egypt in operation, 2 large trains that is Train 5 and 6 are already also in Egypt. The last one arrived 1 week ago. They've taken it already from Alexandria to Cairo. We hope to have both of them 5 and 6 operating by the end of this month. Now for this year, the manufacturing will be concentrated in Deutsche Bahn project #1, in Denmark project #1. And in the Renfe trains, we are redoing the new powerheads that is the 26 powerheads. In terms of maintenance, which represents 72% of our backlog, and are inflation indexed. Just to tell you that we are in levels of overall work on maintenance and that means in traffic that are similar to the ones we had prior to COVID that is [ 29 ]. Additionally to that, we've been working on the new pricing and the new pricing model that is record margins, indexation, we are including now financial cost and inflation this year and it seems it's come to stay where we do have financial costs also embedded in our prices. In terms of supply chain we have to say it is better than what it was, but we still have here and there some slowdowns on the slots. It's much smaller than what it was, especially I would say in bearings and motors and electronic materials. But we hope in our new policy with all our suppliers, that is improving and increasing the number of supplies, reaching long-term agreements. Some geographies in this pricing list have proved to be less beneficial in terms of supplies and we've been [ oriented ] these geographies I would say. In next page, we go to commercial activity. What can we see in trains? I think the momentum is very sweet, it is good. And I have to tell you that we are well aware we have the extensions. DSB has already been signed, it's only subject to the parliament. We believe that's an administrative procedure because the Commission of Transport has already approved it. As for DB, we hope to come this year with good news. But let's be prudent, we are still working hard on it and we do think that we will have good news to share with you briefly as to the DB extensions. For Saudi Arabia, we do think this will be more at the end of the year in these 2 projects, extension of the actual project and the 2 royal trains. So all in all, we've already got new orders subject to: that is the DSB that's 184 plus Egypt that's 280, and that's how we have that 464. This means that at present we have a manufacturing backlog is 583, which is clearly we have practically duplicated it. It's 80% more than what we had we think in terms of the visibility guidance very important. And in this case the new ones, DSB has indexation of inflation and Egypt has had to be a fixed price so we embedded in the price our expectations in terms of the inflation. That means more and more maintenance has indexation. All our new contracts now will be indexed in terms of manufacturing. So all in all our backlog will be in the future 100% indexed. Next page that is the key financial figures. As you can see, we've had a turnover of round figures EUR 127 million. Last quarter we had EUR 117 million in those round figures or EUR 116.9 million. But Q1 last year, we had EUR 118.4 million. In terms of EBITDA, we were last quarter at EUR 14 million, that's 12%. So now we are a 12.2% EBITDA margin that's at EUR 15.4 million. Last year in Q1 we were 12.6% and we have seen a consistent improvement in margins in the last 3 quarters I believe. Last and not least, net income amounted to EUR 2.4 million. Last year again in the first semester basically it was EUR 3.5 million in Q1. And what can I say here? We have been impacted by financials. Why financials? We have, as you know, 65% in margin is fixed, 35% is variable. So we have already seen the increase in what is variable in terms of interest rate. Additionally, we have instruments at [indiscernible] that are also available and that's why we've been impacted by that in the net income. And also we have good margins in maintenance and in international maintenance and in those countries we have to pay local taxes. So the all-in-all average has been high. That's why we are impacted with that. Last and not least in the last page so you can go to the page with the outlook. We are confirming the outlook. In terms of EBITDA 12%. Clearly we've already been 12.2% in the first one. Working capital we hope to maintain as stable. The net debt even though this year at the beginning we have increased our working capital, then it will end up decreasing and we are working hard on that. And we confirm the 2x EBITDA. Remember, we have [ prominence ] about 3x EBITDA. CapEx of EUR 30 million. In terms of our backlog execution, it will be 40% of what we had over the backlog of '22. And our average book-to-bill will be above 2x clearly. In terms of the shareholder remuneration, we've gone up to EUR 12 million. That will be the proposal to the general shareholders assembly and it will be a scrip dividend, which gives you the flexibility of a dividend in cash or dividend in shares and then we have a share buyback. So that doesn't alter, doesn't change the actual structure in capital we have. Last, but not least, I would like to insist on 2 things. That is one, Renfe on the penalties. We have an open time as you know. That was built about 1 year-ago. We've launched that with all our allegations and we have had COVID, we believe that's force majeure. They had changed the specifications of the train. Additionally, the law has changed in terms of the homologation of what days we could do the testing and what should have been selling days, we have only 2 days and they have asked us an update on that. We've given the update and for the moment there is nothing. It's only a fine, there's no legal issue there. We hope that will be solved and not really an issue. The lawyers are quite confident that we have a clear case to win this due to force majeure. In terms of Los Angeles the metro, there was a lawsuit that was last year made on 15th of September. We answered to all this with a countersuit and now we are in the discovery phase and this will be -- we will have a trial by April 2024. Let me close this saying I insist very much what we believe it's very important that is timing, the timing of projects both with good margins in terms of manufacturing, also in maintenance. All our orders now in terms of manufacturing are having indexation. In addition to that, as I already said, we're including the financial costs and we're doing full review of what does this mean in terms of our penalties, guarantees in order to limit this going forward with a sign that it can only be a percentage of our margins. That's where we are. So thank you all very much. I'm clearly open to answer questions. Thank you very, very much for your attention and for coming.

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

Can you hear me?

Yes, we can hear you.

Okay. Sorry, because I'm with headphones and I was not sure if the line was very good. So my first question is regarding the guidance that you have provided where you say that there is upside risk in terms of the potential order intake. So I would like if possible if you could elaborate a little bit more on the opportunities that make you be more optimistic on that? And also in terms of the guidance, the margin which stays at around 12.2%. I would like to know what should we expect in terms of margins in following quarters? Should we expect some further progressive increase? And if this is so, your guidance of 12% could look conservative. I would like to hear also your views on that.

Thank you for your questions as always. Look, I'll start with the second one. In terms of our guidance for EBITDA margin 12%, I think you should run your numbers for a moment and you know we are prudent and we maintain our guidance to 12%. Could this have a tendency? Up to you to think of it. We're permanently maintaining our guidance. Now in terms of order intake, I think what I said or what I tried to say is that we could improve this. It is true that the moment is a sweet moment. We already spoke of DSB. We have Egypt, that was the second one. We see already for DSB, it's subject to the approval of the parliament. As I said, we believe that will be Q2. Second for Egypt, it's a question now. The Egyptian Ministry still has to approve it, [indiscernible] given us. Second for both of them, as we said, we hope to brief you when we come up with good news. But until we sign it, we are prudent on this. Additionally to that, we have Saudi Arabia. We think this will come more by the end of the year. And we have other open deals maybe Le Train, which we already added public and other ones we are looking into mainly in Saudi Arabia and in other places. So that's why we feel comfortable and we think that we can improve the order intake.

The next question comes from Alberto Espelosin from JB Capital.

My first question was asked by Jaime on EBITDA. I also think that your margins are fairly conservative. Just to confirm, should you progressively see a quarter-on-quarter EBITDA margin improvement due to lower inflation impact on backlog? Just if you could please comment on this if we should see a margin progression quarter-on-quarter from this 12.2% EBITDA margin. Then on net income, net income seems lower year-over-year despite much higher EBITDA. If you could please comment, you said that this was due to financial expenses, was this the only reason or what is this driving this miss in net income? It's only financial expenses it seems to me. Is it only financial expenses? On Renfe, do you have any visibility on timings on the deliveries of the trains? You just see very confident with the possible penalties that you might not pay because this is COVID effects, et cetera? Do you have any visibility on timings? And I also have a question on Egypt. I was wondering what is the reason behind the long period. Why is it taking so long to sign the contract? You said it's due to present conditions related to project financing, but if you could provide a bit more visibility on this, please? Also, one last one. The Denmark project seems to be at much higher prices than the first one, the expansion of the product. Are you being able to pass through prices and do you expect to be able to have higher margins due to pass-through of prices in the contract renewals?

Look, for EBITDA, I'm going to reiterate what I just said and what I said in the presentation. Are we conservative or not? I think for the moment we want to maintain guidance. That is very clear and that's where we stand at this point. Second for net income, we have not only financial expenses. It has been part from financial expenses and part from taxes because we did have good results coming from aboard and those results have a different impact because in Spain we have NOLs, et cetera. So at the end so we have had more taxes. So those are the 2 basic reasons. See in terms of Renfe, look, the delivery depends now on the state agency, National Safety Railway Agency. Normally we have 4 months so that's where they would be now. We've put this about 1 month ago so it was April performance, but it's now in the hands of the state agencies. Now if I go to penalties, we are convinced there's no legal case to pay the penalty. That's what we have seen with our lawyers. But for the moment, they have not. If they want the penalties, they would have to take to a legal case and for the moment that has not been the case. I do think that maybe it has been done in the past. We have negotiated. I have to tell you we have negotiated with DB, with DSB and with Egypt and we have had no penalties due to our negotiations. So that's what we hope. On timing, I think it's up to the agency now and we have 4 months since mid-April more or less. So in terms of Egypt visibility, look, we've had the approval of the Spanish government that is already there. But I think we have had questions of state budget, et cetera. Now we have to approve it by 4 ministries exactly and it is taking some more time. But the ball is in their part of the court because we've had the approval, which is a very good, the finding on this is very important and very interesting for the customers and excellent conditions. So it's up to them now. But we hope that in the following weeks, months, this should be there. But the ball is in the court of the Egyptians. And as for DSB, I have to tell you about the renewal of contracts. It is true we reviewed those contracts, we reviewed the pricing of those contents. But there's more things because in DSB, there's change now. There's been change orders, there's been now cap cost, there's been changes in some of the purchases. So I think there's more on that to roll out. But we have reviewed their prices, we have the adequate indexations, putting our financial cost also. So for the new reviewed contracts; the indexation, financial cost and we have reviewed in terms of penalties and guarantees.

The next question comes from Quentin Borie from ODDO BHF.

I have one regarding sales. What can we expect for the coming quarters? Should we expect sales to gradually increase sequentially or would you expect sales to remain on that level and increase in 2024 to reach your guidance of backlog execution? And I have a second one regarding your Egyptian order. Can you confirm that it includes 15 year of maintenance and that the EUR 280 million represent only the manufacturing part of the order? So should we expect something higher than the EUR 280 million to be booked in the following quarter if you also book the maintenance part?

As for Egypt, the new order that we are saying we have to sign it so let's be prudent, it's 16 years of maintenance. Now as for -- Quentin, thank you for the question. As for sales, we do expect increase in sales as the quarters go forward.

The next question comes from Jaime Escribano from Banco Santander.

Just a follow-up question. On Le Train potential contract, could you update us on the -- I remember you were expecting the homologation of the Renfe train in France and if this happened, it would accelerate the potential agreement with Le Train. Maybe you could update us on that and any other potential projects or bids that you are working out of the ones you mentioned that we should be aware of or that you are excited about?

First, I think we've given that our pipeline is EUR 7.5 billion so there's many projects there we are seeing. I can give you an example: in Saudi Arabia we are seeing 4, we have seen in Portugal, we have seen in France, we are seeing it in different areas of the world, we've seen an additional 1 in Egypt. So I think that's many. We are seeing things in Italy. We're seeing another 1 for Spain with the private operators. So we are seeing. So I would say there's many things there in the pipeline for your second question. As for the first in terms of France, France is not an easy place. We asked for of course Renfe that the ministry to help us because the homologation there takes time and we know we need full support of the government, which they have given us and Renfe is very interested. So that is taking time. We have a train there. We are doing testing of that train at present in France and that's going to take time and the French are not easy for this. They never say no. So we're really putting a lot of pressure in every way in that issue.

The next question comes from Beltran Palazuelo from DLTV.

I have 2 questions, if I may. First of all regarding margins of 2023, it's very good to be conservative. But as you already have increased salaries, just to understand what can go wrong along the year in order for your margins to not keep improving. We have seen 5 quarters of increases, what can go wrong? And then just to understand it better and just seeing the numbers of the consensus for 2025, I've been analyzing the price of your contract in their part; the one you signed at the beginning of 2020, the one you signed this year and all of us have seen the difference in prices. So currently your margin this quarter is around 12.2%. Once you execute all your manufacturing contracts with low margins; if you could be more clear so maybe the market understands this better. What is the normalized margin of this company with healthy manufacturing and healthy maintenance?

In terms of margins, I think there's 2 questions. For the first one, what could go wrong? I mean look, we have put in our budgets and new offers; it is the salaries, the impact of raw materials, we spoke about the supply chain before. It is on a good track. It's not 100% sold clearly, but all these issues and points have been taken into account. So in theory, I think the big challenge we have is to increase production. So in theory, there should not be any surprise or negative surprises for us, everything has been taken into account. That is just for your first question. Now if they are normalized? That is a great question, Beltran. But look, it is true that our portfolio not the maintenance, but yes in production is impacted by lower margins because we did have a squeeze in margins clearly due to a closed price and clearly the increase in salaries, the increase in raw materials, et cetera, delays, et cetera. That is clear. Going forward, all the new orders: first, we have to normalize this; second, going forward this will not be the case as we're more holding in as we have maintenance to [indiscernible] and that's why we are working hard on to continuing that. So clearly normalized margins, the mechanism should be different going forward. And then also the figure today we have in guidance where it is. We've only done it for 1 year. But that should be the case going forward clearly.

Okay. So I can assume for 2023, it's a low bar because if all increase in salaries are already done. When I understand what is happening in the European industry as supply chains are improving not the other way so I understand it. And then maybe a number because it seems that the people are putting in 13%. [indiscernible] and you're already at 12.2%. So when I see the example of how you adjust margins, why not say clearly what is the ambitions of this company medium to long term? It seems that you should put more strength in the medium to long-term values.

Well, I take a note of that and let us reconsider this. But we've always been very prudent. For the moment we maintain it in 12% for the year and let us see what we have to do going forward. But I guess we are convinced there's long-term value. You all know what it is to Talgo, you all know what that means. Let us reconsider your point and let us review it and analyze it.

[Operator Instructions]

Well, thank you very much. If there's no further questions, thank you very much for attending, for your support and your interest. And we'll be in contact and we hope that we can do things well and come up with good news. Thank you very much for attending this call. Bye.