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

Good everyone, thank you very much for joining the call, which is aimed to present the results of the first half 2023. And for this aim, Gonzalo Urquijo, the CEO of Talgo, will go through the executive summary of the presentation we released yesterday. At the end of the presentation, we will open a Q&A session. [Operator Instructions] Thank you very much.

Good morning to all, and thank you very much for joining the call. [Foreign Language], Javier and to the rest of the financial team and the Investor Relations team that are here. I believe you said you raise their hand in Teams, but if they want to do by writing, they can also put the questions by writing, of course. First of all, I think we are here. We are presenting better results. I think it's a good news. And we're also in the last 2 pages, presented something different. That is our vision for the medium to long-term. Now if we start with the first page. That is in terms of ESG. That's a big priority for us, and the health and safety and well-being of our workers is the most important priority. And we've had, as you can see there, in terms of frequency rate, that is 7.21. Last year, we were at 9.9. And in terms of severity, there's a small error. It's 0.22 instead of 0.29. And last year, we had 0.14. So in that sense, we have not improved. But we are working hard on that, especially with the subcontractors. And I have to say and inform that we have not had any severe real accidents. Additionally to that, the commercial momentum is good, of course. And we have to try, and we are benefiting from that for sure in many ways as I will try and explain in a few moments. In terms of financial results, we have increased our manufacturing activity, which is clear. We have now and we'll see it after 3 basic big projects. And in maintenance, the activity is good. We are back to previous COVID levels with good and stable margins. In terms of aEBITDA, you've seen its higher sales and higher aEBITDA, and we have been able to protect and maintain our margin. Shareholders, they've made a choice, and that is only 17% have wanted cash, and the rest have chosen shares. In terms of debt, EUR 175 million. It is what we expected if we compare it to last year. We're even somewhat better. And for next year, we're confirming the guidance. In terms of the outlook, I think there's 2 things. We will confirm our guidance. There's only one small aspect that we will and have to improve. That is the average book-to-bill ratio from 2 to 3. And for the rest, as we said before, we've given some visibility for the long-term vision. Next page, please. Business performance. First of all, the backlog was EUR 2,748 million at the end of the year. What have we included? For the moment, we've only included one project. It's the Danish project, which is EUR 184 million because DB has still 1 issue pending that we're still ending and finalizing. That is the funding, and once that is signed, it will be incorporated. And the Egyptian one has also one issue. It had to go through parliament. It should be no problem, and we hope to see this at the end when we come back from the summer or, I would say, in autumn, and that is for sure. Additionally to that, we go to maybe to the lower part, which I think is important. We can see the backlog as I said, was EUR 2,748 million. Now we've had inflows and outflows, as I say. We had new order intakes. That was basically the Danish one and some other small ones in terms of maintenance. We have what we consumed or while there has been the work in progress that has been deducted, and we are at EUR 2,668 million. And then we put the projects I was mentioning before. It would lead us to 4.3 -- EUR 4,350 million, which will be a record undoubtedly. I do think also that this is -- this backlog is providing stability for us, and it's providing a long-term vision that in the sense we can see that our portfolio is going to be full if everything goes okay for the next 4 or 5 years. It is true also we have become more European because these 2 large projects are part of Germany and Denmark. But we are always open in terms of risk that's better, but we're also continuing to work on Saudi Arabia, on Uzbekistan and of course, on [ Le Train ] so -- and the other ones I've mentioned before, no. Now the new contracts or the indexation clauses that we will review in a few minutes. Next page, the business performance. What are the main issues here? First of all, manufacturing is gaining pace. That means we are fully embedded in the German project number one, of course, and the Danish one and also the Renfe one. The Renfe means now it is the powerheads and the conversion of the night train. So those are our main projects for this year. And as I said before, the maintenance is on budget and is performing well. And we had a lot of customers, for example, in the Mecca-Medina, in Ramadan, and that really went out, for example, worked out very well. Now as I said before, the backlog and the profile is somewhat different, even though we are open to other ones. In terms of the opportunities, we see we have EUR 6.4 billion. 60% of that is Europe. Middle East, North Africa is 30%. And as you can see, Spain is shrinking because for the moment, unless there's some things in maintenance for the rest, we have no new production for Spain. Additionally, we have been working with industrial optimization and all our supply chains. Financial results. And revenues is EUR 289 million. It is for the first semester. It is 33% more than last year, okay, with the projects I mentioned just a few minutes ago. In terms of aEBITDA of EUR 35 million, it's 50% more than previous year and with a margin of 12.1%, while last year, we were at 10.7%. And as I said before, we have been able, even though we've increased sales, to keep the margin above 12%. Last but not least, you've seen we've had higher financial interest. Those are financial expenses, but it's basically been a question of the accounting standards affecting the AAD acknowledge abstract debt. That is we -- due to IFRS 9, we had to account for that. That has interest every year. But the [indiscernible] tell us no, that we have to bring it all forward and account for that as of today. And that is -- so that has meant a EUR 4 million more expense increase. And that is not a cash out. It's more of an accounting. You see in the bottom part in the columns, we have quarterly revenue. This has been historical high. Revenue for the quarter is EUR 161 million. Since 2015, we have not had one as high. And the one we had in 2015 was when we were doing the Saudi Arabian trains, and it was EUR 1 million more. If not, it would have been the record. And that was -- in 2015, it was EUR 162.5 million. Now in terms of margins, as I just said, our aEBITDA was EUR 19.6 million in Q2 and -- with EUR 19.6 million with 12.1%. We have seen we're out of the 11s, and [ clearly, independently ] it was more revenues. We have stabilized for the moment that aEBITDA. Balance sheet-wise, we have increased working capital from EUR 278 million last year to EUR 304 million. It is part of the more revenues, the projects we have been in. And at the beginning of the year and the end of last year, we had quite a lot of stock. We did that because we didn't want to have more problems with the supply chain. And now it's been -- we're starting to consume it. So that situation as we have -- and we increased our work in progress, will be more and more normalized. Additionally to that, you see that in terms of sales, we were 56% and, 1 year ago, 58%. It is true that if we compare to the end of the year, we were at 46%, as you see in the lower columns. That is clear. But now we are involved. Last year, we were running out of -- not really not, I mean, finishing some projects. And now we are really pushing the new projects. So that's our normal course of business, I want to say. In terms of debt, so EUR 175 million. 1 year ago, it was EUR 163 million, and it is true by the end of the year last year, we were at EUR 97.4 million. But as I said, if we compare last year, look, we were at 2.8 multiple at midyear and, at the end of the year, 1.9. And for this year, we are at 2.7, and we confirm the 2.0 by the end of the [ year ]. Second to last, that is the outlook. And the outlook, we confirm the aEBITDA, the capital structure. As I said at the beginning, the average book-to-bill from 2, we pass it to 3, which is a good news. And I think we have the second good news is the scrip dividend that 83% of the shareholders decided that it should be the share buybacks or new share buyback. I would like to -- and it's very important that we, at the end, share these 2 last pages. For us, it's very important. Now may I say that this is an outlook. It is a business long-term vision. So we have to be, as always, very prudent with this because we have many factors that could lead to change. We have another pandemia or something or any other thing. So once -- in this long-term vision, we want to be extremely prudent, and that is what we see as of today. How do we build this? We've built it basically with what we have in our order book, what we see -- and we have signed, that is pending the final signatures. And what are other contracts, we are very close to and we are very advanced in the negotiations. With this, we'll try to look at the -- with a long-term vision. But for all this, I think it's important to insist that in terms of backlog, we are -- that's to build this historical high. Additionally to that, we see a lot of opportunities in our core markets. Clearly, all these new offers and going forward through the new paradigm, that means indexation clauses to protect us from inflation. We have continued working very hard on all the supply chain and the purchasing department in terms of widening the base of supplies, improving it. So the reduced time, clearly, long-term contracts. Last but not least, our offers now have also been adapted to the new financial scenario. That means that liquidity is more difficult and interest rates are higher. So that should be embedded in our projects. Technology, where we have 2 new platforms that is the German one, the ICE L or 230 platform and the AVRIL clearly. And so we do have 2 very good products, which are going to be extremely helpful going forward. In terms of commercial entering new markets, that we say we are still looking at new markets. Clearly, we have -- what do we mean by that? We are looking at homologation for our high-speed train in France. Now for the German [indiscernible], we are looking at the Netherlands, we're looking at Austria and maybe other countries around Germany. Last and not least and very important, the industrial part. Clearly, we're working very hard on industrial optimization. What does this mean? It means the following. What we are looking at is efficiency, efficiency, efficiency. This means we are reviewing fully all our industrial processes, and it really means that we have to improve or continue improving in cost, time and quality. The 3 of them are just as important for us. And when we talk of [ time and quality ], it's internal standards and our customer requirements. What are we doing for this? Clearly, we're looking at all, what is technology, digitalization, looking at our value chain, standardization, outsourcing of things that we are looking into because at the end, we have to benefit from this tremendous opportunity that the market is offering today and produce as much as possible. In terms of maintenance, we will have new contracts. That is important going forward. It will be Germany. It will be Denmark. It will be Egypt for the night trains. Clearly, 2 new ones in Spain, that is the AVRIL and the [ 130 or 730 ] train, which we have to renew, and we think we will. And with that also, we are working very hard in maintenance. When we started, it was corrective, then it began preventing -- preventive and thus become predictive. That means we have to change our behavior, and we're looking through data analysis, through technology, and we are able to advance on the [indiscernible] much more efficient in maintenance. And our 2 main things here is safety and quality. Now this last page. At the end, what we try to summarize what we said in the previous pages, we see our revenues and see with the prudence. We have -- we see our revenues higher than EUR 700 million going forward. Our aEBITDA between 14% and 15%. Debt profile, I would say, moderate leverage. And we expect to grow the shareholders' remuneration in view of the growth of results. So that's basically it. And thank you very much, and we are open to questions. And thank you very, very much.

[Operator Instructions] We have a couple of questions. First, yes, it's coming from Quentin from ODDO.

Thank you for providing the midterm targets. The step-up in sales as compared with the run rate of between EUR 500 million and EUR 600 million is quite significant. And I'm wondering what are the underlying drivers to reach the above EUR 700 million of sales in 2025, 2026. And should we expect significant CapEx over the coming years in order to increase your industrial capacity?

Thank you very much. I'll start by your second question. No, we are not expecting an important CapEx going forward, maybe some increases, but at the end, we are talking of 15% of what we're doing now or 20% no more than that per year. So very moderate, I would say. And in terms of sales going forward, we do believe that with the backlog we have today. And at the end, let's not forget that many of these orders are orders that are repeating what we've just done. So we believe in our efficiencies there and with all this improvement plan. So at the end, we'll see that we're going to see, on one side, more maintenance, and on the other side, we'll have a higher volume in terms of manufacturing, Quentin, okay?

Thank you very much. There's also a question coming from Bosco Ojeda, UBS.

I have a few short questions, if I may. First one is on Saudi Arabia if you're still on the race for that. And second, on factoring levels, if you could give us an update on how much have you discounted from clients. Also wanted to ask about the legal disputes that you have, the claims. Why are you not provisioning that, if you're not? And what -- or do you have any visibility there? And then finally, a more strategic question. You're gaining a lot of contracts in the sort of medium speed, not so much on high speed, whether that means something. Do you think that, that is likely to be the case for the very long-term? I mean I can see you have upgraded margins. So probably those medium-speed trains are still having quite a nice margin. But if you could comment on that.

Thank you, Bosco. Okay. In terms of Saudi Arabia, clearly, we're still continuing there. We are looking now. There's -- we had already said it. They want to, and we are now negotiating an increase -- well, an increase, sorry, an extension of the actual contract in 20 trains. That is as for now, number one, and we're looking at other projects in Saudi Arabia. The [indiscernible], there's another project of [ Royal Trains ] at some stage where we are looking at 3 projects. But I would say the closest. The other one is the extension of the 20 trains. In terms of factoring, I can only tell you, we don't give that figure, but will we figure it. It is in the same level than what it was at the end of last year. So that is where it is. In terms of legal disputes, that was your third. Look, first, with Renfe, we do not have a legal dispute. The only thing we've had is they sent me a letter with a notary, and that was it. We're saying we have the right to claims. And we have answered to that saying, well, this is our answer to all this. We think no, there was force majeure, the law had changed, there was -- you have changed your own trains. So that is it. And we gave them the answer. That was a [ 900 ] pages answer. With this, I have to tell you that they have not answered anything. But there's nothing to provision on that in the sense that there's no legal claim here. There's only a letter saying that they have the right to claim this. That is -- for the second comment for the U.S., there has been their legal claim, but we've checked it with our lawyers and our auditors. We believe we have a very good case in that sense. And that's why we don't have to do absolutely no provision, at least for the moment. And your last comment in terms of contracts, look, I think we've seen now that 2 contracts that are, let's say, medium speed. They're also high speed because it's trains that will be going at 230, but it's clearly not very high speed or high speed as we understand it in Spain. Bosco, you're right. But I mean, I think it's a question of when those contracts have come in. We continue to -- first of all, the margins in those, you know we are very strict on our margin as good as in high speed or very high speed. And look, when I speak now, Uzbekistan, when I speak of Saudi Arabia, when we can speak of [ Le Train ], et cetera, those are very high speed. So it's just a question, I think, of momentum. Not that we're moving in or out or anything like that. We are -- our core sector is, at the end, as you know, those regional that go at a high velocity, high speed, and the other have very high speeds, okay.

There was another question coming from a phone number. I don't know if you still want to make the question. I believe so. Please go ahead, phone number starting 615.

Maybe he put the hand or where there wasn't, he didn't do it on purpose or something.

Yes. Okay. Well, I think he's not able to read the question. We also have other questions written through the chat. I will read them, so we can go on them. The first one says, could you give us some update of the Le Train opportunity? Are they being able to obtain financing?

Who is this, the question?

The question comes from Miguel Angel Rodriguez, Goldman Sachs.

Look, at the end, we continue working on them and on the contract. And they are now the only news we can say and know from them is that they are working on the closing the equity and closing the funding. And they hope to be -- have it closed by autumn, okay. [Foreign Language], Miguel Angelo. Another one?

Yes. Following question comes from [ Iñigo Orecio, GCC ]. Although no [ policy ] has been made for [indiscernible] because they are confident of a positive resolution. What would be the worst case with the [ LACMA ] project?

Well, if I have to tell you, our lawyers believe that we have a good legal case. So that is where we are. But the worst case would be the claim they have done, but we think we are very far away. Not only that, we think they have to give us money. So that's what we've counterclaimed on. So for us, that is where we stand in this position. And I have to say we have to be very careful with this because all of it is legal and confidential and privilege for legal matters. So there's a little more we cannot add to that, [ Iñigo ].

Next question comes from [indiscernible]. What is the moderate leverage in terms of net debt to aEBITDA?

[indiscernible], good question, but I can't answer more than that not the [ lowest ] is what we said is moderate leverage. You have to run your own numbers and think of it. I can't go forward than what we've put in writing. In any case, thank you, [Foreign Language], [ Cesar ].

The last question coming from -- please, the one connected through the phone number 615 is trying to make a question.

There's another one also putting a question.

Okay. In any case -- he has not been able to make it. Okay.

No further questions?

No further questions. Thank you very much.

Thank you to all and have a...

It's Beltran Palazuelo from DLTV. I much appreciate the medium- and long-term guidance, Gonzalo and all the team. I have 2 questions, if I may. And one is regarding the balance sheet, let's say, dividend policy. Now that let's say, we are more certain of the, let's say, normalized margins and, let's say, excellent execution and maintenance. What would be the dividend policy long-term, seeing that, let's say, all the working capital investment is already more or less [ low ]? And then the second question is regarding M&A, medium to long-term. What other opportunities -- accretive opportunities are you mapping and you're analyzing in the market, maybe maintenance or maybe whatever you think might be accretive?

Thank you very much, Beltran. In terms of dividends, I think we have to say what we've said here. We expect the dividends to grow with the results. But a little more we can say to that, and that's what we put in the outlook in the business long-term vision. So we do hope as we're saying that aEBITDA with this will increase. So net income should also increase. So that should be the trend also for dividends. And it will be the Board of Directors to propose to the General Shareholders Meeting and to the General Shareholders meeting. But that should have a good trend in any case. Look, in terms of M&A, I think we have to be very careful. And I think last time we talked about this. Certainly, I was in the press, the following day and saying that we were going to [indiscernible]. Look, we -- this -- the Board of Directors of Talgo and the management team always analyze opportunities that are accretive, Beltran. And it's in, let's say, and it can be directly linked to more production, to maintenance or to other things, maybe software, maybe signaling or other modernization, other things. So -- but I can just confirm that if there's any opportunity that comes to us or is brought to us, we are always analyzing and looking at it, really make strategic sense. That means financial and logic in where we want to be in the next years, et cetera. That would be it, Beltran, okay?

Congratulations for growing results, for all the team.

Please, Gonzalo, there is a last question coming also again from [ Iñigo Orecio ]. How do you see the options to get DB maintenance in Germany?

Look, we are working on that, and I believe we made public that we had signed an LOE with DB. So we are working on it. And I think, yes, we should get maintenance or confirm we will -- in principle, we have to find -- sign the final document. But I think you ask me now, we will get maintenance in Germany. The answer is yes, which is key for us and very important. Thank you.

There are no more questions.

Well, look, thank you very much to all of you for your interest and support. Have a good day, but above all, have a good and safe summer. Take care, all. And thank you very much. Bye.