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

Good afternoon, everyone. Thank you very much for joining this call, which is aimed to present the results of Talgo for the first quarter 2024. Gonzalo Urquijo CEO of company will go through presentation that has been released. And at the end, we will open a Q&A session. [Operator Instructions] Thank you very much.

Good afternoon to all, and thank you very much for joining this call. First of all, let's move to the first slide, please. As you see, Magyar Vagon presented a takeover bid for 100% of Talgo shares at EUR 5 per share. The CNMV admitted that offer on April 22. Now this remains subject to CNMV approval after receiving the corresponding regulatory and antitrust authorization, little more than we can say on that point. Second point, which I think is a great news is the delivery and acceptance of the Renfe Avril or very high-speed train that has started for the last weeks, I would say. And for the moment, we have already 15 trains that have been accepted. It is 11 ones that are variable gauge, 4 that are fixed gauge, and we will be having more in the following weeks. Our target is to have by the third quarter -- or around the third quarter to have at least 27. Why 27 out of 30? Because we do have out of the 3 that are left, 2 are used now to get homologation as a couple train -- double train, let's say. And the other one is the one we are using for all the tests in France. So I would believe that is a great news for all of us. In terms of sustainability, we're always there in terms of health, safety and ESG, of course, improving our frequency rate and severity rate. Now this year, we'll see and we should see a high level of manufacturing activity additionally to the upside in maintenance business. As you know, we have a pipeline that is, what we'll see, in the next page, much larger, but I would say tangible one of EUR 3.5 billion. In terms of commercial success and backlog, we continue to have very high backlog, and this gives us visibility over revenues and industrial activity for the next 3 years, I would say. Additionally to that, we have this recurring business. That is a maintenance that continues. And all the new offers, we're looking into -- or looking have maintenance included. Additionally to that, as we already said in our last presentation a few months ago, the share buyback was completed in January 2024, and it was 2% of share capital acquired, which is important. That was 80% of the shareholders who had right to this dividend or the scrip dividend decided to continue in the company. In terms of the outlook, it's what it is, and we remain there. I'll come back to it in our last page. Next page, please, business performance. In terms of business performance, you know that our backlog is historical highs, around EUR 4 billion. Additionally, in terms of manufacturing, this year, it's going to be very active. I would say, basically in 3 main projects. It will be the Deutsche Bahn 1 and we'll be starting soon with Deutsche Bahn 2 and Danish 1 and 2 projects and additionally, we also have the, what we call Train-Hotel, the high-speed trains we are doing for Renfe that are refurbishment of other trains, which is also a very important contract for us. In terms of maintenance, the business will continue stable and we will have a new contract that will be the new, very high-speed Avril train that will be incorporated. Last but not least, we continue with our new paradigm. As you all remember well, that is projects that have the adequate margin. Very important that these new projects that are coming in, all have indexation which allow us to -- as these are long-term contracts at the end not have margin squeezed through inflation in that sense. And last but not least, for us, it's very important, all the new projects having positive cash flow, which is key and having the adequate level of guarantees. What else can I share with you? We do see this sector commercially continue strong. I mean in terms of European market and world markets, global market in transport of mobility in our business due to decarbonization process due to third parties that are private participants that have entered this market. This, as I said at the beginning, is strong. Pipeline. Even though the pipeline totaled EUR 15 billion, I would say the one that is very close to us is around EUR 3.5 billion. Our main markets, as you very well know, is Europe, we are very focused on West and also Central Europe also and new -- we are looking at new contracts in Eastern Europe. We also have the Middle East market, North Africa and if there's any opportunity in the spot market we'll also be there if it makes sense in terms of profitability, risk, indexation, et cetera. Next page, please. In terms of key figures, we present to. As you all recall, in quarter 1 and quarter 3, we don't present what is balance sheet figures. It's only the P&L figures. Now as you see in Q1, we had 126.7; last year in Q1 2023. And this year, we're up 31% with 166.5, important in growth. Now you may compare it to a previous quarter, we are somewhat lower, but we had -- I think that is due to seasonality, and then we did have January and then Easter that fell into the first quarter. But at the end, I would say that it's going to be strong, as I said before, the Renfe powerheads DB, DSB will be strong in terms of revenues. In terms of EBITDA, we are 34% above last year, first quarter with EUR 20.1 million and a 12% EBITDA margin as an average, as you very well know, of the maintenance and manufacturing. Now we can continue working hard in the industrial plan that is improving our execution clearly. And as you know, as I said before, we do have indexation in all the new contracts. so I think it's important to note that our net income here is EUR 10.4 million, which is clearly, I would say, if I'm not mistaken, I recall correctly, I think it's double of what we had last year. Last but not least, in terms of outlook. Look, we're going to confirm our outlook, Somebody could say but when you're talking of an EBITDA of 11.5% and you're having 12%, but we thought it was agreed and the Board we had today that was more prudent to continue leaving it in circa 11.5%, and we'll see how the following months continue evolving. Last but not least, in order to try and pre-answer some of your questions. In terms of U.S.A., the LACMTA legal case, we continue. We are in the phase of discovery, a little more I can say on that. And in terms of Renfe, remember they sent us the first letter, I think it was the 28th July 2022, and we answered to that with a fully fledged plan why we think there was no reason for the penalties. Additionally to that, they sent us a letter a few months ago, we've also answered and we've even used an external adviser for this, who has done a full report on it, and we continue believing that Talgo is not liable for this. In terms of dividend, we are in the middle of a takeover. So the Board has decided for the moment, there's no news on this point. So thank you very much for your attention, and we are open to your questions.

[Operator Instructions] Antonio, please go ahead.

I want to go a little bit far on the pipeline you're expecting, the pipeline for opportunities. You were mentioning that from the EUR 15 billion opportunities in the near term, you will be more relying on EUR 3.5 billion. And you've been mentioning some geographies, Europe, Middle East, North Africa. But I would like to know if you could provide us some more visibility in terms of more specific regions or more specific type of contracts we will expect to have announced from your part. If you could provide a little bit more visibility on the opportunities you have, it will be very helpful for us.

Thank you very much for your question, Jose Antonio. And I'll tell you, I have to be prudent in the sense that many of the things are not signed. You know that in France, we have one that was made public, that is LE TRAIN, they're waiting to, and there, we are still working on that one, which is an important one for us. They're really closing all their funding in that sense. Then we've had other ones in Central Europe, I would say, and Eastern Europe, clearly. But for the moment, we are not allowed to say the names. We are working on this as an opportunity for many of us in Morocco, which we are also working that I can say that. And another one that we have also is in Middle East. So we have -- and we hope that in the following weeks, months, we have an opportunity that we believe at this stage, we are quite close to that opportunity now. That is as some of the ones that are very close to us, that we are looking at many other ones in that area of Middle East in that same country. We are looking at other ones in Europe, in this part of Europe and in other parts of Europe. So I would say, we have many open ones, even one in the Far East. But that's what I can tell you at the moment because we are in the middle of the negotiations and that can go left or right in north or south, Jose Antonio. That's what we can tell you. Now some of them, I would say, the basic of our office are the following. Clearly, one more I can say in Egypt, we hope that was signed and made public. We hope that is it needed to go through a process of approvals in the local -- in Egypt. That it means in terms of parliament, et cetera. And we hope this one will be solved in the following days, I would say, or weeks. That's we expect at least. But that is where we are now. And I can tell you, Jose Antonio, the market is strong, and we do believe we'll see at least we believe -- in terms of Flix, we are basically focusing on 2 products. That is our very high-speed train that is replicating the Avril or the German one. That is the other one. And then sometimes, some of them want only the coaches of the German one or they wanted also, for example, with the locals, where we are working on both. That would be our basic -- our main products. But we are also open to like the project of Egypt, which is a night train. Okay. Jose Antonio?

Okay.

It looks like there are no more questions.

Yes, I was going back to the queue. But if there's no more questions, I will -- if I may ask a follow on. Regarding -- I know you didn't provide net debt-to-EBITDA figure because you don't provide net debt in the quarter. But in terms of -- to know a little bit -- to be a little bit more specific, you're expecting net debt-to-EBITDA to 4x to 3x in your outlook. But going forward, what's your target more midterm in terms of net debt to EBITDA? In which level would you be more comfortable to say a little bit how after the strong backlog execution you will be having in the next years as you've been mentioning? What will be your comfortable level in terms of net debt to EBITDA?

Okay. Thank you for the question once more, Jose Antonio. And look, we've given net debt circa 3x EBITDA for this year. So in that sense, that's where we maintain, and that's where we are in year 2024. Having said this, I do believe that going forward in the midterm, the long term, with all what we are in the new offers, we are working very hard on the cash flow. So that debt level should decrease going forward in that sense. But of course, we are improving very much in all our new offers, the cash flow has become extremely relevant. Why? Because the cost of money is much higher, liquidity is more difficult. And we do believe this industry should change in that sense and have positive cash flow. So I can only tell you that is in terms of our target is -- for this year, circa 3x net to EBITDA. But going forward, we do expect that this should be reduced, if everything goes well, and we continue closing targets as the ones we've closed. And it will probably be more between 1x and 2x, I would say, Okay?

Between 1x and 2x, you mentioned. Okay.

But that's going forward. It's not [all expected they can really improve it indiscernible's] That if everything goes, as we said, and as expected, it should be. Only we have positive cash flows in the future projects, it should undoubtedly decrease. Somebody else is there. Alberto?

Yes, Alberto from JB Capital.

Alberto, we can't hear you.

We cannot hear Alberto unfortunately.

So if we can't hear you, send it by writing and we'll answer to you immediately Alberto. But I'm sorry, whatever is a problem with your unmuting.

There is another question from Jorge Reynaldo.

Okay. Just a quick question. Because today, we received a notice from a different fixed income brokers regarding an ECP program that you're starting to launch, I guess, it has been probably been on the works for a while. But as you mentioned that they were put on -- the dividend payment pending to be defined because of the takeover, I guess this issued circa EUR 150 million program, I think you're issuing next week 20. I think -- it's just what's the reasoning for this? If it's taking advantage of the active ECP market? Or what's the reasoning for starting to launch or at least now this timing.

Thank you, [ Jorge ], for the question. And I'll tell you, we are seeing as a company that was prior to the bid and all that we were looking at with all the financial department how to diversify our sources of funds. And one of them was the commercial paper, which I'll come back to; and the other one was looking at long-term investors that could invest with us in terms of one straight important bond, 5 years or 8 years in order to diversify sources of funding. We also thought it is good in the case of the commercial paper, it's, as you say, up to EUR 150 million. We want to go out in the following week with EUR 20 million and it's long term, and we want to test the market, the appetite for the market and where it is, and we think that's good. It's another source of funding, I would tell you. It's diversifying it and it will give us a reference. It is clear that this market if the things go complicated, does close down. So in that sense, you may have volatility. But we would like to have a program that is recurrent. And if we have investors that are willing and are happy with our paper 3, 6 months, we'll be very happy to issue that commercial paper, Jorge. Okay?

So it's just another financing source.

Yes, exactly. Yes, Alberto, let's try now, if you can. Yes, now he is. He's been able to unmute. Alberto?

Yes, my question is probably one, you're probably not allowed to answer anything related to takeover bid. But just in case, do you know anything of the government position? Or has the government approach to you or asked anything or confirm anything, like any news about the government on the takeover bid?

Thank you very much, Alberto, for your question. And look, there's nothing we can say on that, as you may suggest, and you even said it at the beginning of your question. So the only thing is what we've done public. We welcome the offer and that is basically it. And the rest is more a question, I guess, to the investor than to us. okay? And as you very well know, from a legal perspective, we have to take the -- we have passivity on this, and that is where we are. So sorry, but there's no more we can say on this topic. Okay?

It looks like there are no more questions. Thank you very much to everyone. Just for any additional questions you may have, you have the traditional channels through the IR. And thank you again. Thank you, Gonzalo.

Thank you very much to all of you for attending this call and all the best. Thank you. Good evening. Bye.