Hello. Good morning, everyone. Thank you for joining the call. This call is aimed to present the results of Talgo for the first half, 2022. For that aim, Gonzalo Urquijo, CEO of Talgo will go through the presentation.
Good morning to all of you, and thank you very much for joining this call. As you may see in the first page, as part of our DNA, we have highest safety standards and ESG practice. The results have been good, and we are very proud and happy. Second, let's talk about the new pricing. We'll go into it in more detail in next pages, but I think that is key. We have seen in the recent months tremendous big important cost increase in raw materials, in supply chain disruptions and costs increase due to inflation. What are we doing to that? We have under implementation to protect margins of ongoing projects as we'll see and renegotiating them.
On the other hand, new offers will be submitted and are submitted now with indexation clauses, and if required, at fixed price, it will be with a price that will take into account the inflation expectations for the following years. Last but not least, in terms of maintenance, the activity is good. You remember last year's first quarter wasn't. We had recuperation, and now we are at full speed with maintenance. Additionally, from commercial point of view, I think the momentum is good. There has been some delays in some projects, and we have different opportunities, extension of existing projects and other projects we talk about often.
In terms of our financial figures, well, you see our balance sheet is strong, even though it's been a tough year in terms of liquidity and the results are what we said, in just a few minutes ago. Last and not least, we'll see the review of our guidance. Next page. In terms of health and safety, higher standards and our target is zero accidents, and you've seen our frequency rate and severity rate have improved. Additionally, to that, we've seen a strong increase in our training hours and of course, in personnel. We're enhancing diversity and a lot of local training, clearly. Last and not least, in terms of environment, you know, our trains are 100% electrical.
They're light, and all the energy we consume in our plants is renewable energy, and we continue with the hydrogen technology as an ongoing project, and it's under testing. Next page. What do we have in the next page? This is basically we call this paradigm. First of all, in terms of salaries, our salaries have increased 9.2%. It was 5% for 2021 and 4% for this year. I mean, that was clearly a bet we took at the beginning of the year, but if you see the inflation we're having and the figures appear today in Spain, fortunately, we were on the right side. Additionally to that, in the existing contracts, you know, 70% of our backlog has indexations. It's all the maintenance contract. For manufacturing, we are on a dual track negotiation.
That means we are negotiating with customers all these inflation and cost increases. On the other hand, with our suppliers, we are also negotiating in order to try and reduce as much as possible the possible increase in prices. As for new contracts, it's important two things. We are working clearly with our customers in two sort of approaches to the customers in terms of the offers. One of them is through a pass-through mechanism of the raw materials in general, inflation. That is as for number one. As for number two, if they want fully locked price, we include all our expectations for inflation for the following years.
If we go to this, we hedge, we're looking at hedging structures also as to have a close the gap so we have no gap between the cost, and that is our target, and the sale. In terms of supply chain, clearly, we have seen delays in the outcome of our closures. We have negotiated with customers on many of them, new dates, clearly. What is our main argument? Our main argument is force majeure or the COVID-19. That is clear. An additional chart, we continue working on cost cutting measures. Now, as for LACMTA, I can only say that there's two parts of it.
One is a legal part of it, but on the other hand, we are under negotiations, and there's little more I can tell you due to confidentiality reasons. Russia, we have a limited exposure. You know, we canceled and stopped the contract we had at the beginning of March. That is clear. Additionally to that, the Russians did not recognize the sanctions that we did. Clearly, they've taken us to court in Russia, and clearly we say that, "No, we should go to court in France. That's where the contract ends," and we end up in a French arbitration with that. But the amount of this is not. It was 1% of our sales, so that is not very significant. Additionally to that, what's most important to us is our workers and the well-being of our workers.
We have 55 workers. We've negotiating with all of them. 52 of them are already out of the company, sorry, and we've left three to finish all the different issues we may have there. Okay? The next page, business performance. If we look at our now backlog, before that, I would like to say in the first half of the year, we've had no new order intake. We've been looking at a lot of projects. We're close to closing at least one of them, but we believe there's been delays for different reasons in that. In terms of the backlog, as you very well know, practically 70% of it is maintenance. This, as you well know, and I've just said, has indexations.
For the other 900, we are working with DB, the German project, the high speed, finishing the high speed in Spain. Additionally to that, the Danish and the laboratory train we have for Spain. Okay. Now, going forward, as you see, the outlook is good. We believe the market is there, the market is strong, and we have a lot of offers that we're looking at now. We have three possible extensions, and we're looking at different contracts close to North Africa, close to closing a contract there. For the rest of Europe, we are looking at other possible contracts. If we go to the financial figures, we see a revenue drop. It is an important one versus last year. In the first half, we did EUR 293 million.
This year is EUR 218 in round figures. Why? I think it's a twofold reason. On one side, we were very full blast last year with the F 70, with the AVE, with the Renfe project, and this year we are now with the start of the German project. At the end, that takes a ramp up, I would say. On the other hand, we've had a decrease in sales due to the supply chain disruptions we have had and material disruptions we have had. This has not only had an impact on revenues, but also on our adjusted EBITDA that you see in terms of absolute terms. Last year it was EUR 30.5, and this year it's EUR 23.4, even though the margin has remained at 10.7%. Here you see the weight of the maintenance business. Okay?
Now, in terms of financial expenses, you have seen they are lower, and we did good negotiations last year, and we've had some positive impact in foreign exchange. Next page, in terms of the balance sheet, we did say since the beginning that this year was going to be a tough year in terms of working capital, but I do think we have to see this not in one year. We have to see it during the cycle of the projects. But it is, at the end, it's a year where we're going to consume cash due to working capital requirements.
Additionally to that, some budgets have been delayed, so we thought there was going to be some cash entries at the end of the year, and probably they will come at the beginning of next year, those collections of these manufacturing projects. Additionally to that, we have not used AAD, the acknowledged advance debt for the German project during the beginning of this year. We will use it in the second part of the year as a few months here, as I can truly say. As we go advancing in the German project, we will use again in the second semester the AAD. Our cash position was around EUR 114 million. Additionally, we have undrawn credit lines, and we have all the AADs.
That gives us a very comfortable liquidity of around EUR 400 million. Additionally to that, 74% of our current debt is at fixed cost. We believe it's a very competitive cost, 1.1%, and which good renegotiations were done last year. This year we have already done some renegotiations with the bank in order to extend the debt and in order, we've done them already to avoid the increase in interest rates, and we are still closing some other ones in order to have a very comfortable position going forward.
As you can see, we can tell you now, the gross debt at the end of the quarter has a average maturity of practically two years and a cost of around 1.1. Next page, which is the outlook and our guidance, let's say. We wanted to reflect what we see the real situation. We've been hit with two things, delays in raw materials and materials coming into our warehouses and also increase in cost. That has been fully put, that is for the existing projects and what we have done through the P&L, and we have it in our backlog already internally that already reflect that.
We do think it's more prudent with this situation we are living now is in terms of 11% EBITDA versus the 13%. Additionally to that, we did say since the beginning, we would have cash consumption. We had estimated a 1.5 in terms of multiple of EBITDA. Now we're at 2.5. It's better than the first semester, but it's clearly above what our expectations were when we did the guidance. CapEx remains constant, and in terms of the backlog execution, it has changed somewhat to 32%. And the average book-to-bill, for the moment, we leave it at one and little to say on the scrip dividend. If you remember, it was EUR 10 million, and if I'm not mistaken, 83% have decided to go for new shares and only 70% to cash.
Now, I would like to add, as we've seen in the press, many issues on the penalties. We signed a contract with Renfe in 2017. The penalties could go up to 20% of the contract. That is asked for, number one. Renfe claims that we have been delayed. I have to tell you, for the first year delay, there was a first year delay. The project should have been, or the train should have been, handed in at the beginning of January 2020. By then, there were some modifications that led to January 2021. Now we are in full dynamic testing. I have to tell you that the delays before 2021, clearly, in our view, it's a question of force majeure. That means all the COVID and what all that bring.
With that, we even become more. I think we are very well placed, and there has been delays that we believe and force majeure has been accepted with many other customers. Our lawyers feel very comfortable. That is a clear case of force majeure and with all the COVID. I would say that is basically it, and happy to take your questions. As I said before, thank you very much for attending.
Thank you. Ladies and gentlemen, if you wish to ask a question by phone, please press zero one on your telephone keypad. You can also submit your questions through the webcast platform. We already have some questions coming, and the first one comes from Bosco Ojeda from UBS. Please go ahead.
Hi, good morning. I would like to ask a few questions. The first one on the provisioning for these legal claims. I wonder why you have not provisioned, if I'm not wrong, anything or much on the P&L. We saw some news report saying that Renfe was claiming more than EUR 100 million. Also wanted to ask if there is a, if you expect a cash outflow at some point from these legal claims, or you can for the time being until there's a legal solution, you can still, I mean, you're not gonna have any cash outflows on those three claims. Second question on your production.
I wanted to ask if you have reached a low level in Q1, Q2 on the production, or you still expect that to continue to come down, depending on, well, this German contract and whether that's going to see an improvement there, or with your current backlog, whether that could still go down or you would expect a recovery. Those were my questions. Thank you.
Thank you very much, Bosco. How are you? Good morning. Look, in terms of the provision for the legal claims, we believe we've talked it with our auditors, with our lawyers. We don't need to do any, because for the moment, we have no legal claim here with Renfe. Yes, it is 20% of the contract that is around EUR 150 million, but this in Spain is called an inicio de procedimiento de ejecución. There is not still a legal claim, but they've initiated a procedure, and for that they've sent us a letter, and we now have to answer to that letter. Clearly, for the legal case after, we believe that we have the clearest case, I would say, legal case in the world. I mean, with force majeure.
When have we seen another situation of force majeure like the one we've seen here with COVID-19? Good example is that many other customers have allowed us. We are very, I don't know, very tranquilos, I would say that. You know, we're very, very sure that we have a very good legal case. If we reach a legal case, which up to now it's not there, that we would clearly have very good argument in order to defend this force majeure. We have a big file on all this and all what has happened. As for your second question, in terms of production Q2, now I think from here to the end of the year, of course, in Spain, you have to be careful because Q3 you have the summer, et cetera, and that.
We are positive in the sense that production should clearly increase. Why? Because we are waiting for many of these suppliers that have not come, that should be coming, and now we should see the ramp-up of the German project. Clearly, in the last four months of the year, we should see clearly a ramp-up. Thank you, Bosco.
Thank you. We have other questions coming, and the second one comes from Jaime Escribano from Banco Santander. Please go ahead.
Hi, good morning. A few quick things from my side. The first one regarding the guidance, just to understand how should we calculate the sales guidance. You say 32% of execution of backlog 2021, 2022. Should we take the starting point of the backlog in 2020, in 2021, so it's EUR 3.2 billion times 32%, then we deduct the 2021 sales, and we end up with around EUR 450 million sales for 2022. Would that be a fair assumption? A second question on margins. Just for my understanding, so you guided 11%. And going forward, for example, for next year, how should we think about margins?
Has all this inflation and supply chain created like a bad backlog that is gonna take two, three years time to clean it up? Or if we see some normalization of supply chain and inflation, according to your accounting methodology, can we see margins recovering again to, I don't know, 12%, 13%, 14%, the initial targets before all this inflation turmoil? Maybe a third question on working capital, just to understand if we have seen the peak, for example, in terms of working capital over sales, and then the net debt by year-end is going to decline a little bit from previous levels, or is it gonna stay the full year at current levels, and then you will start cashing part of all these receivables in following years.
Thank you very much.
Thank you, Jaime. I'll start with your third question in terms of working capital and net debt. I do believe we should be, unless there's surprises, seeing the peak. As you can see, our guidance is better than the debt we have at the end of the first semester. We do think we've seen that peaking, and that should improve. In terms of the margins of 11% going forward, well I think there's two businesses. We are very confident on the business of maintenance. That will continue rendering a good margin. As for manufacturing, we do think we pass through P&L everything. Going forward, we are going to see new projects which have a different profitability.
I don't think we'll have what has been in some of our projects now, we've had to review our margins, so we've had an increase in margins. That has had a direct impact on our P&L. That is as for number one. Going forward, you shouldn't see that for 2023, as you were saying. Additionally to that, if we have new projects with different margins or higher margins, that should also improve your weighted average and your margin in terms of that. Okay? That is where we. For your first question, if you remember, the backlog was three point two, practically EUR 3.2 billion in 2020. With this, what we do is what has been the 2021 and 2022 sales in this case, and it's 32% of that.
That would be around EUR 1.20 billion. If you take away the revenues of 2021, you are left with some revenues for this year of approx EUR 470 million. That would give you the exact figure, Jaime. Okay?
Very good. Maybe just a couple of follow-up questions. You said that you are close to close a contract. I don't know if you can provide us further information on that. Also on the backlog, which is EUR 2.9 billion, it was EUR 3.2 billion in Q1. If you do the math and you deduct the sales, you end up with a negative order intake of around EUR 150 million. I don't know if it's because you have removed the contract in the U.S. or something that you have modified in the backlog. Thank you.
I think, to come back, in terms of these two questions, the closure of the contract, let us be prudent. We prefer not saying, but we do hope in the following weeks we'll have a good news on this. Let us be prudent in staying in terms of not mentioning, names. In, the second one, when you see reduction in our backlog, the basic reason has been Russia. At the end, we had part of our Russia maintenance, and we've taken that out. Okay. Jaime.
Thank you very much. Thank you.
Gracias.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press zero one on your telephone keypad. We have another question from Beltrán Palazuelo from DLTV. Please go ahead.
Hello, good morning. Thank you for your presentation, Gonzalo. I have three questions, if I may. First of all, if you could give us a little bit more color on the supply chain. We have seen, well, of course, during the, let's say, the last 18 months, a lot of inflation in the supply chain and but difficulty. We're also seeing since, let's say two to three months, a lot of deflation, zinc, aluminum, copper, iron ore.
If you could give us a little bit more color on the supply chain, what you're seeing. Regarding the margins, if I may, once you clear this year and next year of manufacturing with all the inflation, exactly regarding maybe 2024, 2025, when you analyze exactly the contracts that you're negotiating, what would be the pro forma profile of this company? Regarding opportunities, you have said you have some clients can exercise options and you are negotiating, and you said you were quite optimistic.
Regarding the size of the opportunities, if let's say all these two clients were to exercise the let's say the options, and then you say you have more opportunities, is there a possibility that maybe in the future you do the let's say strong order intake, you are analyzing on increasing let's say your manufacturing facilities? Thank you very much.
Thank you, Beltrán. Nice to hear. Look, in terms of opportunities, I'll start with your last question. Let's say if all the contracts come together, Beltrán, well, we have. It'll be such a great problem to have, but it is true we could have a problem of capacity. I do have to tell you that to go into a new plant, we would increase the shifts. We're working with three shifts. We could always go to five shifts. It's even better than that, and we have a good orders. To have a new plant, we would always review that. Let's say, let's fill what we have for the next years, and let's move the shifts upwards if requested.
It is true we have the extension of three contracts, and we have other contracts that are now we see them as moving forward. We take that decision when it comes, and it will be a great discussion to have and a great conversation. I insist we still have the maneuverability from three to five shifts. In terms of margins, going forward, and clearly you spoke of 2024, 2025. Clearly, once I think we are over this situation we live, and the way we are quoting now the contracts with the offers, with indexations, et cetera, I do think we should come back to close to the margins we saw in the past. Because at the end, the maintenance is a very stable business. It is there. In terms of manufacturing, we should improve in that.
Going forward, and especially if we have indexation, we should not have margin squeeze as we have now going forward. Your first question was in terms of supply chain and what is going. First of all, I would like to clear up that in terms for us, raw material is only at 20%. It is 10% that is aluminum, 5% is steel, and another 5% is others, which is chemicals, which is copper, et cetera. So at the end, our biggest concern here now is other materials, I would say, and inflation. It's not easy because you cannot hedge those, because it's not like hedging another raw material or whatever. Because when you buy seats or you buy the roof of the train or you buy the bathroom of the train, at the end it's not.
It's at the end that means hours in terms of inflation. I would say it has a more correlation, a larger correlation with inflation clearly. Because at the end, you have a lot of labor into that, and that is what we are trying to hedge, also, going forward. We do think that this situation should not, and we hope it doesn't last all what we've suffered in the last months still. I insist, in terms of cost, in terms of delay, I don't know which is worse, to be honest. Because at the end, the delays are also. The days means money. Not by penalty. Delay means money, but I guess at the end, the cost that brings with it.
I do think this going forward should clearly work in a different way, and we're optimistic in that sense. Especially if we go now with clauses of indexation with our contracts, or if not, we are going to fully include what we believe is inflation for the next three to four years. At the end, we should be able to marry that or to, at the end, balance that with our supplements. Okay, Beltrán?
Okay. Thank you, Gonzalo. If I may, a little question regarding opportunities. I was willing to hear, but well, in the past days, we saw that you are well in conversations or something in India. If you could give us more color if you can, or maybe if you cannot talk about what opportunities does India have for Talgo to, let's say, to focus more on the long- term, because clearly now everybody's focusing in the short- term. If you could have a couple of words on India and what opportunities does India have for Talgo.
Yeah. We signed an LOI with this future partner we have for the moment. We've seen now in India there's new contracts that have come up. Some of them suit us well. It's not easy. As you always know, India is a complex country. You have to produce a part there, then you have the exchange rate. I think there is an opportunity in terms of real demand of a couple of hundred trains there, trains that could fit very well to ones we produce, and we are looking into that thoroughly. That's what I could say now, but I would be prudent with this, Beltrán, and let's see if we can drive it in the correct way, and we're working hard on that. Okay?
Thank you. All the support for the team. Thank you.
Mm-hmm.
Ladies and gentlemen, one last reminder: if you wish to ask a question, please press zero one on your telephone keypad.
I believe there's some written questions, if you could tell us what the questions are, Javier.
Yeah. Okay. There are also written questions on the webcast. I will read them now. The first one comes from Íñigo Recio. It says as follows: Which projects have been most affected by supply chain disruptions? This issue has affected second quarter 2022 sales by more or less EUR 20 million, according to the presentation. Which components have had the most impact on the delay? When do you see a return to normality? Also, a second question that says-
Wait, let me go first.
Okay.
If you want. First of all, as you see that we have the famous EUR 28 million that we see, I believe it's in page 12. This is the impact of supply chain delays. That is as per the first one. In terms of materials, well, you did see the raw materials increased very much in the first quarter, and at the end they have decreased somewhat. But what we have seen is I couldn't define exactly. I mean, I think all the rest of our materials in the world are impacted, and impacted by inflation. Look at the inflation. Today, you have the figures saying more than 10%. That is what has been hitting us and hitting us badly. It's been in many of our products. In many of our products, we do have closed contracts, and they have been respected.
In other words, we have smaller supplies, which is difficult, and we've had to renegotiate some of that. I couldn't tell you specifically it is this or that. I would say I would generalize it as it's due to inflation, no? What is the other question?
The other question is: In first half 2022, we see an EBITDA adjustment of EUR 4 million. What is the breakdown of this volume, and if they are recurring for the second half of the year?
Just a second. Well, the adjustment is the Russia, which already played some layoffs we've done in Russia and we had some pending bills, which we're not sure of the recovery of those bills and our customer at this chain. That's for one, it is Russia. Another one is some layoffs we've had in Spain. Those are the major chapters for this adjustment. Okay?
Okay, thank you. The next question also from Íñigo is, according to Expansión, Talgo's Indian subsidiary has signed an agreement with the multinational buyer for the manufacture of trains. Is this true? Can you give us an update of this?
Yeah. As I said before, I think the India question has already answered and I tried to answer. We have signed an LOI with Bharat. It is an LOI, and we want to work together to close a structure in which we could at the end, but we have to see what is our final role. It could be if we produce in India, maybe it's produced by a third party, and we would be the engineering and the technological partner, clearly. That's how we see it in this moment. Okay? We have to get this done in the following months because we have given us short time for it. For the moment, I see it more, and coming back to your question on the time, that it could be more at, you know.
There's two ways of doing it. Do we want to really enter into production there? To be honest, we're not there. The idea is more of a support technologically and, as I said, engineering and design to the project. We think that derisks the project also. Thank you.
Okay. The last question from all, from Íñigo, is about Los Angeles, a contract which is the worst case scenario.
Okay. Look, I have to be very prudent. In terms of, you know, everything in U.S., you're bound to confidentiality. I can say what the lawyers have allowed us to say. That is, look, there's a legal case, but on the other hand, we are negotiating. We hope there will be a negotiated solution. That is, what I can say. For the moment, there's no quantification. If not, we would have had a provision, and we reviewed it with our auditors, and we found it was not necessary as there is an ongoing negotiation. Okay. Thank you. Íñigo.
Next question comes from César Sánchez-Ranu. It says: What percentage of the manufacturing contracts are covering with indexation clauses, and in particular in the case of the DB project?
Let me tell you, we have to be confidential. Of the existing ones, we did not have indexation clauses, but we did have it in maintenance, of course, not in the manufacturing ones. Now what we are negotiating is changes, not only for new ones, for the existing ones. In some of them, we have achieved that. We are bound to confidentiality there. There's little more I can tell you, this, and we are positive. At least in North Europe, we are quite positive with all this. Okay?
Okay, thank you very much. There are no more questions on the webcast and neither on the audio platform. Thank you very much, everyone, for your time and for joining the call. As you know, the investor relations channel is still open for any additional questions you may have. We're looking forward to hearing you on the next investors call. Thank you very much.
Thank you very much to all. Have a great day. Bye.