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Edited Transcript of TLGO.MC earnings conference call or presentation 24-Jul-19 5:00pm GMT

Half Year 2019 Talgo SA Earnings Call

LAS ROZAS DE MADRID Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Talgo SA earnings conference call or presentation Wednesday, July 24, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eduardo Fernández-Gorostiaga

Talgo, S.A. - CFO

* Javier Oriol Piñeyro

Talgo, S.A. - IR Director

* José María de Oriol Fabra

Talgo, S.A. - CEO & Director

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Conference Call Participants

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* Jaime Escribano

Grupo Santander, Research Division - Equity Analyst

* Jose Maria Canovas Garcia de Blanes

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst

* Pablo Cuadrado

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Javier Oriol Piñeyro, Talgo, S.A. - IR Director [1]

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Good evening. Thank you very much for joining us in this conference call today and to present the results obtained in the first half of 2019. For this end, José María de Oriol and Eduardo Fernández-Gorostiaga will go through the presentation. And at the end, we will open a Q&A session to clarify all the questions you may have.

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [2]

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Thank you, Javier, and good afternoon, ladies and gentlemen. Today, Eduardo and I will be happy to highlight our first half 2019 results and answer any questions that you may have.

As a general overview, let me highlight that the first half of the year has been marked by the initial phases of the main manufacturing projects on the backlog. Situation that is reflected in both, the industrial activity and the income statement of the company. This manufacturing projects will drive the company revenue growth in the following quarters. Since the award of the Very High Speed project in Spain in 2017, the company has been very successful from a commercial standpoint, winning contracts in both national and international markets and with a diversified product mix, thus confirming the successful implementation of its commercial strategy, mitigated all risks related to the future sustainable growth capacity of the company.

On top of this, Talgo has shown for over 75 years not just its proven capacity to win high-quality contracts, but also to execute them with attractive margins and to deliver our clients business service with the highest operational ratios. This track record is the best guarantee for our clients and shareholders of the current and future performance of the company.

Getting through the results of the period, Talgo is reaching a strong commercial momentum and this is reflected in the strong order intake registered in the period, which amounted about EUR 800 million, reaching EUR 3.2 billion of backlog. In this industry, the performance of the company must be analyzed considering the schedule of the projects, the profitability and execution and the collections managed. In this regard, all ongoing projects have been executed on time and on budget, resulting in the margin registered, which are in line with the company guidance for the year.

On top of this, the successful management of collection in the last quarter has driven us to a comfortable net cash position which over EUR 300 million in cash to provide a healthy and solid balance sheet to the company with a strong capacity to finance either current or future projects.

Within operational highlights, the order intake registered amounted EUR 804 million in the period on the back of a number of international awards, in Germany, Egypt, U.S.A. and Uzbekistan, in which the company has leveraged on its diversified product and service portfolio, together with its competitive advantage to deliver efficient and customized orders.

As a result, backlog has significantly increased 24% in the last 6 months to reach EUR 3.2 billion with a higher waiting of manufacturing and overall projects over the backlog of the company represented almost half of the company backlog.

Meanwhile, the projects currently in delivery process, mainly Mecca-Medina increased the stalled fleet in the last quarter to over 2,800 vehicles and that the main thing is revenue contribution to the company.

Spain Very High Speed project is between the first and second execution phases combining engineering activity and the first industrial phases, mainly integration of underframes and body shells of coaches and locomotives. This project is staged as the main revenue contributor for the periods 2019 to 2021 and it's -- it is on time and on budget.

Uzbekistan project was recently signed. The project contains firstly the client commitment with its plans to increase its high-speed fleet and secondly, the good results delivered by the 2 powertrains already in operation in the country.

Deutsche Bahn project was awarded and signed in February on the back of a framework agreement that comprised of up to 100 trains for an approximate value of EUR 2.3 billion. This is significant contract for the company not just due to the volume, but also given the client quality profile, potential upside and commercial impact in all the European countries. The project is currently under engineering phase and in line with client expectations.

Egypt project recently awarded by Egypt National Railways and is a company positioned in Middle East, North Africa countries where Talgo is already a company of reference for national operators. In addition, European Bank for Reconstruction and Development has financed this project, which adds value to the project from a finance help point of view.

On the other hand, Talgo continues executing maintenance service for over 2,800 vehicles that are operated in a daily basis and which good results are a reference for operators all around the world. Within the maintenance projects, it must be highlighted the good results being obtained from Mecca-Medina maintenance activity, which contains the successful product offered with a wide range of technologies in core project with trains in order to trace the weather conditions of the country.

Lastly, Talgo is achieving in strategy to enter into overhaul segment, where we are already executing 3 projects, out of which 2 are related to third-party trains with new customers in international countries. We expect the company to deliver a good result on these projects and continue growing within this segment.

On top of the already booked orders, Talgo aims to continue talking -- taking advantage of the clearly good commercial momentum with a proactive approach, guided by the company strategy based on a strengthened international and diversified presence of the company.

Talgo has already submitted offers amounting approximately EUR 3.4 billion, out of which the most significant is the High Speed 2 project in U.K. or the manufacturing of 55 Very High Speed trains and their maintenance throughout the period of 30 years. In addition to this, we have an identified pipeline of potential opportunities for a total value of EUR 7.4 billion expected to be awarded in 2 years' period. However, as commented in previous occasions, the pipeline has not started yet and therefore, projects may suffer delays or cancelation, as well as new opportunities may arise. Within the pipeline still remains a significant source of new opportunities. On one hand, we expect RENFE to launch the already approved tenders throughout the second half of the year and award them throughout 2020. However, schedules will depend on final decisions of RENFE.

On the other hand, the ongoing registration process could also be source for new opportunities for Talgo. In this sense, Talgo could play connective role in the process either as a high-speed manufacturer of reference on the market with a leading product, and/or as a business diversification opportunity. In case of deciding to participate as a potential candidate to operate, we will need to submit offers by October 31, 2019, preliminary awards will be communicated by Adif on December 15, 2019, and final awards will be confirmed in March 15, 2020.

Lastly, let me highlight our commercial strategy is based on reaching new geographical developed areas with both existing and new projects and service offering, by maintaining the original Talgo selective approach, limiting the participation to offers with attractive margins, acceptable cash flow profile and strict legal conditions. We confirm our position in this regard, our will is to be consistent with it.

Let me now hand you over to Eduardo to take you through the financials in more detail.

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Eduardo Fernández-Gorostiaga, Talgo, S.A. - CFO [3]

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Thank you, José María, and good afternoon, ladies and gentlemen. During the first half of 2019, the revenues recognized were in line with the stage of the project's execution and with normal valuations relative to manufacturing and schedule adaptations that does not impact the overall performance of the project.

As commented in previous occasions, the performance of the project is measured based on compliance with the deadline established with the client and the fulfillment of the budget set for the project. And in this regard, Talgo is on time and on budget. In this sense, the profitability during the first half of the year, the mix of the project executed and their good performance in the period resulted in an adjusted EBITDA of EUR 30 million reaching margins of EBITDA 18% in line with the company target for the year.

The operational profitability obtained result of the following: First, a good quality of the project and backlog, all of them currently delivering attractive margin. And secondly, the company successfully proven business model based on an outsourcing and light factor, which contain overhead costs.

Regarding the adjustment, we have impeded this year the impact of IFRS 16 after negative adjustment to EBITDA in order not to disturb the guidance given for year-end. Such adjustment amounted EUR 1 million in the period. The low EBITDA, reduced financial expenses registered in the period and a lower effective tax rate resulted on an increased net profit in the period.

In terms of shareholder remuneration, Talgo is currently undertaking a share buyback program with the objective to acquire up to EUR 100 million on sales representative of 16% of the company capital to be subsequently redeemed. Once the program is finished, existing shareholders will increase their participation on the business by 20%. As of June 2019, 39% of the program was executed amounting EUR 39 million and 6.8 million shares.

With balance sheet working capital performance of the period in line with normal project execution where the increase of inventories and consume of advances reflects the initial phases of the project. As of June 2019, working capital remain at a sustain level reaching EUR 76 million. However, 2019 is a period of free cash flow generation. In this sense, during the second half, we expect additional collections to be received from the main projects under execution, therefore, we may expect working capital to evolve probably in the period.

In terms of cash flow, cash invested in working capital, CapEx and taxes offset the EBITDA generation of the period. As José commented, during the second half of the year, we expect the cash collections from manufacturing project to enhance the free cash flow generation of the year.

Regarding the CapEx during the first half of the year, lower investment were required, although we suspect that during the second half of the year certain research and development projects are -- and developments will increase such investments.

Considering the free cash flow generation, the debt repayment and the additional cash invested in the share buyback program, the company maintains a net cash position of EUR 64 million at end of June, thus providing the company a healthy balance sheet.

A lack of additional debt maturities expected in 2019, together with a smooth debt maturity profile in the following years with low interest rates provides a good debt profile to the company. On top of this, we keep EUR 75 million of credit facilities fully available, which provide us short-term flexibility and capacity for current and future projects. As a result, Talgo has a sound financial profile with over EUR 300 million in debt and a very comfortable debt repayment schedule. In this sense, even considering the significant shares buyback program currently under execution, the company will continue to maintain a healthy cash position.

And now, I hand it over to José María to get through the outlook update for the year.

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [4]

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Thank you, Eduardo. By looking at the outlook, we reiterate our main guidelines for the year-end in terms of business performance, profitability and capital structure, while highlighting the remuneration policy currently being implemented through a strong shares buyback program. In this sense, we expect to continue executing quality manufacturing backlog in line with the different project schedules with an industrial planning that will drive revenue growth for year-end.

Talgo's proven track record in so different type of projects as Mecca-Medina project or Kazakhstan is a guarantee for clients in terms of correct delivery of the projects.

Within the maintenance projects, while existing projects are expected to continue delivering our reliable service to clients, new projects as Mecca-Medina, are expected to raise revenues contribution.

Regarding the commercial activity, we'll continue proactively and based on already awarded projects, while we continue working on existing and new tenders.

In terms of profitability, we reiterate our margins objective setup 18% adjusted EBITDA margin by the end of the year based on the expected margins of our projects executed in the year. In the same line, we reiterate our guidance for the year-end based on cash flow generation, driving by expected cash collections coming from projects under execution.

Regarding the CapEx requirements, no external cash outflows are expected. Thus, we expect to close the year in line with the guidance provided.

Lastly, we reiterate the commitment of the company with shareholders through their ongoing buyback program. With that, ladies and gentlemen, we conclude our presentation, and Eduardo and I are pleased to answer any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Pablo Cuadrado from Kepler.

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Pablo Cuadrado, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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Just a few questions on my side. The first one would be on the year-end guidance. I think nothing is changing at the end of the day, but it is true that the performance in Q2 in terms -- particularly on the revenue front has been potentially a little bit weaker because we were expecting a year that was expedited out in terms of revenue growth and all of a sudden Q2 revenue has been lower than Q1. So are you witnessing a strong growth by year-end, but if I look at consensus, today is indicating a revenue at the year-end of around EUR 450 million, which will suggest a revenue growth of around 40% year-on-year, while H1 has been only 4%. So I wonder -- I know is difficult, but whether you can share a little bit an absolute figure of revenue for year-end or at least a range? Because clearly, some double-digit growth is servicing above 10% and is a little bit tricky.

Second question is on the tax rate. Clearly, it has been low during H1 and has been only 16%. Can you detail what is behind that? And which are the -- your expectation for H2? If you expect as well a strong pickup and therefore, have later an average tax rate close to the average of 20 something percent or you expect it to remain where it has been during H1?

And final question is -- I'm sorry for this question because probably, I should know it myself. But can you remind us what is going on with this contract on maintenance that was awarded back in 2017? Because it has been several quarters and clearly waiting for the final signature and therefore included in the backlogs. And is there -- but is not fully signed. So could you remind us why that has not been signed?

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [3]

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Pablo, regarding your first question guidance and revenues, as we have explained the first half of the year, as a consequence of this new schedule for the manufacturing projects and the engineering, we have recognized lower revenues than expected. But we maintain our guidance of growth in the second half of this year.

And regarding the tax rate, the tax rate could vary depending on the permanent establishment that we have abroad. So this is basically the reason for the violation.

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Eduardo Fernández-Gorostiaga, Talgo, S.A. - CFO [4]

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Okay. Regarding the third question, Pablo, the contract awarded for the maintenance of the contract of the supply of the 30 high -- Very High Speed trains to RENFE, we still have enough time to sign the contract. So we are not, let's say, in a hurry, and RENFE has already foreseen in the awarded, across in which they have plenty of time to sign this contract even before we deliver the first units. So it's not a concern from our side, not even from RENFE side either.

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Operator [5]

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The next question comes from Jose Maria Canovas from JB Capital Markets.

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Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [6]

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I have a few. First of all, following up on the revenues. You were saying that all projects are on time. So -- and as Pablo commented, we were expecting a year, which was supposed to accelerate from second quarter onwards. So what would be the reason for not seeing an acceleration in the second quarter? I know you still expect this acceleration for the coming quarters, but what happened during the second quarter?

And also on the revenues. Back in February, you stated that you felt -- well, you gave the guidance and you basically said that you felt more or less comfortable with a figure that consensus was given at that time, which was EUR 470 million. Now consensus says pointing to EUR 450 million, do you still feel comfortable with revenues in the range of those 2 figures or should we expect something lower?

And finally, this is just -- well, in the cash flow, I've seen in the dividends, you report EUR 34.8 million. I'm guessing this is the threshold above the share buyback program. Isn't it?

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [7]

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Okay, thank you, Jose Maria. This is José María as well. So regarding the first question, you are correct. We keep on saying during the call today that we are on time and on budget on all the projects, that is true. But also we have to point out that sometimes, especially with this High Speed project with RENFE, the definition of the layout of certain coaches takes more time than expected. So this has been an idea of RENFE coming to us. So since we signed the contract, then you have to start definition of the layout. And for certain coaches in this case, a good example is the cafeteria, the bistro, it took us more than expected from their side. So this has been an agreement between the customer and us, that they requested us more time to define that a specific coach plus other coaches as well, but this was a more significant one. But again, this will not impact the final delivery of the project. So it took us more time to define, it took us more time for the engineering, again, agreed with RENFE, but this will not impact the final delivery. So most probably, the revenues for the next quarter will be improved.

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Eduardo Fernández-Gorostiaga, Talgo, S.A. - CFO [8]

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Regarding your second question about the revenues, As José María has explained, the changes in this layout has moved our estimate for revenues, and we think that during the second half, it's going to be a ramp-up in the industrial activity. But we think that is perhaps it is soon to make an estimate that we will be in the range of EUR 400 million to EUR 450 million revenues.

And in connection with your third question that I don't know if I have understood properly, the share buyback program as of today is EUR 39 million that we have invested in the program, and we will continue with the share buyback during the rest of the year and probably during 2020 till we get the 9.5, and we will redeem the sales and continue to the EUR 100 million.

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Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [9]

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Okay. Very clear. Just following up on the last one. What I was telling is that in Page 25, I see dividend payments and I see an amount for the first half of the year of EUR 34.8 million, but I believe that you canceled the dividend during this share buyback program. So I just wanted to understand what is this figure?

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [10]

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(inaudible)

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Eduardo Fernández-Gorostiaga, Talgo, S.A. - CFO [11]

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Yes, these were share buyback, the remuneration, yes.

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Operator [12]

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(Operator Instructions) The next question comes from Jaime Escribano from Banco Santander.

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Jaime Escribano, Grupo Santander, Research Division - Equity Analyst [13]

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So I have a couple of questions. The first one is, if you can review a little bit more in detail the pipeline, particularly I would like to know how is it going the tender bid of Belgium? And how is it going the one of U.K.? Maybe if you can tell us what are the next milestones? And if these -- the final resolution of this contract is going to be by year-end or is going to maybe delayed for next year? And also a little bit of update on the Spanish tender bids, and of course, any other potential hot tender bids you have in the following quarters? So this would be our first block of questions. And then I wanted to know if you can tell us how much do you still need to collect from Mecca-Medina? I think that would be interesting to know, to have a little bit of visibility on the cash flow? And I think that's it from my side.

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [14]

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Okay, Jaime, thank you for the question. This is José María. Regarding the first one, the pipeline, I think you mentioned Belgium, if I understood well, we are not involved in any process in Belgium, maybe you referred to Denmark in which we are involved.

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Jaime Escribano, Grupo Santander, Research Division - Equity Analyst [15]

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Denmark, yes, sorry.

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [16]

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Okay. So in Denmark, we did deliver the offer some months ago. Now we have to deliver our best and final offer by October this year, and we expect the award most probably by the beginning of 2020.

Regarding the U.K., we did also deliver our offer in June this year. It's not clear whether they will make the awards by the last quarter of this year or first quarter of next year. Again, it's a big question mark, I don't know. Most probably, they will jump to next year due to the timing and considering that they have to evaluate 5 different offers which in size are huge number of papers.

And regarding all the projects in the pipeline, yes, it's true that now we expect several different projects that has been launched already by RENFE for the power heads. This has been already the prequalification phase at 3 different batches that will be released by RENFE for commuter and regional trains of up to above 350 trains. We have already presented the papers for the prequalification for both power heads and the first batch of high-capacity commuter trains. We're expecting to get the tender papers by the end of this month. We don't know whether that will happen or not. If that doesn't happen, it will be September most probably. And also we expect the tender papers for the second and third batch of commuter of RENFE to be released third quarter of 2019. Whether they will award any of these projects within 2019, it's depending on when they release the papers. So it's not clear. So this is the most or the starting point in which we are involved as for the moment. But also as we mentioned during the presentation today we have identified a medium, long-term pipeline that amounts approximately EUR 7.4 billion.

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Eduardo Fernández-Gorostiaga, Talgo, S.A. - CFO [17]

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Regarding your second question, Jaime, in Mecca-Medina, we have remaining EUR 80 million to be collected. With this, we'll finish the collection of the project.

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Jaime Escribano, Grupo Santander, Research Division - Equity Analyst [18]

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Okay. And just as a follow-up, it was asked about tax rate, maybe you cannot give us a guidance, but just to understand if the tax rate for following quarters would increase due to geographical mix? Or if you can provide us a little bit more visibility because it's true that it was quite below than expected?

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Eduardo Fernández-Gorostiaga, Talgo, S.A. - CFO [19]

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At year-end, we'll be in the region of 20%.

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Operator [20]

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(Operator Instructions) Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to the company. Thank you.

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Javier Oriol Piñeyro, Talgo, S.A. - IR Director [21]

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Well, there are no more questions. So thank you very much for everyone who joined the call. Also thank you, José María and Eduardo. We don't -- however don't hesitate to contact us for any additional questions you may have. And that's all. Thank you very much everyone, and see you soon.

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José María de Oriol Fabra, Talgo, S.A. - CEO & Director [22]

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Thank you.

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Eduardo Fernández-Gorostiaga, Talgo, S.A. - CFO [23]

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Thank you.