Comida Coloquio con Javier Martínez Ojinaga, consejero delegado de CAF: 2ª Parte

Regarding projects and sustainability, historically it was seen as an element that hindered competitiveness, like a cost. But now I believe it is beginning to be more of a strategic element. And the truth is, as I said before, we were talking about alignment with best practices at CAF. We have been publishing corporate social responsibility reports for many years, following GRI standards. We have created dashboards, so we already have a tradition of alignment with best practices. I think there is a leap, which is what I mentioned earlier: greater commitment and greater transparency. Commitment is formalized by adhering to specific objectives, but what is important is that you measure yourself. We are subject to ratings from different agencies, and we are exposed to what they tell us. Right now, we are giving better sustainability ratios than the competition. And I think it's important because it's a strategic element. Sometimes it's hard for us because, as a company with deep cultural roots in its origins, we are very much about doing and we find it hard to talk about what we do. So part of sustainability is what we have done: we have created an ESG story, a sustainability report, submitted to financial information. I think we have taken on the challenge of saying what we do, and in that way, getting people to join this race. So in that sense, I think we are there in terms of sustainability.

First, by also being larger ourselves. In the end, we invest 1.5% of sales, but the investment is in absolute euros. So we are in the Champions League, but of course our difference: we are a company of 3 billion, there is a company of 7 billion, a company of 15 billion, and a company of 30 billion. So we need to grow in order to invest more in absolute terms in technology. And how do we do it? With smart resources. We try to do it intelligently. We have made certain technological bets historically that have worked for us. I think the world of batteries, very associated with the world of traction, the world of energy storage here with Cap Power, is a success story. So you do it with knowledge and also with attitude, that emotion I mentioned before, that we are not satisfied and we want to advance and improve. Each one of us has to have that. So I think it's knowledge, that attitude, and then as an organization, as a board and as an executive, we have to provide the organization with the best way to do that. And then we shy away from that? No, from doing that we shy away.

Culturally, we avoid overly centralized areas. We try to generate internal organizational structures that know how to take advantage of the knowledge from the people in the business, where opportunities arise, with specific lines of work that try to advance the future. So you combine being at the forefront with day-to-day efficiency. This has been seen concretely in the world of batteries. We began with the first catenary-free tram systems in 2009, which already indicates we've been working on this for a long time. We started in Seville, then Zaragoza, and then internationally in projects like Birmingham. We have continued working on all areas of energy storage, traction, and have become capable of offering battery trains. For us, the news of being awarded the VR project last year, the largest European battery train project in Germany, a 60-train contract with 30 years of maintenance, where we are offering regional trains with batteries with a range of 70 km in commercial operation. Often you hear how far a train can go with a certain battery or hydrogen, but the key is in commercial operation, maintaining that autonomy for 30 years. So our history with batteries is a success. And then on hydrogen, it is a technology we are also working on, although we consider it less mature than battery technology at the moment. So, trying to combine the forefront with day-to-day operations.

It's a fact. Whether you do it or not, it will impregnate. The question is that impregnation or that path is the one you want. We give importance to this because it's true, we were talking about 2016 and 7,500 employees, but then there have been incorporations in large blocks of people. It's not that you incorporate organically little by little; we have integrated 3,000 people in Poland, 1,000 people in Sweden, and 700 people in France, which are important cultural blocks. So whether you like it or not, the culture gets modified. You have a challenge. We place a lot of importance, and I say it again with the saying, something we knew implicitly, but now we have to make it much more explicit. We have to talk about what we do because it is relevant to maintain that CAF DNA. And that has to do with values. Trust is one. It has to do with the values that CAF has. We have them technically well developed. If I had to summarize them: commitment to work well done, to the client, principle of honesty, principle of teamwork, and the principle of making a more sustainable world, which revolves around CAF, together with another element: a concept of long-term industrial project and legacy. We are a century-old company. We on the board and in the executive have received a legacy, and we have to take care of it, transmit it, and tell this story. But then keep doing. We are a company of doing. Right now we have to say more what we do, but we have to keep doing.

History demonstrates it. If we look at our product development, just look at where we first put that product into commercial operation. If we hadn't had trams where we did, we wouldn't have a business in 50 cities. If we didn't have metro where we do, we wouldn't have been able to accelerate the reference element that institutions and clients here have offered us. They are fundamental. And we continue applying that in all energy efficiency areas, with traction technologies using silicon carbide. I'm not an engineer, but it's an element that makes it much more efficient, saves much more, and we have them in commercial operation. There are few companies that have them; there is a lot of lab work, but not many in commercial operation. So I think it's not just theories; we have concrete examples that it is so. And the other part was... Well, it was for headlines. The truth is, I can use doctors? The church also has doctors. I refrain from giving advice. Each sector has its own singularity. What I do think is that the question had something interesting: we don't have a specific problem in the Basque Country; we have a problem at the European level: that fragmentation I was talking about. Europe is an agent, and I believe the challenges we have are at the level of European industry, and we are probably providing solutions at a much more state/regional level, often with a lack of coordination. But the challenge is this. And beyond that, we must work on competitiveness and productivity. We are a value-added economy, and technology and innovation are fundamental. Without that, I think our industry has a more uncertain future. So my bet would be basically innovation, productivity, and trying to find mechanisms at the European level that provide solutions. And right now, last week I came back from Brussels, the Commission announced an industrial plan, which is a bit of the response to the Inflation Reduction Act. We'll see if there is an escalation. But all that ultimately depends on how it filters down to the real economy.

Integral projects? All trains, I mean, I said it before: we have been, we are, and the railway vehicle, the train, is the anchor of our business. What we do in an integral project, as I said before, we can only do it from the Champions League. We are talking about projects that cover everything from the feasibility study phase, to engineering, to building the solution, to constructing the train, to operation and maintenance, even financing. That's what we call an integral project. That means sometimes it includes financing and sometimes not. This gives us several businesses: the industrial business related to engineering and integration of the project and the vehicle (the train and signaling), and then the operation and maintenance part. It's a complete business in terms of the capabilities you have to incorporate into the project. These solutions are liked in certain parts of the world because for the contracting authority, it eliminates the need to coordinate subsystems. The problem is not the work of coordinating, but the cost derived from the difficulties. So as a client, you place that responsibility on the consortium. And for us as a company, it's interesting because the barriers to entry in these projects are very high. Only four or five can enter; the fifth is the Chinese. So in a growing segment, it positions us well. Historically, we have developed these projects. Currently, there is an expectation of growth, but we have about 20 such projects executed or in execution or in the pipeline. The last ones have an average value of around 700 million euros: about 350-400 for investment and 300 for operation and maintenance. These are big projects. As I said, we have historically and in execution or in the pipeline about 20, and in very diverse geographies: for example, we have projects in Liège, in the US in Maryland, in Israel, in Australia. So we cover quite a bit of the world with this type of project.

It has impacted. But I would distinguish two dimensions. In terms of volume of investment, contracting and investment in mobility in the world has not decreased; that's a fact. So what has been affected is fundamentally the execution of projects and results. Our last year in contracting was spectacular, but it was also a good year for our competitors. So it's more about affecting execution and results. In that, we usually distinguish two realities: supply chain and cost/inflation. On the supply chain side, much is said about semiconductors, chips, but actually even connectors, cables, many things have been lacking. And it's true that it has affected us more in the bus business than in the train business because the bus business has a shorter cycle; in eight weeks you turn it around, so any cost increase you suffer quickly. The supply difficulties have hit the bus business harder. In the train segment, you have more time. To reduce impact, we do what everyone does: work on stockpiling, technical modifications on the supplier side, and on the client side, negotiate delivery times and reduce penalties. On the cost and inflation side, with suppliers it's more of the same. On the train side, with clients, the range of possibilities is larger because these are longer cycle projects. There are indexations, you negotiate. At certain times we have had to drop some projects where we had a window because the client didn't accept price increases and the numbers didn't work for us. So we left. Also, it's true that about two-thirds of our order book is covered against price escalation, either because the business itself incorporates it (like service contracts with an average duration of 13-14 years, which include indexation) or because we execute purchases at the time of the project, fixing prices. In some geographies, indexation is a commercial condition. So combining these, we have two-thirds of the backlog covered. So the impact on execution and results: we expect a certain normalization of profitability in the bus business throughout 2023 due to the nature of the cycle, and in trains, because it's a longer cycle, we expect recovery in 2024.

This also has a derivation. In the design of the strategic plan, we do contemplate corporate operations. But the truth is we ask ourselves: what do we want them for? We want them for things like smart mobility solutions, to complement our organic growth with specific operations. So in terms of portfolio, our plan contemplates corporate operations in terms of operational efficiency and proximity to markets. But we are not currently in the middle of anything; we analyze operations continuously. But continuously means for many years now. Since I joined the CAF board, we have had operations on the table continuously. It's something recurrent.

With the values we have. It's a company that, without being very explicit, is very client-oriented. It gets things done and solves problems. In our sector, projects are complicated, and anyone who reads the press, any company involved has its difficulties. So we approach clients by solving problems, not making declarations about specific situations, and meeting commitments. Then we have realities: the data I gave earlier about client repeat business. Regarding stock market confidence, we systematically have a 40% gap with the target price given by analysts. They ask us: 'What's wrong with you? Why do you have this gap?' And I find myself saying: 'You tell me.' So we have a huge room for improvement. In fact, we had a board reflection. The way we have presented the last strategic plan is also a response to that reality. We were very explicit, and the plan was well received by the market in terms of ambition. Each has their own expectations, but in terms of the effort we made to communicate who we are, where we are going, and why our proposal is differential compared to the competition, I think we have achieved that. And that is a step forward to build confidence in the markets.

The zero-emission urban bus business. Last year we sold around 1,500 buses. If we take the last month, more than 80% of the buses we manufactured and sold were zero-emission. So we are in that market segment, and it has tailwinds due to decarbonization. Regulations are accelerating, administrations are buying more zero-emission vehicles. The Clean Vehicle Directive says that by 2030 or 2035, 45% of new urban buses must be zero-emission. That will probably be exceeded. So expectations are good. Our strategy is to accelerate our migration to zero emissions as much as possible. Our mix is already above 80% in the backlog. And grow in zero emissions. The second axis is to expand our inmobility portfolio to the interurban segment, which is dominated by two companies, and with the electric solution, in which we have been pioneers with electric interurban buses in operation. We want to leverage that to become the third player in the interurban segment. The third axis is to enter the US with an exclusively zero-emission proposal. So we migrate and grow in Europe, expand into interurban, and launch in the US. It will take time; the first units will be in the 2026 cycle, not a major impact initially, but by 2030 it could be.

That axis is a bit of a commercial focus on specific geographies. We have done an analysis of which markets we should bet on, based on competitive dynamics, market size, how our product offering fits, and our capacity to win. The model is to have 70% of sales concentrated in what we call core markets: Europe, the US, and the Asia-Pacific region. These are large, recurrent markets where our products fit well and where we have a footprint: we have engineering, production, or supply chain. These are the axes we have defined. As I said before, it has to do with the perception that the world is fragmenting. Local content requirements are increasing, not just tariffs. Having industrial implants gives us positioning, and from there, sales are more house-market based, more opportunistic.

I think first of all, it is evidently a concern we have, and we dedicate focus and time to it. The battery of tools we use is not very different from what other companies of our size use: employer branding policies, talent development plans, succession plans, communication, etc. But I think we are giving importance to building a purpose. We have to make the company attractive, a place where people want to come. That's what we can do. There is the overall concern and the individual concern as a company. We want to build an interesting project in which people want to participate. It is true that, regardless of the number of people, people are different from us, from my generation at least. We have to prepare and make it attractive for them. But, paraphrasing an intervention by our president in this forum, we look for normal people. That's it, and it's our obligation to generate a project that is attractive so that people want to participate. And the truth is we have the ingredients: it's a nice sector: decarbonization, sustainable mobility, public transport. Formulated well, it becomes attractive. So we work on that line along with more traditional variables and programs.