Q3 19/20 TU

Jan 16, 2020

Earnings release

Ladies and gentlemen, welcome to the Alstom Conference Call. I will now hand over to Laurent Martinez. Sir, please go ahead. So good morning, ladies and gentlemen. I would like to wish you first very Happy New Year and to welcome you to our conference call on orders and sales for the 1st 9 months of the fiscal year 'nineteen-twenty 20 with, of course, as usual, a specific focus on the 3rd quarter. So I'm together here with Julie Mathieu, and we welcome today Claire Le Pelletier, which has joined us in the team. Claire, welcome. For the 1st 9 months of 'nineteen-twenty, Alstom recorded €8,200,000,000 order intake compared to €10,500,000,000 last year, which is, as you remind well, was the result of our 2 major contracts of last year, the new TGV and the Montreal Metro. During this 3rd quarter, we achieved excellent commercial performance, orders reaching EUR 3,600,000,000 above last year quarters. And these orders leads to a new record high backlog of €43,000,000,000 on the 31st December 2019, which is obviously providing us an excellent visibility on the future sales. This dynamic order intake occurred in a context which is extremely favorable to the rail. End of the year, the European Union disclosed its green deal, targeting climate neutrality for the EU by 2,050, as you know, and with a specific target on the transport sectors, which should decrease by 90%, its emission and rail and public transport are obviously expected to be instrumental to this transition. In Germany, the number of domestic flights declined last year, while Deutsche Bahn long distance transport has increased for the 5th year in a row consistent with the overall trend of European for mainline. Copier as well in the context was, as you know, the German government adopted a climate package with €20,000,000,000 incremental investment for Deutsche Bahn and tax measures to promote trains over planes. Finally, on the urban transport side, which is, as you know, our 2nd growth engines after mainlines, we see mega cities accelerating investments into public transport, such as in India or in Singapore. Back to Wellstone, where our orders were particularly important in services and signaling and this fully in line with our Alstom in Motion strategy as well as in Europe and Asia Pacific. So let me pinpoint a few important contracts this quarter, both in terms of size and technology. So first, Alstom was awarded a combined contract for Rolling Stock and maintenance for Perth, the largest orders ever received by Alstom in Australia for approximately €800,000,000 Also in Australia, Alstom was chosen to manufacture driverless trains and a digital signaling system for the SINA metro extension. Both of these contracts strengthen our position in the countries as Rufferbish and maintain high speed train spandolinos for the Aventi West Coast line for 7.55 €1,000,000 within a 7 years contract. It includes an upgrade program of the 56 Pandolinos, which is believed to be the biggest train upgrade ever undertaken in the UK. This overall will focus on onboard facilities and, as Tom, will maintain this fleet alongside a new train fleet recently ordered from Itachi. In France, as you know, Alstom has been awarded, very proud of that, the renewal and automation of Marseille Metro for €430,000,000,000 1,000,000 on top of providing a modern automated signaling system. This new Metro will be metal funded with 96% recoverability at the end of their lifespan, 25% less energy consumption than current metros. On the automation side, Alstom will provide its Eurobales 400 solution, already deployed on 1500 kilometers of Metroline worldwide. As you may know, Alstom is equipping 25% of the CBTC Metro Automation in service over the world. Finally, also in France, we have been awarded a major frame contract in consortium with Bombardier to renew and manufacture the new generation of metro for Ile de France Mobility and Air ATP. This confirmed part of this contract covers the deliveries of 40 4 trains, but the frame contract is much larger with a total of up to 4 10 trains. Moving to the sales side for the 1st 9 months of 20 trains. Moving to the sales side for the 1st 9 months of 2019 2020, we reached EUR 6,200,000,000 out of which €2,100,000,000 trading in the last quarters. This represents 3% in actual and 2% organic growth year on year, consistent with the consistent with the perspectives we've been giving you in the last Capital Market Day. Turnover was fueled by the very positive ramp up of our major rolling stock project with 11% growth year on year. And on signaling, we had a sales increase of 16%. All of these for these two products showing an acceleration compared to the first half. On the systems side, we had a foreseen decline by 22% due to fully traded contract for Panama Metro in Latin America and contract nearing completion in Middle East, such as Lusail. Finally, on services, we had a slight decrease of 2% due to some one off maintenance events last year. Moving to the operational side. We had as well several major project milestone achievement this quarter, starting with, again, Australia with commenced revenue services, while Alstom is providing the full integrated light rail systems. The tram of SINA has been equipped with the latest innovative power solutions, including a wire free APS, ground based supply and ESOP Energy Recovery Substation. 1 Express with Alstom Coradia Polyvalent strength and onboard ERTMS digital solutions, which will enable cross border operations. This LeMond Express is the Europe's largest cross border rail network operation with 45 stations and 2 30 kilometers. Last but not least, the first line in Denmark equipped with both ERTMS trackside onboard solution and integrated with traffic management system has started Commercial Services. And this is, I can tell you, a significant milestone in Denmark countrywide to replace the current legacy railway signaling systems with the latest ERTMS standards, which will lead as a conclusion to a capacity increase in terms of passenger. So to wrap up on the key messages, we have achieved an excellent commercial momentum this quarter in the context of an extremely very dynamic market and this leading to a new record backlog of EUR 43,000,000,000 Our sales are definitely consistent with the dynamic we had communicated during our Capital Market Day, IT ramp up of our rolling stock and singannings and expected ramp down on systems as some of our major system projects are being completed. Altogether, this puts us in a very good position to reconfirm today our outlook given during the Capital Market Day concerning the midterm as well as this current year 20 1920. The year 20 1920 fiscal years would be a year of stabilization of growth after 2018 2019 fiscal years with exceptional sales and profitability growth. For 2019, 2020 fiscal years, the business cycle with the finalization of major system contracts and the evolution of large rolling stock projects, will lead to a sales and margin growth lower than the average objectives set in the context of Alstom in Motion and to a working capital evolution impacting the annual growth rate of sales around 5% over the period, an adjusted EBIT margin to reach around 9% in 2022, 2023 and as you know, conversion from net income to free cash flow above 80% by 2022, 2023 and final year dividend policies with a payout ratio between 25% to 35%. Furthermore, Alstom will conduct disciplined investments and external growth transaction policies to support development and to create value. So thank you for your attention on this introduction, and I suggest that we switch now to the Q and A session. Thank you. Thank you. I will now Thank you for taking my question. I would like to ask about free cash flow for the full year, if you can provide any details. But maybe then about working capital. I appreciate you have mentioned that the evolution will impact free cash flow. And I believe on a previous call, you have said that the ramp up the working capital ramp up for rolling stock projects should continue in the second half. But I'm wondering if you could give any color as to how the second half would compare to the first one, maybe taking into account recent awards. And also how you see this evolving in the forthcoming fiscal year? Okay. Thank you, Benjamin, for your question. So on the free cash flow, to start with a high level statement, no change, no evolution since the Capital Market Day end of June for this year and no change in terms of what we communicated for H1. So just to give you some more colors on this. So we have been we are facing, as anticipating, some headwinds on the working capital in the second half, which is fully, I would say, in line with the ballistic evolution of our ramp up of our main rolling stock project being Regional Train, Traza, Amtrak or Iluco. On this basis and as well on the basis, as you say, of the commercial on the order intake and the commercial, I would say, achievements, in line with our anticipation, we confirm fully our outlook for this year in perspective of free cash flow generation. And to wrap up again, We confirm free cash flow generation for this year. We confirm free cash flow generation for this year. Our next question comes from Martin Wilkie from Citi. This is Martin from Citi. Just a question on the tender outlook. Just wondering if you had any change in views as to potential orders coming up. We saw news this week about Germany ramping up investment in Vela. I appreciate that can take some time to come through. But just wondering if you could talk about have you seen any pickup in tendering of late that might lead to some better orders over the coming quarters? Thank you. Thanks, Martin, for your question. So the market, I have to say, is extremely buoyant overall. And I want to reiterate the 2 main engines of this market growth, which is number 1 on the mainline side and Europe, including Germany, is, of course, a key part of it. But as well, on the urban side, with, I would say, all the major projects from the megacities, I quoted India, Singapore, Paris, Washington and many others. So these are on the fundamental. Back to your point on the key tenders to come, we have definitively a very active pipeline ahead of us. And just to name a few of them, we still have some opportunities of Tramway in France. We have opportunities of regional train in Germany, I would say fueled as well by this momentum we are having in Europe and specifically in Germany. And looking ahead, we have definitively opportunities in Spain on the regional trends with as well a very active momentum on this market. In France with the replacement of the ARR, which will be a massive contract for next year. And in APAC, just to complete the round of the world, some interesting opportunities to develop in India and in Taiwan. So altogether, extremely positive market. Maybe move to next question. Our next question comes from Miguel de Bois from Deutsche Bank. Just looking at the major uptick in signaling that we've seen now both in terms of orders and revenues over the past few quarters, could you perhaps comment a little bit more about that please, about what's driving the sudden growth there in that business? I mean, I was obviously wondering if the group's catch up in the signaling market was perhaps coming a little bit at the expense of margins possibly. So good morning, Gael. Thanks for your question. So we are extremely of Alstom in Motion together with services. So first, I would say the key background or the key drivers of this growth in terms of market. Number 1 is mainline digitalization in Europe. And the Denmark case I was quoting is the perfect example. We are moving from legacy to digital interlocking and the rollout of ERTMS. So that is one key access drivers. 2nd one is on the Eurobank side, where we are uplisting the Eurobank signaling systems called CBTCs to increase capacity of the existing infrastructures. On the back of these two axis, which is definitively within the core of our signaling strategies, we are have been, I would say, surfing on a very positive wave in terms of market with Marseille, which is a major contract, but as well with the activities we had in APAC, which is as well extremely interesting, but as well in France on the mainline Parisillon to give you a couple of examples. So we see a positive trend on the signaling. We are having still ahead of us an acceleration of growth in the last quarters that we are seeing on signaling. And to last to your last point, Gael, this is not at all in detriment of the pricing or the margin, and we are extremely pleased as well by the margin on order intake on signaling. Next question? Our next Our next question comes from William Mackie from Kepler Cheuvreux. Yes. Good morning. Thanks for taking the question, and good morning to Laurent and all. Could I just try to understand the developments within Systems? Middle East, and we can observe the fall in volumes in Q3 in the Middle East and in the systems related business. Have we now reached a new normal? And how should we begin to think about the development in the systems business and Middle East over the next 24 months or 12 months even where you have good visibility? Thank you. Yes. Thank you, Will, for your question. So on the Systems side, the dynamic is, of course, fully expected and, I would say, ballistic. So the dynamic is based on, number 1, the completion of our major systems contracts. So Panama in Latin America, but as well Dubai, as you know, is expected to be completed around spring summer 2020 in advance of the exhibition in October 2020, but as well Riyadh, which is as well getting to a completion phase. On this basis, will the 4th quarter will show stabilization of the systems sales activities from the comparison to the 3rd quarters. If I look ahead, of course, we have, I would say, opportunities in terms of systems activities. We have the ramp up of our Montreal Systems Metro, which will be ramping up, of course, ahead. And we have, of course, having tenders activities on the systems. And I want to quote the Metro of Abidjan, which has been signed on the 23rd December and which will be hopefully in force within a year from now, which will be, I would say, additional growth drivers moving ahead on Systems. Move to next question. Thank you. Our next question comes from Akash Gupta from JPMorgan. Yes. Hi, good morning, Nuno. I have a longer term question like, I mean, if you look at the demand driver, we have healthy demand drivers in place and we're getting a data point every week or month that growth in trains should be better than what we knew before. So the question I have is that could there be any upside risk to your medium term 5% organic growth guidance? May not be in the next couple of years, but let's say, if we look at growth in, let's say, 3 to 5 years out, then is it fair to say that there could be upside to mid single digit growth that you have targeted in the current plan? Akash, thanks for your question. Good morning to you. So we are focused on our trajectories, and we are extremely confident on our trajectories, Akash, to the 5% up to 2022, 2023. And I think that our first main driver is obviously our backlog of EUR 43,000,000,000 of backlog. It's, of course, a immense asset that we have. Looking ahead, as you say, whether on the mid long term post this 3 or 4 years, we can be above 5%. It's a bit early to say. Obviously, the dynamics we are seeing on Mainline and on Eurobank is accelerating. This is what I can say at this stage. So we'll see where the development will come. And the fact that we had, as a stat, as you know, 6% of passenger increase in mainline in Europe is extremely positive trend. So let's see how things are developing and unfolding in the months or years to come. Move to the next question. Our next question comes from Katie Self from Morgan Stanley. Good morning. I just have one question on the service activity. Could you remind us the current level of service in the backlog? And then in terms of the large contracts that are coming online over the next year or 2, what are those? And then what's the time line on when those will be feeding into revenue? So the dynamic of the services is a long term dynamic, Clari. So just to wrap up on this, we usually sign 10, 15, 20 years contracts, which means that, of course, the translation from backlog to services can be, in some cases, a bit long. A counter example is the services contract we've been signing on the UK recently, I was mentioning, which is a 7 years contract, which is more short term. Overall, in terms of backlog, we are probably in the range of €13,000,000,000 to €14,000,000,000 of backlog. So it's a bedrock of activities. But as you have seen in these first 9 months, we are building up on this backlog, which is, of course, will be the drivers for the growth moving forward. So we are, I would say, extremely pleased, extremely confident on this line of business and on the development of this line of business. And needless to say that in terms of margin, this is something which is extremely attractive. We'll move to the next question. Our next question comes from James Moore from Redburn. Please go ahead. Your line is open. Yes. Good morning, everyone. Hi, Laurent. Yes, Laurent. Yes, Laurent. Can I ask about your 3 large contracts, Prasa, Matapura and Amtrak? I mean, big picture, how is the ramp up going? Do you feel that you'll hit your previously planned delivery milestones by March? And specifically, if I can, on Matapura, where I think you had some oscillation issues. It looks to me that the new design of locomotive was cleared by the RDSO in mid November and cleared for dispatch from the factory. Is that correct? And do you feel that we've gone past the key risk point on India? Hello, James. Good morning to you. So we are thanks for your precise questions. And maybe I start with the Indian Iloco. So on e loco, we are very pleased indeed by the new design, which is being tested as we speak, tested with extremely positive results. So we are, I would say, in terms of homologation development certification fully on track. And as you say, it has been recognized and publicly announced by our customers. We had very good relationship with them. So our concentration loco in the weeks months to come to start the infill in service and the infill in the operation on this project. So all on track on Madepoa. On Praza, we have been delivering 29 trains. So we are in a ramp up mode in Ghibela in close to Johannesburg. So everything is on track as well. Customer is happy about the trains. And we are, I would say, putting our effort and energies on the ramp up, which is, I would say, delivered as expected. Amtrak is a flagship project for next year. So we are extremely happy to have seen the first prototype doing the first, I would say, the rollout of the first train and the first ride on the first train. So extremely positive about the start of this first prototype since December. We'll be starting the testing phase around the spring and in parallel prepare our ramp up with our factories in Ornell. So as well in Amtrak, the train is very well borne, which is extremely important. The first prototype are completed, almost completed for the second one. And we are adding to the test and ramp up preparation. So on all of these three contracts, honestly, we are fully in line with our expectation, and we are very pleased by the development. Next question? Thank you. And I'll take our next question from Alfred Glaser from that area, please? Good morning, Alfred. Thanks for your question. So on the external growth and M and A, so we are stable in our strategies, which is bolt on M and A, focused some specific areas like signaling and services. So I will not get into the details of it, but we are having, I would say, an active pipeline of opportunities, which I was reviewing yesterday again. And we are confident that we'll be able to get into some of these few acquisition in the months to come on the basis of our opportunity pipelines, which is well structured, well organized and the implementation of this M and A are proceeding, I would say, in the right direction. So I would say all on track on that, and I hope and expect that we'll be able to announce a few of these transactions, which are bolt on in the months to come. Our next question comes from Rohit Batraffary from AlphaValue. So I have a quick question on the sales growth. If I were to roughly calculate the number for Q3, it comes out to be around 2.5%, which marks an acceleration versus 3.2% achieved in H1. So can you please talk a bit about talk a bit more about that with respect to your full year target of revenue? Thank you. Yes. Thank you, Mauricio. Good morning to you. So looking ahead in terms of sales for the full year, in terms of the perspective for Q4, Moit, we see an acceleration of growth on rolling stock and signaling, which is fueled by our key project on the rolling stock ramp up, which I was mentioning, and as well by our signaling Alstom in Motion plan development. As I said, we'll see for the 4th quarter a stabilization on the Systems activities. So all in, I would say we confirm the growth perspectives we have on 2019 2020 in terms of sales as we outlined in the CMDs, and we are very confident to reach this target. Next question? Our next question is a follow-up from William Mackie from Kepler Cheuvreux. I just wanted to come back and touch on the business development in the Americas and also the relationship to services. I understand that there were a number of large service contracts which expired last year, and that is part of the reason why we've seen lower growth in services this year, but should expect an acceleration. However, when I look at Q4 in your Service business, there is a very high how should we think about the development of business in the Americas? How should we think about the development of business in the Americas as you transition to ramp up Amtrak? And will you be able to achieve growth in services in the Q4 of the year? So maybe I start, Will, to your question on services. So as a matter of fact, 2018 2019 comparison is impacted by some maintenance one off events, which has been putting some exceptional sales in 2018 2019. So this is explaining in the main the slight decrease of sales of services up to the 9 months, and we will have a similar trend for the full year. So this is more due to exceptional sales due to some specific AV renovation, AV maintenance events last year, which is putting us in this situation. So that's on the services side. On Americas, we definitely see an increase of activities in the quarters to come. We have definitively the AM track, as I was explaining, which will be ramping up, but you have as well the REM, the Montreal Metro, which will be ramping up as well in the 4th quarters. And of course, next year will be a very important increase for the business in the U. S. With both Amtrak, number 1, and the Metro of Montreal, definitely number 2. Just two last word on Americas. The market is still very positive, and we are active on a number of opportunities in Canada, in the U. S, both in terms of holding stock and signaling. So Davis as well, of course, interesting commercial opportunities in the in North America looking red. We'll move to the next question. We will now take a follow-up from James Moore from Redburn. Yes. Thanks for the follow-up. It was really just with respect to the margin development for the group in the second half. And I think you're up 60 bps in the first half. And I know that you've maintained your target for the year, but are there any different dynamics that you will point out between the levers that drive margin from currency to savings to mix to volume that make the shape of the second half development different to the first half? Is there anything that we should consider in that picture? Yes. Thank you, James, for this follow-up. Nothing too specific first one. As I say, pricing is good. Second half compared to the first one. As I say, pricing is good. Execution is on track. And in terms of, I would say, the savings and Alstom in Motion, we are as well on track with the dynamics we have in H1. So nothing specific on these subjects. Our next question is a follow-up from Achal Zeboy from Deutsche Bank. Yes. Thanks for the follow-up. This is actually on the cash flow side. In light of the pretty good order intake this quarter, so do you feel now more comfortable about the guidance for positive free cash flow this year? Or does it still really depend on additional down payments that you may receive or not receive by the end of March? So indeed, Gael, thanks for the follow-up. We are happy about the order intakes and the down payment we received into it. Need to consider, however, that there is some services elements in our order intake as well. So overall, no change compared to our perspective or our expectation in terms of this side of the equation on the cash. So the cash, I would say, for the H2 drivers are, of course, the remaining order intakes and associated down payments, but the other key driver is obviously the progress payments. And as I said, nothing to I would say we are fully confirming the perspective we had on these subjects. So I think we probably can wrap up the call. I would like to thank you for your attention. And just to make a conclusion, I will echo Henry quote in the press release. We definitively have a very positive green mobility and market momentum for the rail, which is making us extremely confident on the solidity of our growth in our core business. And the 2nd pillar, we reconfirm our Alstom in Motion strategy implementation. We are fully on track on this, and I think that this performance in the 3rd quarters is demonstrating that. So I thank you, all of you, for your attention. Our next financial event is now on the 12th May for the full year 2019 2020. I wish you all a very good day. Thank you very much. This concludes today's call. Thank you for your participation. You may now disconnect.