Ladies and gentlemen, welcome to the Alstom conference call. We'll now hand over to Laurent Martinez. Sir, please go ahead.
Good morning, ladies and gentlemen. I would like to wish you first a very happy New Year, and to welcome you to our conference call on orders and sales for the first nine months of the fiscal year 2019-2020, with, of course, as usual, a specific focus on the third quarter. I'm together here with Julie Mathieu, and we welcome today Claire Le Pelletier, who has joined us in the team. Claire, welcome. For the first nine months of 2019-2020, Alstom recorded EUR 8.2 billion order intake, compared to EUR 10.5 billion last year, which is, as you well remember, was a result of our two major contracts of last year, the new TGV and the Montreal Metro. During this third quarter, we achieved excellent commercial performance, orders reaching EUR 3.6 billion above last year's quarter.
These orders leads to a new record high backlog of EUR 43 billion on the 31st of December 2019, which is obviously providing us an excellent visibility on the future sales. This dynamic orders intake occurs 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 2050, as you know, with a specific target on the transport sectors, which should decrease by 90% its emission on rail, Public transport are obviously expected to be instrumental to this transition. In Germany, the number of domestic flights declined last years, while Dutch urban long-distance transport has increased for the fifth years in a row, consistent with the overall trend of European for mainline.
Occurs as well in a context where, as you know, the German government adopted a climate package with EUR 20 billion 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 second growth engine after main lines, we see mega cities accelerating investment into public transport, such as in India or in Singapore. Back to Alstom, where our orders were particularly important in Services and Signalling, and this fully in line with our Alstom in Motion strategy, as well as in Europe and Asia-Pacific. Let me pinpoint a few important contracts this quarters, both in terms of size and technology. 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 EUR 800 million.
In Australia, Alstom was chosen to manufacture driverless trains and a digital signaling system for the Sydney Metro extension. Both of these contracts strengthen our position in the country as a market leader for the supply of railway technologies. In the U.K., we add as well a flagship contract to refurbish and maintain high-speed trains, Pendolinos, for the Avanti West Coast line for EUR 755 million within a seven-year contract. It includes an upgrade program of the 56 Pendolinos, which is believed to be the biggest train upgrade ever undertaken in the U.K. This overall will focus on onboard facilities, and Alstom will maintain this fleet alongside a new train fleet recently ordered from Hitachi. In France, as you know, Alstom has been awarded, very proud of that, the renewal and automation of Marseille Metro for EUR 430 million.
On top of providing a modern automated signaling system, these new metros will be environmental friendly, with 96% recoverability at the end of their lifespan, 25% less energy consumption than current metros. On the automation side, Alstom will provide its Urbalis 400 solution, already deployed on 1,500 kilometers of metro lines worldwide. As you may know, Alstom is equipping 25% of the CBTC metro automation in service over the world. 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 Île-de-France Mobilités and RATP. This confirmed part of this contract covers the deliveries of 44 trains, the frame contract is much larger, with a total of up to 410 trains.
Moving to the sales side, for the first nine months of 2019-2020, we reached EUR 6.2 billion, out of which EUR 2.1 billion traded in the last quarters. This represents 3% in actual and 2% organic growth year-on-year, 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 a 11% growth year-on-year. On Signalling, we had a sales increase of 16%. All of this 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 contracts 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 quarters, starting with, again, Australia, with Sydney Light Rail, which commenced revenue services, while Alstom is providing the full integrated light rail systems. The tram of Sydney has been equipped with the latest innovative power solutions, including wire-free APS, ground-based supply, and Hesop energy recovery substation. Léman Express, with Alstom Coradia Polyvalent trains and onboard ERTMS digital solutions, which will enable cross-border operations. This Léman Express is the Europe largest cross-border rail network in operation, with 45 stations and 230 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.
This is, I can tell you, a significant milestone in Denmark countrywide program 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 passengers. To wrap up on the key messages, we have achieved an excellent commercial momentum this quarters in the context of an extremely very dynamic market, and this leading to a new record backlog of EUR 43 billion. Our sales are definitely consistent with the dynamic we had communicated during our Capital Markets Day, i.e., a ramp-up of our rolling stock and Signalings 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 Markets Days concerning the midterm as well as this current year 2019-2020.
The 2019-2020 fiscal years will 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 project 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 generation of free cash flow. Up to March 2023, Alstom targets an average 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 finally, a dividend policies with a payout ratio between 25%-35%.
Alstom will conduct disciplined investment and external growth transaction policies to support in development and to create value. Thank you for your attention on this introduction, and I suggest that we switch now to the Q&A session. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question, and please note that only one question is allowed. I will now take our first question from Benjamin Szekeres from Goldman Sachs. Please go ahead. Your line is open.
Hi. Good morning. 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, maybe then about working capital. I appreciate you have mentioned that the evolution will impact free cash flow, I believe on a previous call you have said that the working capital ramp-up for rolling stock project should continue in the second half. 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, also how you see this evolving in the forthcoming fiscal year.
Okay. Thank you, Benjamin, for your question. On the free cash flow, to start with a high-level statement, no change, no evolution since the Capital Markets Day end of June for this year, and no change, in terms of what we communicated for H1. Just to give you some more colors on this, so 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, Prasa, Amtrak, or e-Loco. On this basis, and as well on the basis, as you say, 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.
To wrap up again, absolutely no change in terms of where we stood end of June and where we stood early November after our H1 results. We confirm free cash flow generation for this year.
Our next question comes from Martin Wilkie from Citi.
Thank you. Yes, it's 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 rail. I appreciate that can take some time to come through, but just wonder 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. The market, I have to say, is extremely buoyant overall. I want to reiterate the two main engines of this market growth, which is, number one, on the mainline side, and Europe including Germany, is of course a key part of it. As well on the urban side with, I would say, all the major projects from the mega cities. I quoted India, Singapore, Paris, Washington, and many others. 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. 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.
Looking ahead, we have definitively opportunities in Spain on the regional trains with as well a very active momentum on this market. In France with the replacement of the RER, which will be a massive contract for next years. In APAC, just to complete the round of the world, some interesting opportunities to develop in India and in Taiwan. All together, extremely positive market. Maybe we move to the next question.
Our next question comes from Gael de-Bray from Deutsche Bank.
Thanks. Good morning, everybody. 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 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.
Good morning, Gael. Thanks for your question. We are extremely pleased by the signaling development. As you know, all, this is one of our two main axes of development of Alstom in Motion together with services. First, I would say the key background or the key drivers of this growth in terms of market. Number one is mainline digitalization in Europe. The Denmark case I was quoting is the perfect example. We are moving from legacy to digital interlocking and the rollout of ERTMS. That is one key axis driver. Second one is on the urban side, where we are uplifting the urban signaling systems, called CBTCs, to increase capacity of the existing infrastructures.
On the back of these two axes, which is definitively within the core of our Signalling strategies, we 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 extremely interesting, but as well in France on the mainline Paris-Lyon to give you a couple of examples. Definitively, we see a positive trend on the Signalling. We are having still ahead of us an acceleration of growth in the last quarters that we are seeing on Signalling. To your last point, Gael, this is not at all in detriment of the pricing of the margin, and we are extremely pleased as well by the margin on order intake on Signalling. Next question.
Our next question comes from William Mackie from Kepler Cheuvreux.
Yes. Good morning. Thanks for taking the question. Good morning to Laurent and all. Could I just try to understand the developments within Systems? I know that we are working through the end of a number of orders, particularly in the Middle East. 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? 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.
Thank you, Will, for your question. On the systems side, the dynamic is, of course, fully expected, and I would say ballistic. The dynamic is based on, number one, the completion of our major systems contracts. Panama Metro, 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. As well, Riyadh, which is as well getting to a completion phase. On this basis, with the fourth quarter, we show stabilization of the systems sales activities from the comparison to the third 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 Metro, which will be ramping up, of course, ahead. We have, of course, having tenders activities on systems.
I want to quote the metro of Abidjan, which has been signed on the 23rd of 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.
Hi, good morning, Laurent. I have a longer-term question. 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 the growth in trains should be better than what we knew before. 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 we look at growth in, let's say, 3-5 years out, then is it fair to say that there could be upside to mid-single digit growth that you have targeted in the past and what you are targeting in current plan?
Akash, thanks for your question. Good morning to you. We are focused on our trajectories, and we are extremely confident on our trajectories, Akash, to the 5%, up to 2022, 2023. I think that our first main driver is obviously our backlog of EUR 43 billion. Backlog is, of course, an immense asset that we have. Looking ahead, as you say, whether on the mid, long term post these three or four years, we can be above 5% is a bit early to say. Obviously, the dynamics we are seeing on mainline and on urban is accelerating. This is what I can say at this stage. We'll see where the development will come. The fact that we had, as a stat, as you know, 6% of passenger increase in mainline in Europe, is extremely positive trend.
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? In terms of the large contracts that are coming online over the next year or two, what are those and kind of what's the timeline on when those will be feeding into revenue?
The dynamic of the services is a long-term dynamic, Katie. Just to wrap up on this, we usually sign 10, 15, 20-year 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 U.K. recently, I was mentioning, and which is a seven-year contract, which is more short-term. Overall, in terms of backlog, we are probably in the range of EUR 13 billion to EUR 14 billion of backlog. It's a bedrock of activities. As you have seen in these first nine months, we are building up on this backlog, which of course will be the driver for the growth moving forward. We are, I would say, extremely pleased, extremely confident on this line of business, and on the development of this line of business.
Needless to say that in terms of margin, this is something which is extremely attractive. 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.
Yeah, Laurent, can I ask about your three large contracts, Prasa, Madhepura, and Amtrak? Big picture, how is the ramp-up going? Do you feel that you'll hit your previously planned delivery milestones by March? Specifically, if I can, on Madhepura, 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? Do you feel that we've gone past the key risk point on India?
Hello, James. Good morning to you. Thanks for your precise questions. Maybe I start with the Indian e-locomotive. On e-locomotive, we are very pleased indeed by the new design, which is being tested as we speak, tested with extremely positive results. We are, I would say, in terms of homologation development certification, fully on track. As you say, it has been recognized and publicly announced by our customers. We have a very good relationship with them. Our concentration now is on the preparation, James, on the ramp-up for e-locomotive. We are expecting to deliver the first loco in the weeks and months to come to start the on-train service and on-train operation on this project. All on track on Madhepura. On Prasa, we have been delivering 29 trains. We are in a ramp-up mode in Gqeberha, close to Johannesburg.
Everything is on track as well. Customer is happy about the trains. We are, I would say, putting our effort and energies on the ramp-up, which is, I would say, delivered as expected. Finally, on Amtrak. Amtrak is a flagship project for next year. We are extremely happy to have seen the first prototype doing the first, I would say, the roll-up of the first train and the first ride on the first train. Extremely positive about the start of this first prototype since December. We'll be starting the testing phase around the spring. In parallel, prepare our ramp-up with our factories in Hornell. As well in Amtrak, the train is very well born, which is extremely important. The first two prototype are completed, almost completed for the second one. We are heading to the test and ramp-up preparation.
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. As a reminder, if you wish to ask a question, that is star 1 on your telephone keypad. Please note that only 1 question is allowed. I take our next question from Alfred Glaser of ODDO BHF.
Yes, good morning. I just want to ask about the comment on external growth and M&A. Could you update us on your plans and development in that area, please?
Good morning, Alfred. Thanks for your question. On the external growth and M&A, we are stable in our strategies, which is bolt-on M&A focused on some specific areas like signaling and services. I will not get into the details of it, Alfred, but we are having, I would say, an active pipeline of opportunities, which I was reviewing yesterday again. 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&A are proceeding, I would say, in the right direction. 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. Next question.
Our next question comes from Rohit Bapatra from AlphaValue.
Hi, good morning, everyone. 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 a deceleration versus 3.2% achieved in H1. Can you please talk a bit more about that with respect to your full-year target of revenue? Thank you.
Yeah. Thank you, Rohit. Good morning to you. Looking ahead in terms of sales for the full year, in terms of the perspective for Q4, Rohit, 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 see for the fourth quarter a stabilization on the systems activities. All in, I would say we confirm the growth perspectives we have on 2019, 2020 in terms of sales as we outline 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.
Yes. Thank you very much for the time. 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 comparative base. Also, when I think about Americas and this transition to prepare for the Amtrak business, I know that you're still in the process of ramping up. Just to be very specific, when we think about the fourth quarter of this year or the full year in 2020, how should we think about the development of business in the Americas, as you transition to ramp up Amtrak?
Will you be able to achieve growth in Services in the fourth quarter of the year?
Maybe I start, Will, to your question on Services. 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. This is explaining, in the main, the slight decrease of sales of Services up to the nine months, and we will have a similar trend for the full year. This is more due to an exceptional sales due to some specific AV renovation, AV maintenance events last year, which is putting us in this situation. That's on the Services side. On Americas, we definitively see an increase of activities in the quarters to come. We have definitively the Amtrak, as I was explaining, which will be ramping up. You have as well the REM, the Montreal Metro, which will be ramping up as well in the fourth quarters.
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, definitively number 2. Just to 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 rolling stock and signaling. There is as well, of course, interesting commercial opportunities in North America looking ahead. 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 basis points in the first half, and I know that you've maintained your target for the year. Are there any different dynamics that you would 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 into this. We are very confident on the margin development. No specific dynamic in the second half compared to the first one. As I say, pricing is good. Execution is on track. In terms of, I would say, the savings and Alstom in Motion, we are as well on track with the dynamics we had in H1. Nothing specific on these subjects. To the next question.
Our next question is a follow-up from Gael de-Bray 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, 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?
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. Overall, no change compared to our perspective or our expectation in terms of this side of the equation on the cash. The cash, I would say, for the H2 drivers are, of course, the remaining order intakes and associated down payments. The other key driver is obviously the progress payments. As I said, we are fully confirming the perspective we had on these subjects. I think we probably can wrap up the call. Would like to thank you for your attention.
Just to make a conclusion, I will echo and 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. The second pillar, we reconfirm our Alstom in Motion strategy implementation. We are fully on track on to this, and I think that this performance on the third quarters is demonstrating that. I thank you, all of you, for your attention. Our next financial event is now on the 12th of 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.