Q1 19/20 TU

Jul 18, 2019

Earnings release

Ladies and gentlemen, welcome to the Alstom Conference Call. I now hand over to Laurent Martinez. Sir, please go ahead. So good morning, ladies and gentlemen. Welcome to our conference call on order and sales for the Q1 of 'nineteen-twenty. I'm together with Julie Morel, our Head of Investor Relations and Julie Amineau here in Paris. So during the 1st quarters, we have been recording €1,600,000,000 of orders. This compares to EUR 2,600,000,000 for the same period last year, which included, as you know, the large contract on the light metro system for Montreal. On these quarters, we recorded a number of major commercial successes, including a major contract for 27 regional Hydrogen Coradia Island with associated maintenance for the region Essen in Germany, 32 DT5 Metro for Hamburg in Germany as well and 16 additional Coradia trains for the bourguin French Conte region and 5 for the region Sud in France. We are starting the year with the sales level close to 2 point €1,000,000,000 up 2% compared to the Q1 of 'eighteen, 'nineteen, with a decrease in Systems and balanced by a positive growth of 9% for each signaling and rolling stock. Our sales were mainly fueled this quarter by our system project, for sure, in the Middle East, the rolling stock contract in Europe, mainly on the regional train, Coradia product in France, Germany, Italy and Netherland and the start of our ramp up on Amtrak in the U. S. And Praza in South Africa. With €40,000,000,000 backlog as of end of June, we have huge and strong visibility of our future sales moving forward. So talking about the main recent business events in the past quarters. We are proud to have our Cine Northwest Metro line entered in revenue services with an outstanding success. I have to say 1,000,000 commuters traveling the line within the 1st 2 weeks. Particularly proud of this as it's one of the most important transport project for Australia and the 1st fully automated metro in the countries. In addition, these 22 6 car train sets were built from our Indian industrial footprint. 2nd key event is related to our new generation Coradia Stream with the entering passenger services in Italy of our POP generations, which is equally a key event for this new product family. We confirm as well the commercial success of our innovative products with several orders over the quarters for a total of 85 Aptis E buses in Paris, Grenoble and La Rochelle and the major 27 hydrogen highlanes orders with RMV in Germany for the renewal of diesel trains. Those flagship orders, I have to say, demonstrate one of our strengths in terms of smart and green innovation, which is, as you know, one of the key axis of our Alstom in Motion strategic plan. In June 2019, after becoming the first French companies to obtain our Afaq ISO 37,001 anti bribery certification for France and Europe in 2017, followed as well by Asia Pacific in 2018. We have obtained certification on our countries in operations in the region of North America, Middle East and Africa and Latin America. Finally, as you all know, we have been launching our new strategic plan, Alstom in Motion, on June 24 during our Capital Market Day. And we are confirming the outlook that we have given during this Capital Market Day, which I remind briefly, average annual growth rate of sales around 5% over the period 'nineteen, 'twenty to 'twenty two, 'twenty three. Adjusted EBIT margin up to around 9% in 'twenty two, 'twenty three. Conversion from net income to free cash flow above 80% by 'twenty two, 'twenty three and dividend payout ratios between 25% 35%. Looking more at the short term in 'nineteen, 'twenty will be a year of stabilization of growth after a year of 'eighteen, 'nineteen, which has been exceptional, both in terms of sales and profitability. In 'nineteen, 'twenty, our business cycle and with the finalization of our major system contract 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 generation of free cash flow. So that's it for my short introduction. Thank you for your attention, and I suggest we are now switching to our Q and A session. Up to you. Thank you. We'll now take our first question from Benjamin Siqueiros from Goldman Sachs. Please go ahead. Your line is open. I would like to ask about the outlook for large orders that you see for the remaining of the year and perhaps beyond. Just kind of just remind us in terms of which areas you might be expecting to receive orders, for example, Athens, Bogota? But if you could kind of give us an update, that would be very helpful. Thank you, Benjamin, for your questions. So taking the chance to give you a bit of an outlook on the market. So we see a very positive momentum on the market. Definitively, Europe is the key engine as we speak, but as well North America and Australia and India. If I zoom on Europe, we see major opportunities in the pipeline in France but as well in Italy and in Germany. We see as well definitively some opportunities on the urban market in North America, which and on the suburban as well, which will come for some of the tenders in 'nineteen, 'twenty but as well in 'twenty, 'twenty one. So on the softer side, Middle East and Latin America are still, I would say, on the recovery phase. Overall, we see an overall buoyant tender pipeline, as I see it today. And in parallel, you want to underline that we have high visibility, thanks to our EUR 40,000,000,000 backlog. Thank you. We will now take our next question from Alastair Leslie from Societe Generale. Please go ahead. Your line is open. Thank you. Hi. Good morning to you all. I was just wondering if you could help refine the full year sales guidance because sales growth lower than the average midterm objective still leaves a 4 percentage point plus range. I imagine a tougher comp in the second quarter, at least on an organic basis, could leave you closer to flattish at the H1 stage. And it looks like consensus has just shy of 4% reported growth for the full year. I was just wondering if that's a level that you're comfortable with. Thank you, Alastair, for your question. So as you know, we don't provide precise guidance for this year. But let me give you some colors on the momentum of our various product line. So as you know, we have definitively headwinds on our systems Middle East projects, which are nearing completion, like Riyadh and Dubai, to name some of them. We see as well, however, a positive dynamics and momentum on the rolling stock and signaling. And you will see an acceleration of this as well in the quarters to come on these specific lines of business. So to the year end outlook, I will not give precise numbers, But there will be these two dynamics, continuous, I would say, headwinds on the systems, but an acceleration on our rolling stock projects in particular. So overall, maybe to complete, we see a sales growth overall for the full year for sure. Next question? Next question comes from Gael De Bray from Deutsche Bank. The question I have is just to well, I guess, I want to check the full year guidance again. When you guide for a rate of margin improvement that will be lower than the average increase expected over the next 4 years, just wanted to double check that it does not take into account the Casco effect and that the increase will indeed be purely organic. And then when, if that's the case and that increase is sort of going to be 10 or 20 bps, when do you expect to make up for the shortfall visavis2023 average target? I mean, do you anticipate a pickup in margins next year? Or will it be rather back end loaded? Yes. Thanks, Gael, for the good questions. So just in terms of technicalities, the starting point of our margin expansion, as I indicated in our Alstom in Motion, is obviously our 'eighteen, 'nineteen I just including cash flow, 7.5%. So this is our floor, and we'll be building from there. And we are looking, just to be very clear as well, to develop and to grow from this 7.5 percent, including in 'nineteen, 'twenty. What we are seeing is that the growth will not be purely proportional over the 4 years, but it will be, I would say, a function of the progressive implementation of our Alstom in Motion plan in terms of efficiencies but as well in terms of mix with the acceleration on signaling and services together with the volume impact. So to cut it short, 7.5% is our reference for 'eighteen, 'nineteen. We'll be building from that. We'll be growing in 'nineteen, 'twenty and there will be a progressive acceleration along the next 4 years. We'll now take our next question from Simon Toineensson from Berenberg Bank. A question just on the Service and Signaling business. Looking at the order numbers for both areas, they seem below sort of if I take a sort of 4 quarter average, knowing that you had obviously some very large service orders last year. Do you think there is upside to the service and signaling orders from the level here for the rest of the year? And maybe just a follow-up on the services side. We always keep asking about large orders, which are often more rolling stock related. But if you're looking at your pipeline for services the next sort of 12 months, is there a chance that we could see a sizable pickup here similar to maybe in a quarter or so we've seen last year where you had some very strong service orders? Thank you, Simon, for your questions. So just to reflect first on our orders for services last year. We had some exceptional orders related to Riyadh operation and maintenance and around as well our Montreal. So we had some, I would say, exceptional jumbo orders in 'eighteen, 'nineteen. So in terms of market momentum for Services for 'nineteen, 'twenty, we still have, I would say, a very big positive momentum in Europe but as well in North America. So we'll be continuing to build into this. I do not expect, as we speak, some major service free cash flow that we should be aware of? Thank you, Akash. So the short answer is no. So the elaborated answer is that the drivers remain the same. So on the industrial CapEx, I just want to underline industrial CapEx, we are still in the 2% to 2.5% of our sales and which will be, I would say, slowing down to 2% in the outer years. On the working capital, we will be impacted, as I explained, by the ramp up of our rolling stock contracts. Down payment is, I would say, stable in our perspectives. And of course, there will be this EBIT evolution year on year. We fully participate to the free cash flow. So nothing new at cash compared to our exchange back on June 24. We'll now take our We'll now take our next question from William Mackey from Kepler Cheuvreux. I'd just like to ask a question about Services. Could you perhaps highlight why there was a decline in Services, which feels slightly counterintuitive in the Q1 revenues and how we should expect Services to develop throughout the rest of the year? Thank you, Will, to underline this point. So indeed, we have year on year a slight decrease on Services Q1 'nineteen 'twenty compared to Q1 'eighteen 'nineteen. So two elements into it. The number 1 is some of our renovation contracts in the U. S. Which are nearing completion. So it is phasing of projects. 2nd one as well, we had in 'eighteen, 'nineteen some one off maintenance overall events in our U. K. Services contract. So you know the way the services contracts are working. You have sort of base activities. And each 7, 15 years, you have major overall events which are providing a peak of activities. And this is what happens in the first half of 'eighteen, 'nineteen, which is explaining the difference with this year. So moving forward, our services strategy is healthy. We are looking, I would say, on positive evolution. So there will be a recovery during the year on this, of course, on this trend. And moving forward, you see that we have, I would say, thanks to our 13 backlog, €1,000,000,000 backlog, a lot of positive visibility and positive momentum on this line of activity. Next question? We'll now take a follow-up question from Gael Debre from Deutsche Bank. Please go ahead. Yes. I'd like to better understand the magnitude of the potential impact of the inventory increase you flagged for the full year. And well, I know it's a very difficult exercise, but I mean, do you still expect to generate a free cash flow in your mind that should be higher than last year or actually below than a year ago? Yes. Kees, thanks for your question. So we are talking about cash generation in 'nineteen, 'twenty. We are not talking about cash usage. So this is definitively the spirit we are in as a management team. There is, obviously, to your point of inventories, some ballistic evolution, which is just linked to the deliveries and the ramp up of our rolling stock project. But our free cash flow as well is, of course, impacted by some usual short term volatilities, which are more related to down payments and progress payments. So I will not answer precisely your question, but these are the key drivers and the direction we are taking. And as you know, cash is a major management focus. We'll continue to put full priorities on this cash generation target for 'nineteen, 'twenty and for the auto use with our above 80% target. Next question? Next question comes from William Mackie from Kepler Cheuvreux. I just wanted to follow-up with a question relating to Brazil and Latin America more generally. Without going into the merits for or against any ruling relating to the previous activities of management in Brazil, I specifically wanted to ask, what is the situation in Brazil? Are you able to bid for contracts? Or will you need to rightsize the operations in Brazil given that it looks like you've been frozen out of the market for a period of, I think, 5 years? Yes. William, thanks to come back on this subject so that I give you more colors on these topics. So first, we just received literally yesterday afternoon as a formal decision. So we are looking at it carefully. We'll analyze that with our general counsels and our lawyers. And we'll be assessing, of course, William, all the possible administrative appeals and judicial options that we have in hand to protect the interest of the company. So in terms just to reassure everyone, in terms of our impact on our P and L, should we have to take into account the liabilities, we are talking about a very minimal impact based on our 'eighteen, 'nineteen account P and L wise. So to your point in terms of the tendering activities, this will be part definitely of our detailed analysis, so I which I don't have in hand as we speak. Overall, what I can say is that our Brazil activities represent 0.8% of our sales. So you see it's very marginal in our big scheme of things. And what we know as well is that the Brazilian market is very soft. So this is not something which is a booming market we are rolling on overall. So we'll be looking at analyzing all of this, taking all the pieces and options that we have in hand to move ahead on this. And at the same time, of course, we have very stringent policies internally so that these type of subjects, which are away from the past, will not happen again for sure. Next question? We'll take our next question from Benjamin Skechers from Goldman Sachs. I just wanted to ask a question about your footprint in India, specifically in terms of what we should expect there in terms of you moving your resource there and the employee base? I know you have from the CMD side, I can see 4,000 employees there currently. And I can also see you're targeting to have 30% of engineering in the country. But I'm just trying to tie the ends up and kind of get to a number sort of in terms of the increase in employees that you foresee in the country on your behalf? Benjamin, for your question. So you know that India is definitively a major asset for Alstom. This is something which is a differentiator as well if I compare to our competitors. So as you rightly remind, 4,000 people as we speak. If I take only the signaling engineers, which is definitely a key differentiator as well, we are moving from 12.50 people in Bangalore, and we want to move to 2,000 people. So you see that there is the major growth that we are targeting on the engineering side. If I look at the 2 type of activities on the manufacturing, we want to basically move from 700,000 hours of manufacturing to more than 2,000,000 hours. So we are basically treating our activities based on our 2 factories of 3 City and Poimbatore. And again, I want to make a link with the Cine Metro that we just entered in service has been built from 3 cities. So you see that it is getting traction in terms of operation. And in terms of engineering, we have 3,000,000 hours. Twothree of that is signaling, and we want to uplift that to 5,000,000 hours. So you see that in the next years, we are developing big time India. And as a matter of fact, we have an executive committee next week in India with full leadership team to work with our Indian leadership team on this ramp up moving forward. Next question? There are no further questions. At this stage, I will turn the call back to the host for any additional or closing remarks. Yes. Thank you very much for your attention, ladies and gentlemen. So if I summarize in 2 key points, our first quarter is consistent with our Alstom in Motion trajectories. And there is, I would say, 2 key orders, Aptis and Hydrogen Train, which reflects our innovation strategy. And the deliveries of Sydney and our core Asia stream are evidencing our momentum on the delivery side. The second key point is we are more than ever after the our Capital Market Day focusing on our key business priorities, which is execution on tenders and execution on projects. So I wish you all a nice summer. Our next financial event, Julie, will be on the 6th November 2018 for our H1 'nineteen-twenty results. Thank you very much. Nice summer to everyone. Bye bye. Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.