H1 18/19

Nov 14, 2018

Welcome to the Alstom Conference Call. I'd now like to hand the call over to Mr. Henri Boubard Lafarge. Sir, please go ahead. Thank you. Good morning, ladies and gentlemen. Welcome to our traditional half year results conference call. I'll we'll take over a presentation together with Laurent Martinez, our CFO, and then we'll be at your disposal for any questions. So let's start by a short introduction. In a snapshot, the results of the first half are very sound on all fronts, I must say. First, there has been a very strong commercial momentum. I mean, you know it. You have seen TGV future. We had a solid operational performance, a solid execution of our backlog, which has enabled us to reach €4,000,000,000 of sales, in line with our expectations and in line with our yearly guidance. And the adjusted EBIT stands at €285,000,000 to a margin of 7.1%, which is slightly above the guidance. And frankly, which probably you have noticed or not that we have slightly changed the wording of our guidance for the full year from up to 7% to around 7%, taking into account the fact that we are already above this 7% trademark. Free cash flow positive at €172,000,000 As you know, this is a very volatile number. But again, during this first half, we have stabilized our working capital, which is, as you know, our long term target. The net debt is at €280,000,000 stable because the free cash flow has been used for the payment of the dividends, and we would be happy about that, as well as the acquisition of additional shares in TMH. The equity stands at €4,000,000,000 Traditionally, every 2 years, we have an update of the market done by UNIFI, the Association of Hell Manufacturers. So this has been released in September. So you probably all know the numbers. A few takeaways. It has been confirmed over the recent past and it's going to be confirmed in the coming years as well that our business is relatively independent from any macroeconomic cycle. And the traffic the passenger traffic, whether we talk about mainline or urban, are growing steadily and actually faster for urban, as we know, than for mainline, but still steadily year after year. Only freight is impacted by the economic growth, and you see a more cyclical evolution of the traffic in freight. But the good news is that over the last years, we have seen a rebound after a downturn in 2015, 2016. This is being translated into regular growth of our markets, both geographically and by product. I mean, what is noticeable is that all regions are growing and all product lines are growing. In average, the growth is 2.6%, which I think is for capital good industry is a very sound growth. And as you know, our target is to overachieve this growth rate, which we have done over the last years. And know that over the last year the last 5 years, we have grown by more than 5% per year, and which is more or less doubling the growth rate of the industry. By region or by product line, we expect a rebound in Middle East, Africa after some slow years in 2015, 2017 due to the oil crisis, as you know. This is a slow rebound that we expect it to come. Asia Pacific mainly influenced by China and Southeast Asia, and we have a continuous growth. But again, so called mature markets in North America or in Europe are continuing to grow on the back of environmental concern and general movement of the mobility towards shared mobility and electrical mobility. In terms of growth rates by product, there's nothing particular to say except that it's a very even growth rate across all product lines. The trend towards turnkey is confirmed. We have still a very large number of projects, which come in the form of turnkey packages, including rolling stock, signaling, infrastructure. This is particularly true in Middle East Africa, and it's clear that we expect a rebound in Middle East Africa of this kind of projects. And it's true in Latin America. We also expect a rebound. But it's also true in Asia, depending on the countries. And for example, in Taiwan, we are talking about system projects as well. In Southeast Asia, there are some system projects. T and T projects in these countries as well. So just coming back on our 2020 strategy. So you remember the 4 pillars the 5 pillars of the 2020 strategy, starting with the customer focus, the solutions, the innovation, the operational excellence and something on people. So in terms of customer organization, I mean, you remember that we have put in place an organization, which is a geographical organization in order to face the customers with necessary means to answer to his requests. So coming the consequence of that is the continuous growth of the company. And again, this first half has been particularly buoyant in terms of orders intake at €7,100,000,000 I think this is a record high level for 6 months period, leading to a record high level of backlog of €38,100,000,000 as well. In terms of geographies, of course, 6 months is always influenced easily by large orders. So it's not a surprise that Europe is has a high share of the order intake. This is again related to the very high speed. And it's not a surprise that rolling stock is also taking the lion's share of the orders intake also related to the ASP. But I will comment some more orders next slide. If you look at the largest order, which have been booked during this half year, so again, in Canada and in France, but we have also some noticeable order, even if they are smaller, like in Germany for the tram because it has been a very long time since Alstom had not the German market for tram. So this is a new market for us. In Norway, there have been a large resignalling of the Norwegian network, and we have been awarded all onboard equipment for this network. On Italy, we continue to record some new pandalino, and this is on the back of an excellent relationship with NTV, the private operator in Italy. And this is a very specific relationship because this is a private operator. So it's a very partnership type of approach. We have been recording new locomotives in Morocco, so continuing our extension in Middle East Africa, even though, as I said, the Middle East market is probably much slower than it used to be. In Asia Pacific, our first entry in Mumbai with Line 3 of Mumbai, very important order for us. We have been very successful in India. We are present in all metros in India. The 8 metros which are today running in India, we are present. But it's self recognized that in Mumbai, we were not as present as in the other one. So with this Line 3, we make a significant entry on this market on Mumbai. And as you probably know, there have been there will be 42 cities which have projects of metros in India, so more to come. Taiwan, as I said, we have been awarded a system project in Taiwan. This is as well a new not totally a new market for us. We have also a tram project in Kaohsiung as well close to Taipei. So we have some activities in Taiwan, but it has been a long time since we are not the metro. Australia, we are continuing to record some orders, particularly in Sydney, where we have been awarded a few years ago the metro, and these are extension of the metro and the maintenance of the metros. Just a focus on the various speed trend. This is I mean, we have discussed a lot about it. I mean, this is not something which is very usual. Last time, we developed a new various speed trends. This was 30 years ago actually in the '90s. In 1996, actually, we have delivered the first train of the last generation. So this is an innovative concept where we have upgraded all the technological bricks in order to have a trend which is much more efficient, both from an economic standpoint, from an operational standpoint and from an environmental standpoint. So I think it's an extremely nice partnership as well with SNCF. It has been done in a total partnership with SNCF. So I think it's a good example and a good success. Our classical indicators, nothing has really changed this half year. Rolling stock continues to represent more or less 40%. Here, we took 43%. That we have a target of 40%. So we are in the ballpark. Service is growing nicely, signaling after 1 year of difficulties 1 year ago in terms of order intake, we are rebounding. And system, of course, is growing also very fast on the back of Dubai and Riyadh in particular. So you see that on the next slide. Out of the €4,000,000,000 So we have a growth large growth in rolling stock on the back of, I would say, the regional and high speed trends in Europe and also Prada, which is ramping up. System, it was the same last year. We announced it Clearly, Dubai, Lusail as well and Riyadh are in heavy phase of project execution. Service is growing quite a lot again, particularly based on the U. K. And in Italy. But the order intake, it's fair to say that order intake of service is very good this half year and will continue to be very good during the year. So we have in the recent years a book to bill each year of 1.5, 1.6 of service, which is an excellent book to bill. A few nice pictures of some of our projects. So just to confirm that we are progressing, if there was any doubt. So the first trends of Dubai 2020 are being manufactured in Cateau Vite. It will be frankly the 2020 project, which is being delivered, is a very, very important project. And it has been it will be a world record in terms of delays or speed of execution of such a project in the world. Lusail, we are also delivering the triumphs in Qatar. R and D innovation, extremely important. We I mean, all as I've said in the past, it's this improved profitability cannot be on the expense of a decrease on R and D. On the contrary, we should continue to at least spend in percentage the same amount and clearly in absolute value and increased amount in R and D. We have now completed the full renewal of our rolling stock platforms. We have started with the tram and the metall and regional trends, and now we are with very high speed. So all that is now being done. And we are expanding these platforms by extending the different possibilities and different sub, if I may call them like that, sub platforms. For example, the Frankfurt tram is in steel and not in aluminum or it's a classical place for Aston. So we are progressively expanding the platform that we have renewed. We continue to invest heavily in predictive maintenance and in all what is smart mobility, our digital programs, and this is paying off. We have a huge investment in these areas. Just 2 innovations, which have been launched during this first half. The first one, and you probably have heard about it, which is the ILINT. It's interesting because it boosts, I would say, targeting the environmental performance of the trends, of course, with hydrogen trends. It's also something which is not purely digital. I mean, it's one of our core technology, which is attraction. And I it's important to say that we are not we are investing a lot in digital, but we are also investing in our core technologies. And this is hydrogen traction, but we are also investing in the classical traction systems. We have on I would say on the other part of the spectrum, we are also launching Station 1. This is the 1st online marketplace for the railway sector. There was no there is none Today, no marketplace dedicated to the railway sector for operators in the world to be able to purchase parts, components to all type of suppliers. And this is a dedicated technical part marketplace. So it's not officially launched, but it will be officially launched in the coming weeks now. But we have announced it's launched recently at Innotrend, which is our fair yearly fair, every 2 years in Berlin. In terms of EBIT, so 7.1% margin. Of course, if you compare with last year, IFRS restated for IFRS 9 and 15%, you see a huge increase of our EBIT. And on the back of the huge volume increase as compared to last year under IFRS 15 again. But fundamentally, our action plans are paying off, and we continue to improve the execution of our programs and our projects. The classical leaders, which we have launched a few years ago. On sourcing, for example, we have changed the way we interact with our suppliers by moving more and more towards frame contracts, towards partnerships for innovation, also towards global sourcing, benefiting from our global footprint. Now we have 50% of our purchase, which are done in low cost countries. So we have improved significantly our global vision of the sourcing. One particular aspect, it was key to Alstom's strategy, which is the Indian ramp up because India is not only here to serve the Indian market. It's successful to serve the Indian market as being seen with the contract in Mumbai, but it's also a strong base to serve the world. And in 18 months, we have doubled the number of employees in India from 1800 to 3,500. And today, the largest engineering centers, both for signaling and for rolling stock, are best in Bangalore. So this has proved to be a very, very successful strategy from an export standpoint. As you probably know, we're exporting from India to CNF or the metro, we're exporting from India to Montreal as well for the metro. And we're exporting a lot of traction from coimbatore to the rest of the world. So it's this Indian strategy, which we have launched a few years ago, is extremely successful. Here as well in terms of project execution, just to highlight some of our key execution and key milestones being achieved. At Praza, we have inaugurated the factory officially. So now it's in full production, delivering the trends. So now it's question of ramp up of the supply chain and flows, but I would say so far so good. It's, of course, a very complex project. It's, of course, a new country, a lot of challenges, but it's progressing very well. And on Riyadh as well, progressing very well. All the trends are now have now been delivered in Riyadh. So they are now tested in order to be ready for the service operational service. So thank you. Now I will hand over to Laurent, who will explain to you more of the financial results. So good morning, everyone, and we'd be very pleased to meet some of you in the days and weeks to come. So starting with a short introduction, all of the numbers that we are presenting now are under IFRS 9 and 15 standards. So going straight below the adjusted EBIT, we had, as you see, €34,000,000 of floating charges, driven by the footprint rationalization, notably in the UK and Brazil. On the other charges, we are included amortization of the intangible assets and integration costs related to the business combinations, such as, as I said, GC, Yaning and Nomad, which we reduced to €7,000,000 And we have the transaction costs related to the Siemens Halston deal, which amounted this half year for €36,000,000 In terms of financial results, we decreased that to €46,000,000 compared to the €53,000,000 of last year, fully consistent with the decrease in our gross financial debt, resulting, as you know, from the repayments of our €272,000,000 bonds in October 2017. And of course, going forward, our financial results should continue to decrease as outstanding burns will be paid out. We recorded as well an income tax charges of €12,000,000 for our first half, corresponding to an effective tax rate of 7%. This effective tax rate has been lower due to a deferred tax asset recognized on previous tax losses carry forward and as well some reversal of tax provision. If we exclude these items, our effective tax rate would have reached 26%, which is very much what we expect to be our normalized level, which is closer to 25 percent going forward. Finally, the share in the net income from equity investments amounted €261,000,000 related to our energy GVs, €99,000,000 and as well as a good performance of TMH with €49,000,000 So in complement, we have, as you see, recorded an exceptional net income from discontinued operation of 2.40 €5,000,000 leading us to full net income group share at €563,000,000 in our first half. Moving to the free cash flow. And you know that this is a key priority for us as a management, benefiting from our impact of our cash focus program. €172,000,000 together with a change of working cap limited to €10,000,000 However, as Henri mentioned, potential volatility volatilities on the periods remains. Free cash flow has been also impacted by some phasing on the financial cash out and as well on the transformation CapEx, which I will detail you. Now moving to next page. So on the CapEx side of the equation, we invested €85,000,000 intangible assets in order to continue our modernization of our existing facilities and strengthen our global footprint. In terms of transformation CapEx, we spent €52,000,000 while we continue the construction of manufacturing of sites, notably in India, in South Africa, where our Gjibela factories was inaugurated end of October, and you see nice pictures on this slide and as well as the extension of Ornell in the U. S. So altogether, at the end of September 2018, our accumulated amount of transformation CapEx amounted to 2.12 €1,000,000 out of our €300,000,000 that we have been communicated so far. Moving to the liquidity and the gross debt. We have a gross cash in hand of €1,800,000,000 at the end of September 2018. In additions of, I would say, it's available €1,400,000,000 of cash and equivalents. We have, as before, a full €400,000,000 revolving credit facilities maturing in June 2022, which is, of course, fully undrawn. On the second October, you know that we have completed the transfer of all our interest in the 3 energy JVs, Renewable Grid and Nuclears, to General Electrics. And we received total cash payment of €2,600,000,000 as planned. Looking at outstanding bonds, which I mentioned before, €1,300,000,000 outstanding end of September. The maturity of October 2018 has been paid for sure. And our next one are around €300,000,000 in July 2019. Moving to the net debt, which has been reaching €280,000,000 in September 2018 compared to 2 55,000,000 end of March 2017, driven by our positive free cash flow evolution of €172,000,000 the acquisition of 1 136,000,000 percent mainly related to the TMH investment of €115,000,000 capital increase of €5,000,000 dividends payment of €84,000,000 and ForEx and other for 2018. That leads us to the equity bridge with equity reaching €4,000,000,000 in September 2018 from the €3,500,000,000 in March 2018. So the key driver is obviously the net income €560,000,000 some limited variation on pension of €16,000,000 dividend pays to the shareholders €78,000,000 share based payments of 16,000,000 and some other evolution of €25,000,000 which includes some €32,000,000 of currency translation adjustments and €60,000,000 fair value adjustment on the LocoTech investment. Thank you for your attention. I'll go back now to Henri for the outlook. Thank you, Laurent. So in terms of outlook, I said, again, we of course, we confirm our guidance for this year with sales around €8,000,000,000 And we slightly upgraded the adjusted EBIT guidance from up to 7% to around 7% to allow us, if we want to do better than 7%. In the medium term, of course, we want to continue to outperform the market growth as we have done over the last consistently year after year, continue to improve the profitability. And again, cash generation is a key focus. And as you know, for us, it translates into a positive evolution of our working capital or at least a stability of our working capital, which is a key target for the company. Of course, in the meantime, as you know, we are building this fantastic project with Cement to create a leader in world transportation, and this is progressing very satisfactorily. The project, I mean, you know this schedule. So we are on time and we are in the discussion of antitrust clearances. We have 27 jurisdictions and it's progressing extremely well worldwide. Of course, it's one of the most important one is Europe and we are progressing as well with Europe. Don't just in case you want to ask some questions, don't expect me to answer to any detailed question on these discussions. These are ongoing discussions, and we are still very confident to close this deal during the first half of twenty nineteen. So I would say that all milestones are being reached exactly in line with our expectations. Now we'll move to the Q and A. Is there any questions? The next first question is coming from Gael Debre calling from Deutsche Bank. The question I have relates to the margin performance. I mean, if we look at last year's performance restated under IFRS 15, it seems that the H2 revenue was about 20% higher than H1 at close to €4,000,000,000 but with a similar margin of 5.4%. So now if I take your guidance for the year, you expect sales of about €8,000,000,000 so implicitly €4,000,000,000 again for H2. So that would be stable year on year. So I guess my question is what are going to be the margin drivers in the second half of the year if sales are indeed only flattish? Thank you. Yes, Kate. On this one, of course, this recruitment of IFRS 16, I mean, as we have said, is not totally even in the year. So there have been some clearly some quarter which are more impacted by the IFRS 16 Retreatment than others. And it, of course, blurs a little bit the comparison year on year. It's true that during the first half, the volume has played a great role. During the second half, you could have a mix between the volume and improved gross margin. Thank you, sir. We'll now go to Akash Gupta calling from JPMorgan. Please go ahead. Yes. Hi, good morning. I have a question on antitrust. I know you are not going to say much, but the question I have is that whenever we see headlines on European Commission concern on the deal. Can you address that only through offering certain divestments? Or can you also address them through changing your market practice or like, let's say, behavior in a sense? Again, I'm not going to enter into the discussions that we have with the European Commission. I think we are working very constructively with the European Commission. 1st, to explain the rationale of the deal and what the impact of the deal on the market and the positive impact that the deal will have on the market and for our customers because we do that for our customers and employees and ultimately for the passengers. In terms of discussions, frankly, on the details of the discussions, we will come back to you when discussions are finalized. We'll now go to Martin Wilkie of Citi. It's Martin from Citi. Just coming back to the point on IFRS 15 and the phasing. I think when you first talked about the transition to the new standards, you mentioned that some revenue that had been previously recorded would essentially get booked again just because of the way that the milestones now fall and you have more coming at the end of the project. Given that you've under IFRS 15, you're now recording some of that later. Is the bulk of that benefit coming this fiscal year? So obviously, we're trying to work out how much of the year on year change is an accounting effect and how much of it is a genuine uplift in your business. But if you could just sort of quantify how much of that the sort of the earnings that you will record once again under IFRS 15 falls this year and how much of it comes over the coming years? Maybe Laurent will take this one. Just to remind a couple of numbers. So in terms of H1, indeed, the restatement of the revenues last year has moved from 3.7 percent IAS 11 percent to 3.3 on IFRS 15. On a full year basis, the restatement is around €600,000,000 from €7,900,000,000 to 7.3 €1,000,000,000 So to your point, Martin, in terms of the phasing, this is a very complex equation because this has led to a number of restatements on our full portfolio of projects. So it's fair to say that the phasing will be on a couple of years and not only on the 2018, 2019 exercise? Also, to your point, there will be no there is no catch up impact. I mean, it's a backlog impact. So some of the very few sales some of the sales, sorry, which have been recorded last year under the older norms have been recorded this year. So there is elements that you said, but other sales which should have been recorded under the old form this year would actually be recorded the year after. So there is a kind of backlog impact more than just a switch point, 1 year to another. We'll now go to Jonathan Mallanchuk calling from Exane BNP Paribas. Just really related to that last one. So first of all, just to be clear, is IFRS restatement distorting your organic sales growth in H1? And if not, just to understand what's happened. So you reported 17% organic sales growth in Q1, I think. So I guess the underlying rate must have accelerated to something perhaps north of 25% in Q2. And if this is a genuine non distorted organic number that we've had in H1, what happens next year? I mean, you're guiding to a target of kind of 5% per annum. You've done 23% in the first half of next year. In FY 2020 and H1, I know the order book supports growth. But given this comp, are we likely to see organic sales growth declines in H1 of next year? I think it's a tricky question that you are asking because we tend to think that sales growth is a physical indicator, where it's not totally a physical indicator. So the change in accounting puts a spotlight on different, I would say, activities of Astom. Under the old norms, we were counting the delivery to the customers. Under the new norms, we are counting the production of Astom. So of course, there is a link between the 2, but not necessarily at the same speed and for the same contract. So it's one was, again, the milestone. So it was really the physical delivery to the customer. So you could have big large bumps because of large milestones when you are delivering a fleet to a customer or something like that. Whereas in the new norm, you are counting your production hours and your supplies. So in a sense, the new norm is more related to the actual growth of the production and therefore, a good image of the ramp up of the company, while the old one was more in line with, I would say, the way project we have structured. Now that we are in this new world, I would say, Clearly, the new norm shows that this year, there is a huge increase of activity within the company, which is in line with previous order intake and backlog. Next year, we should not see again the same kind of growth rate, and we should come back to the guidance specific. I would say, you should forget about the rate statement. It's specific. I would say, if you forget about the rate statements, if you just live in the IFRS 16 world, it's a little bit specific with a huge production. You would have had, I would say, lower growth rates under the old norm or under the new norms if you were to come back a few years ago and the ramp up would have been. Because when you do and that's what I explained by Laurent, we have a huge ramp up of activities. The 1st year of projects is usually dedicated to engineering and therefore produces some sales under the old norms, but very little sales under the new norms. So if you were to project Aston trajectory as it has been experienced over the last years, it would have been under the new norms a much lower ramp up. And this year, as you can see, a very strong ramp up. The old norms, because it gave more importance to the milestones of engineering than the new norms, has actually delivered to some results a much smoother ramp up. This is what explains the difference. We'll now move to Mr. James Moore calling from Redburn. Please go ahead, sir. Thanks for taking my question. It's on free cash flow. But can I just step back to that last one and say, did you look at what the margin and organic sales growth would have done in the first half under the old accounting? And if you did, could you give us a rough flavor? But my question is on the free cash flow. Your transformation CapEx, do you expect to hit the EUR 300,000,000 this fiscal year? And on financial cash outflows, you mentioned phasing. And the cash tax in the first half seemed quite high. Could you help us a little bit with how you see financial cash and cash tax for the full year? On the margin, we did not entertain at all any, I would say, what could be the result of H1 'eighteen, 'nineteen under IAS 11. We did not get into this analysis at all, James. So to your point on free cash flow, which is, as I said, a key focus of the management. Related to the transformation CapEx, we have spent so far EUR 212,000,000 as I said. We are very much on track in terms of industrial progress. So overall, I would say that this transformation CapEx project is fully on track. To your point on the financial cash out for and the cash tax cash out for the second half. Indeed, then there will be some phasing, and we are expecting a slight, I would say, acceleration of the cash out for the financial cash out in the second half. While on the tax cash out, on the contrary, we are expecting positive phasing, I. E, less cash out in the second half versus the first half. Thank you, Laurent. Any questions? Thank you, Mr. Now we'll go to Mr. Alfred Glasner calling you from ODDO. I just wanted to ask you about the profit evolution. You posted an extremely strong margin growth in H1 and you slightly revised up the full year guidance. What's your view on the margin going forward into next year and maybe the year after? How do you view your potential for further margin improvement? Yes, on the outlook for the year, as I said, that we have upgraded our guidance from up to around. So we are already at 7.1%. So we are already in this around 7% territory. So that gives you the answer to what we expect for the second half. On the long on the medium term, we continue to target an improvement of the profitability as we have recorded in the past years. And frankly, we have that not it's not theory. It's on the back of the improved margin contained in our backlog. We continue to record orders with improving margin month after month or quarter after quarter. And not only the volume of backlog is at a record high, but as well the margin included in this backlog. So it sustained a gradual improvement of our margin. But the gross margin as you know, the gross margin of our backlog, it takes time to and we discussed that in the past. For example, some of this margin upgrade is due to service maintenance, which is, as I said, growing nicely. But of course, orders in maintenance are translated into sales very gradually, so it takes time for the gross margin to improve. Then of course, you have the volume impact and the cost structure, which is directly impacting the yearly margins. Next question. We'll go now to Alok Katre calling again from Societe from my side. Perhaps could you help us understand a bit more on how you organized in your businesses within across regions and particularly in case of the signaling unit. Just wondered if that's split cleanly at the country level or is it a bit more closely aligned or intertwined with the other units? And I'm just thinking about factory, sales organization, the supply chain, etcetera, so signaling versus the rest. Yes and no. We have the basic product development and platform development is managed in different units, not necessarily sites. I mean, we can share a building or that, of course, is different. It's engineering capabilities, so it can be in the same building, but it's usually managed differently with a different manager. However, there are a lot of commonalities with infrastructure in installation, management of suppliers and some of the groundwork. So some of our units, when you talk about sort of one site with a manager, are dedicated both to signaling and to infrastructure. It can happen, particularly again in units, which are not responsible for product development, but which are responsible for the installation of our product on the ground. So we have here and there this so we can report the sales, but it's true that in terms of some of other indicators, it can be mixed locally. Okay. I think there is no other questions. Okay. So if there is no other questions, just to thank all of you for your attention. Just last point. If you look at the agenda first, we'll talk again on January 17 for the Q3 orders and sales and May 7 for the full year results. As you can see on the contact part of the slide, there have been slight changes. So Julien is still here to serve you, of course. But Selma has decided to work for a grocery shop. So she will move, and we will welcome Julie Morel. I will take over beginning of December. Thank you, everybody, and talk to you very soon. Bye bye. Ladies and gentlemen, that will conclude today's conference.