Q3 17/18 TU

Jan 17, 2018

Earnings release

Morning, ladies and gentlemen. First of all, happy New Year to all of you. Welcome to this conference call on orders and sales for the 1st 9 months of this fiscal year. We have 1st of all, as you have seen, we have achieved a good commercial performance over the 1st 9 months with another intake of €4,900,000,000 In the Q3, we booked €1,700,000,000 of orders. This includes notably the last 100 trains for Praza and some new Pendolino trains for NTV. I have to say that these orders were not previously announced, so it may have surprised some of you. But this is due to the customer requirements and we could not make any announcement before today. So I excuse myself for the ones which were we were surprised by these orders. In terms of sales, which are as you know the direct consequences of our large backlog. For the 1st 9 months, the sales amounted to €5,500,000,000 up 6% organically, which is totally in line with our midterm targets, which we are more than achieving year after year. If you look at deliveries of the quarter, as for last quarter, no particular change. The growth was mainly fueled by progress on the real metro and of high speed and regional trains in France as well as a large maintenance contract in the U. K. Overall, the backlog is extremely sound at €32,800,000,000 and gives a strong visibility for our future growth going forward. Of course, these results as you know are totally in line with our expectations and anticipation. And therefore, we are confirming today our 2020 objectives. A few events noticeable during the quarter. The first one in terms of M and A is the fact that we have improved, reinforced our partnership in our site in Kazakhstan. And we have agreed to acquire 25% stake in AKZ and we will have 75% of the company. The 25% remaining still being owned by our partner TMH from Russia. We have also announced the end of the self reporting with the DoD. You know that we had a 3 years period during which we had to regularly report to the DoG. This is now coming to an end which mean that the DoG is certified ISO 37,001 which is the anti bribery certification. An update on the Siemens Seltzerom transaction. Today, I would say the process is going according to our plan. We are still in the 1st phase of the process, if you may recall, which is a social phase where we still need to get the works concealed information and consultation. This is still being expected in the coming period. And after this information, after this phase, we'll be in a position to sign formally the BCA and then after that to formally file to the European Commission. So this is totally in line with what we announced back in September. Nothing new. As I said a number of times, it's a long process. We need to go step by step in this process. Nothing particular to mention. So as you have seen, I would say a good quarter in line with our operations, in line with our expectations. So we are continuing our journey toward our 2020 objectives and we are going and continuing our journey towards the long term future with our colleagues from Cement. With that, I think the last point is to say that our next call is planned on May 16. And of course, if there is any development in the meantime, we'll let you know all the developments on both on the cement system deal and on the rest of our operations. Thank you for your attention. Now I think we can take some questions and Marie Jose Donshu and myself will be happy to answer to any of your questions. Thank We will now take our first My first question is on pipeline of large orders and what should we expect in Q4 order intake given 1st 9 months book to bill is just below 90%? Thank you, Akash. I think I said a number of times that this year is not a year where you would have a large number of large orders. It's just a question of phasing of a certain number of large orders. It's not a question that we have lost. There have been no particular bad news during the get. There is one order that we are discussing, as you know, in France on what we call TGV Du Future, which is the next generation of very ASP train in France. We are discussing this one. We may have some news on large orders, but apart from this one, I don't see any orders which could be booked before the end of March because as you know in our business, if you get good news on being preferred bidder or something like that, you are not going to book it very soon. It takes always a few months to book it. So as expected, I would say not a lot of very large orders with the exception of this order, which I don't know whether it will come before or after the end of the quarter. I said a number of times with our backlog. I think this kind of pause in very large order is not something which I'm necessarily negative about because as you have seen our growth in sales, we need to absorb quarter after quarter this growth in sales and I think it's a nice way of globally manage the company. Thank you, sir. Our next question comes from Gael De Preux from Deutsche Bank. Please go ahead. Your line is open. Thanks very much for taking my questions. I have a couple, please. First of all, since we've seen a 2 point decline in the share of both services and signaling activities as a percentage of group sales so far in the year, would it be fair to assume that the mix will turn a bit negative for margins this year? And still in relation to the potential margin development, I mean, is there any guidance you'd like to give the potentially negative FX transaction impact for the second half of the year? So that's basically a combination of questions. And then perhaps the third one is in relation to the 2 contracts that we had not anticipated, in particular for the contract in Italy, would it be fair to assume relatively similar terms as the contract that you had been awarded last year with the same client? And do you also confirm that the size of the contract for the last one of the trends in South Africa is around €600,000,000 Thank you, again. On the first question, we're not giving, of course, guidance on the margin. What I can confirm, and this is in line with your assumptions, that in terms of drivers for margin expansion, the mix impact, if you step back and look at our journey since we have announced IFRS twenty 20, the mix impact is mostly behind us. So there may be some little positive, little negative, but we are more or less where we wanted to be. And in terms of share of the different activities, and yes, you can have systems growing faster and then the other ones going not as fast or having some ups and downs, But we are more or less where we want to be. So the first driver today is the impact of what we did in the 1st year, which is the complete renewal of our platforms, which are bringing competitiveness to our product. So that I can confirm. And I confirm that the results that we see are in line with our expectations, which allow us to confirm, as I said, our objective for 2020, which means that we are confident on this second driver or second engine to the margin expansion, which is not only the mix which was achieved more rapidly, but also the cost cutting initiatives and the competitiveness of our platform. In terms of transaction or translation impact, I guess you mean maybe, Maurices, I can say a word. I don't see any. So in the organic growth calculation, you can actually spot the scope adjustment, which comes from the acquisition of Nomad end of last year as well as some ForEx conversion effect, which is slightly negative coming from the evolution of the U. S. Dollar and the British pound. Frankly, no major things to highlight there. As you know, we have a systematic hedging policy, which means we are protected in our operations from currency fluctuation from the start of the contracts. And therefore, I do not expect any adverse effect in the P and L coming from the volatility of the currencies. Thank you. On your second question, yes, first it illustrates it's interesting because NTV is a private customer. So of course we don't have the same kind of open tender and so forth. It's a very partnerial if I may say approach with NTV where they are ordering a few trains and also it depends on our production facilities and so forth. So it's a very pragmatic approach which we can have with NTV. And yes, globally the order is of a similar nature and therefore order of magnitude in terms of price or value per trend and maintenance as the one we have booked in the past, so nothing particularly different. Similarly for PASA, it's the last 100 trends. And yes, in the main, the price per trend is the same with a little bit of differences due to the ForEx and so forth. But you can take as an assumption that it's more or less the same price per train as the ones we have booked during the first booking. Our next question comes from Martin Wilkie from Citi. It's Martin from Citi. I appreciate you've given some commentary on the structure or the timetable for the merger with Siemens. But just to understand if there's been any feedback from customers or any change in order patterns often when a merger is happening or change of control is happening, you can see either customers delaying orders or perhaps in this case, people feel that the marriage entity will be better and therefore you're seeing more orders. Just to give some sort of sense as to what customers are or how customers are reacting, sorry, to the merger announcements? No. Thank you. We have, as you can imagine, a large number of discussions with customers on the future positioning of the company. Clearly, the feedback is extremely positive from the customers and they value it as a possibility to have with them a very strong partner and also locally based. So they see that as an opportunity to have very close intimacy with the future company being present in a very, very large number of locations. In terms of order flow, it does not really change to be fair because all the customers have launched public tenders. In some cases, we are in competition with Cement. As you know, still the closing, we are competitors. In some cases, we are in competition because we are answering both of us to the same tender. It has not really changed the situation neither positively nor negatively because they are just following their process and we are answering to the tender and it's also very it's a very, I would say, mechanical and technical evaluation on that respect. So no particular impact in the meantime. Our next question comes from James Heckler from Barclays. Two brief questions. First of all, just to confirm with all these commodity movements that you are indeed fully hedged and we should really expect no impact on margins. And the second question is, is there anything else you can say about feedback from other stakeholders on the merger since we last spoke in, I guess, November? Maybe Marie Joseon, the first one. So on commodities, we have no particular, let's say, hedging policy in place. In fact, what we have embedded in our contract is more of escalation type of formulas since we have multiple year type of execution projects. And the indices broadly reflect, in fact, the evolution of the procurement price evolution. So far, basically, based on the experience we have, it's been a pretty efficient way to deal with the fluctuation of commodities in the market. And therefore, no particular adverse impact is expected from those fluctuations at this point. Yes. You should also keep in mind that commodities in our cost mix is relatively low. I mean, it's maybe 5% to 10% max. It's not we are not like, I don't know, steel pipe manufacturer or something like that? One commodity we are protected, let's say, in the escalation is also inflation of the labor Yes, labor, as probably the That can come in the various geographies where we operate. And not sure. It's appropriate to call it a commodity. On the various stakeholders in terms of the merger, we 1st, the first stakeholder is the internal stakeholder. And we made some survey internally within ActharM and within Cement. And in both companies, the overall backing of the transaction is more than 80%, where 80% of our employees or more depending on the geographies are supporting the are saying that the transaction is a good transaction for both companies. Of course, then you have discussions, as you probably have seen, particularly in France, about what will be the future of the different sites. And I mean, as I said, as we are in the social time of the process, we are discussing with our unions and they express some concern on some aspects. That's so customer we discussed, I mean I had a number of discussion with the customers, always positive discussions on the way forward and the way we structure. European Union on the antitrust, we have not yet started. We are just in the very early phase of describing our activities. So I cannot give you any feedback. I mean it's a very, very in-depth dialogue. But as I said, it's a very analytical dialogue. We cannot say that there is any conclusion so far. Globally, the side of the European Commission, is it positively in terms of bringing the European industry to a next step? So I would say there is a positive global environment from the stakeholders. There is no negative. And that being as you for those of you who are based in France, there was a political debate which is mostly behind us. Thank you. We will now proceed to our next question from James Moore from Redburn. Please go ahead, sir. Your line is open. Yes. Good morning, everyone. James at Redburn, maybe 3 if I could. On the free cash flow, I know you don't report at the quarter, but you mentioned at the first half that CapEx would increase in the second half. Did you mention it would roughly double? And is that still valid? And are there any considerations on working capital from the mix that you now see better in the second half that we should consider? The second question is really a broad one. Henri, perhaps for you, what's the rough percentage of management time split at the moment between the deal and the organic operation? And could you perhaps talk us through the current priorities and how they're going? And then lastly, maybe if you could expand a little on the issues with the French unions that need to be overcome. So probably first on free cash flow. So I confirm the CapEx evolution that we described in the at the end of the first semester. So there is an acceleration of the spending visible in both South Africa and India. For the greenfield factories, we are building up to execute the Prasa contract and the Madepora contract in India. Regarding working capital, as mentioned a few times, in fact, we are in a business with some volatility in the execution of the projects in terms of cash curve since over the lifetime of one project, we would have phases which would be pre funded and some phases that would be under funded. And therefore, there is this, let's say, variance that can occur during the execution of a project. Overall, of course, at the end of the contract, the margin equals the cash. So far, you've observed actually a pretty good evolution of the working capital. Let's say it is not a trend that I expect as a generic trend. The working capital should be pretty stable. I don't see any major evolution in the terms and conditions that we get on the new contracts compared to the ones that are in the portfolio. And therefore, let's say, nothing major to be expected in terms of trend there. Thank you, Andres. On your question, it's a good question and it's a very important question, your question on management and how we organize ourselves. It's clear that we have a dedicated team for the deal implementation to make sure that we are executing the deal properly. We need I mean, as I said, it's a long time. So we need to make sure that the management and the day to day operational management is fully focused on the execution of the contracts and the commercial momentum and so forth. At the same time, of course, we need progressively to project ourselves in the I would say, a small fraction of their time, which is I would say a small fraction of their time which is dedicated. And when I say the teams, it's at the management committee level, a small fraction of that time which is dedicated to the deal. For myself, of course, it's a little bit more than that. I'm more involved on the day to day. It's not a question to be to give you a personal flavor. It's not a question of number of hours, which I'm dedicating to the deal which at the end of the day remains relatively limited. It's more a question to make sure that in my head I'm combining the 2 dimensions. 1, the long term dimensions of the deal and how to set up the new company and also the short term dimension which is a day to day business which is continuing to run. This is classical for any managerial situation to have this kind of situation, particularly in the company such as ours, which is quite a compact company. But in these days, it's probably one of the challenges to make sure that we continue to sustain this. So I'm not overly concerned by the number of hours, but more I would say concern are attached to the balance in terms of management attention to the two aspects. In terms of unions, as you know, there have been some commitments taken by Siemens in front of the French state. And so it's more of a question of social organization and so forth. It's not particularly the French unions, it's the unions in general rather than a physical commitment. It's more the way we are going to be organized in the future and so forth. So no I would say no particular concern. Our next question comes from Daniela Costa from Goldman Sachs. I just wanted to ask you about sort of how do you think the U. S. Tax reform could potentially impact you, I guess, on the back of GE signaling? And so if you could comment on that, what that would do to the current perimeter, let's say, of Alstom and I guess also French tax reform, What would be the impact? So regarding the evolution So regarding the evolution of tax reforms actually in a number of countries, so we've looked into the U. S. New tax reform. You should remember probably U. S. Activity represents less than 10% of the revenues of Alstom. I think it's around 7% to be precise. So no let's say, no very significant impact expected at this point. And you may also recall that the tax assets that we have recorded are pretty limited. So no major impact actually expected there. Regarding France, in fact, we've got 2 measures going opposite cancellation of the tax on the dividends, which are being distributed within the same group. So we are getting some refunding on some dividends that were taxed upfront. And at the same time, there is a special tax actually this year to fund this first measure, which has a slightly adverse effect and offsets the first one. So there are also no major news, let's say, in terms of net impact on Alstom accounts. I'm still expecting, let's say, an effective tax rate pretty much in line with what we reported in the 1st semester, which is around 20 8%. Thank you. Next question? Thank you. Our next question comes from Christophe Caron from Societe Generale. Please go ahead, sir. Your line is open. Yes. Good morning, everybody. And just coming back to 2, if I may. Looking at IFRS rules, could you give us some view on any potential change, more particularly related to IFRS 15, if I'm correct? Looking at France also, do you have any impact on the CECL merger? This is the first question on accountancy. 2nd one is in terms of orders as you discussed with the first question, could you come back on the potential tenders you may have in the coming quarters? Is there any in India? Is there any in Canada? Is there any in other countries that you may be concerned with? And particularly also in U. K. And in France with the evolution of the Grand Paris financing steps? On the tenders, I mean, the pipeline of tenders remains quite strong, including in large tenders. So the next year will be probably more rich in terms of large orders. There are some in Canada. You know that there is a very large tender, as you said, in Montreal for the line which is crossing completely Montreal, which is a very large tanky tender. The tenders on the Grand Paris is still going on. To be fair, what has been announced recently was known by everybody in, I would say, in the small world of the mobility in Paris. And therefore, the tenders were issued according to this new situation. I mean it's not a surprise that the budget of the Grand Paris has increased a lot and so forth. And the timing also was not a surprise. So all that is continuing. There are some tenders in Asia. Yes, there is there are some tenders in India, as you said. Both as we said, Mumbai would be a city where there will be a number of standards in the coming period. We have in Australia. We're in Singapore. So it's a large variety of standard. We have a very large standard in India where we are participating as well. So it's I'm not sure we are still in the Middle East. I mean we'll see whether the oil price surge has a positive impact on some of the projects. As you know, we said that in the past that project Saudi Arabia have been postponed. We are still working in Dubai. There is a just by memory, we have also a large tender in Dubai for the Al Maktoum project, which is the link between the 2 airports, the current airport and the new airport, which has just been launched. So the pipeline is quite rich at that stage. So regarding IFRS 15, we are currently actually assessing the impact on the backlog and on the flows of the year. The work is in progress. And as you could see, in the first half, we mainly give, let's say, a qualitative indication. Clearly, for Alstom, it represents a change in the revenue recognition method since up till 1st April of 2018. We are trading and recognizing our revenue based on technical milestones, which are basically events defined together with the customer that reflect, let's say, the physical progress of our projects. Tomorrow, we'll be recognizing revenue based on the cost that we incur, which may have a different speed actually compared to the physical progress of our contracts. So we are reprocessing the portfolio. It's pretty extensive exercise since we've got, let's say, more than 700 live contracts across the company. We'll be ready in terms of work in progress. Let's say, we'll be ready to share with you some figures probably at the closing of the financial year accounts, so which means mid May. Thank you. Next question? On CTO, sorry. Yes. On the tax impact, actually no major adverse effect as we speak. As I said, we have some positives and negatives coming from the various tax reforms. Overall, pretty balanced final situation regarding the tax net tax charge for the company. We have now, sir, our last question from Jeffrey Demendez from Kepler. Please go ahead, sir. Your line is open. Yes. Hello. Good morning. I just have one question regarding your participation in the Kazakh JV. Could you from 50% to 75%. How big this is, what it represents? And just maybe the rationale of this investment and your view on the region there, please? Yes. I think it's a very I mean, it's a very positive evolution of our partnership in Kazakhstan. The 25% that we are acquiring is today in the hand of KTZ, the Kazakh railway. We have developed our site, joint venture, which is now exporting from Kazakh to Azerbaijan, for example. So we want to make it as a hub for locomotives and potentially other products for the region. So I think in that sense, it was good that we take the full control of the joint venture, which will allow us also to remove some of the barrier and legal barriers, which were imposed upon us in terms of labor, employment, for example, and way we are managing a number of things due to the fact that we were in a kind of joint venture with a state owned company of Kazakhstan. So we'll be more flexible and more agile in the way we are managing the company. And at the same time, there is a privatization program in Kazakhstan. So it was also for them a good opportunity to implement this privatization program. So there was a good window of opportunity to discuss ourselves now that it's quite mature or making it a kind of normal site, if I may say, in the Alstom footprint and for them to implement their privatization So that's how we came. It's not huge amounts which are at stake, but it's more important from an operational standpoint. That was our last question. So at this point, I'd like to hand the call back to Okay. Thank you very much. Thank you, all of you. Again, I wish all of you a happy New Year. Hopefully, we'll get continue to get in touch and in contact during this year. And our next event is on May 16. Thanks a lot. Have a nice