H1 17/18

Nov 14, 2017

Welcome to the Alstom Conference Call. Today's conference is being recorded. I now hand over to Mr. Henri Poupar Lafarge. Sir, please go ahead. Thank you. Good morning, ladies and gentlemen. Welcome to our half year results conference call. I'll start with the usual agenda. We start with the introduction, then we go over our strategy and our results. And then I will make a short update on Siemens Alstom project. And of course, we will open the floor for questions and answer. As a summary, as you have seen from our press release and our results, the first half of twenty seventeen, twenty eighteen has been extremely good in terms of performance, in terms of operational performance and totally in line with our objectives of 2020. If you take the order intake, the order intake has been of €3,200,000,000 of course, lower than last year, but we didn't record this year any extremely large order. And that's why the small and midsize orders have summed up to this number, which is a good number if you take into account the fact that there was no large order in the first half. Sales were up 5% organically or facially at $3,800,000,000 again, in line with our long term objective of 5% gross annual. The EBIT has been up 16% at €231,000,000 The margin adjusted EBIT margin has been at 6.2%. Here as well, a strong progression as compared to last year, in line with our objectives. What was quite remarkable is the free cash flow of €227,000,000 clearly outlining the good performance of our project as well as the results of our cash focus program and the emphasis that we are putting on cash within the company. This is leading to a reduction of our net debt, which is now at €101,000,000 confirming the very strong balance sheet that we have and equity of €3,800,000,000 So we come back on Siemens sales term. It's early days. As you know, it's a long process, and things are going exactly in line with our expectations. However, it takes a lot of time, as you know. Just going back to the different items of our P and L. Focusing on our strategy of 2020. You remember the 5 pillars of this strategy: customer focused organization, the solutions, innovations, operational excellence and diverse and entrepreneurial people. This strategy has been set for a number of years. And year after year, we confirm the relevance of this strategy and the results, which are totally in line, not only in terms of headlines, but also in their details, totally in line with the implementation of such a strategy. So the first one is definitely to take advantage of the growing market worldwide. And as you can see, we have now a very balanced order intake levels in the different regions as well as in the different product lines. So out of the €3,200,000,000 of orders, you have now a good balance between the different product lines, where rolling stock is now representing less than half of the activity, as we know usually, classically now in our portfolio and the rest being split between the system services and signaling. As I said, there was no large order this half year and therefore no large system orders. So the level of orders for system was relatively small as compared to last year. You can look at the split of the backlog, which is, as you have seen, 45% in Europe, now the split of the backlog, 16% in Asia 17% in Americas 22% in Middle East Africa. So a situation which is much more balanced than a few years ago. And if you look at the sales, by the way now, we are around 50% in Europe. So the rebalancing of our portfolio, taking advantage of the growth in the, I would say, outside Europe has occurred. Some examples of orders, which again, we had a very nice activity in North America, particularly in Canada, on the back of a stronger success of our Citalis Spirit, both in Ottawa and in Toronto, but also in Los Angeles. So good first half for North America. Some activities in Europe, particularly on regional trends. We did book the first order in sub Saharan Africa in Senegal of regional trends. And this is one of the last regions, sub Saharan Africa, where we have digital presence, and we are increasing our presence with a number of potential orders. And of course, in Asia, we're continuing to assess in Asia. Not coming back on Canada. So you've seen 2 contracts for almost 100 light rail vehicles, our newly introduced Italy space. It's a good story because I think this is a product that we have introduced a few years ago, only 4, 5 years ago on the market. And this has not thanks to, I would say, the good execution of the Ottawa project, we were able to book a project in Toronto. In terms of solutions, so as said now for a number of years, we intend to decrease the relative weight of holding stock and increase the weight of the different activities or the different other activities. Of course, quarter by quarter, it may depend on the execution of some projects. But today, rolling stock is now 43% of the total of our activity. Service, 19%, signaling, 16% and system, 22%. There was a high growth of sales in system during the first half on the back of the execution of both Riyadh and Dubai. On rolling stock, it has been relatively stable situation. We have started to trade the regional projects that we have booked in Europe. Amtrak is going on the right direction. We'll come back to that. And we have delivered some trams in Algeria. Signaling and service have slightly decreased on the back notably of their presence in the U. K. And the adverse ForEx impact in the U. K. R and D. This is the innovation, one of the stronger, stronger of our strategic plan. As you know, we have launched 5 years ago the complete renewal of our product range in rolling stock starting by the tram, and we have seen the good success in North America, but the metro with smart Metropolis, the regional trends. And now the high speed and very high speed, notably with the contract in the U. S, but also the so called Tejverdu Future in France. This is now well ongoing. So we are continuing to develop, and we are spending a lot of money on the very high speed and on regional trends. And of course, we have ramped down our spend on the tram and metro now that we have renewed the range. Continuing to grow our smart mobility programs and in signaling, but not only in different digitalization of the mobility. And we have also quite a lot of money on predictive maintenance. Some, I would say, headlines. The first one with the hydrogen trend, and we have signed November 9, so a few days ago, the first commercial success for the Coradia ILIN after the development of the hydrogen trend. And quite noticeable is that we have received the Innovation Award at the Bus World. The Bus World is equivalent of Innotrends, so it's the World Fair for buses, which happens to be in Belgium. And we received the Innovation Award for Artis, which means that we have really brought to the market the breakthrough concept. Operational excellence. I think it's always the same story. I mean, day after day, we are taking advantage of all our initiatives in terms of cost cutting in terms of project management, in terms of portfolio improvement. Also, this half year, there is strong growth of system, which is good, but not, I would say, in terms of margin, not as good as signaling or service. So the mix has not played such a large role. But having said that, we continue to take advantage of all our initiatives and the good execution of our portfolio. In terms of initiatives, just a few of them, as you know. We still continue to work a lot with our suppliers. Of course, as you know, twothree of what we sell has been bought. So we need to clearly improve day after day the partnership with our suppliers. And we have created what we call an alliance, and now we have 20% of our supplies being purchased through the alliance, which is really innovating and innovating together in terms of product, but also innovating together in terms of ways of working. We have increased the low labor cost countries purchase to 40 5%. We were closer to 40% last time. So year after year, we are increasing that. Of course, because we are growing globally, so we take advantage of this growth, but also we take advantage of this footprint to serve other regions. One example of that is India. We are continuing to grow our activity in India. We are now more than 3,000 people in India. Bangalore as an engineering site is becoming the largest engineering site for signaling, but also and this is new, the largest engineering site for Rolling Stock as well. So nice continuing nice story in India. And as you can see on the picture, and I'll come back to that, the Madepora factory is now being built. So coming back to this very large contract that you probably follow. On PRAZA, not a lot to say. As we have delivered all our trains from Brazil, as you can see on the picture, revenue operation has started. So all that is going well. The factory is almost completed. Actually, even though it's not fully completed, we have started to work in the factory of Dibella. So things are moving in line with our schedule. Clearly, on India, I think we have done excellent work on India. The contract was booked 2 years ago more or less. And within 2 years, we have managed to build a new factory in Madepura. And we are producing the 1st locomotive, which will go out of the locomotive by February 2018. And I think this is an extremely good achievement of all our teams worldwide who have been able to produce in such a record time, actually much ahead of schedule in terms of Indian production, the first commodity. Amtrak, it's early days for Amtrak. We have started to freeze the design and delivery, which is always very important, which has been rebuilt in October. So far, so good. I think we are progressing quite well on the engineering of the trend. But of course, it's early days in terms of project execution. So clearly, this solid project execution has allowed us to grasp the fruits of our cost cutting measures, which have not been hampered by any deterioration of the margin of our backlog. On the contrary, the margin in the backlog continues to improve quarter after quarter. Just on a more general topic. We have been very proud to have been certified ISO 3701, which is anti bribery management system. I think we are the 1st French company to have been certified ISO 3701, and I think it shows all the efforts and all the discipline that we have put in place in the company on these topics. Similarly, we have been selected for the Dojo Sustainability Index for the 7th year consecutive year. And we are now part of the top 5%. So it means that we are also progressing on sustainability, clearly, as being seen by the CDP Scores B. Clearly, our as you know, Istom is fully dedicated to a sustainable development, both because our products per se, Rail is the most environmentally friendly mode of transportation, but also internally, we are improving our way of working in order to decrease the energy and the carbon footprint of our production. I will now hand over to Marie Jose for the financial results. Good morning, everyone. So I'll take you through the other financial indicators. So moving straight to the items below the adjusted EBIT line in the P and L. You'll see we have sorry for that. We have restructuring charges of just below €20,000,000 for the semester, driven by footprint rationalization, notably in the U. K. And in Brazil. The other charges include the amortization of intangible assets and integration costs, which are progressively reducing compared to last year. This led to a substantial increase of our EBIT at €194,000,000 compared to the €168,000,000 last year. The financial result has decreased to €51,000,000 compared to €71,000,000 last year for the same period. And this comes directly out of the reduction of the gross financial debt after we repaid the bond maturing last February for close to €500,000,000 The group also recorded a tax charge of €40,000,000 corresponding to an effective tax rate of 28% compared to 33% last year. I actually consider this rate should be sustainable in the future. The share in net income of equity investors amounted to €110,000,000 This is made of, let's say, 2 main items. First, the reevaluated options on the energy alliances for €80,000,000 and the improved performance of our non controlling interest in Casko in China and TMH in Russia, which together contributed €30,000,000 in terms of P and L for the semester. So this leads us to a net result, a net income of €230,000,000 for the first half 'thirteen'eighteen. If we look at the cash flow generation, of course, the operating performance increasing has supported the good cash flow generated over the period as well as 2 main other items, the positive evolution of the working capital, which benefits, of course, from the company wide efforts on the cash focused program that continues to bear its fruits as well as from the favorable cash profile of a number of contracts, which have allowed us to decrease the construction contract in progress in our balance sheet. The second item is the staging of or the phasing of the CapEx, where you actually recognize there is a ramp up of our CapEx, in particular, including the strategic CapEx we are making in South Africa and in India. And definitely, I expect more to come in the second half. So all this actually contributed to this high profit cash generation over the period of €227,000,000 for the 1st semester. Looking a little bit more in detail into the CapEx, as I mentioned before. So we invested €80,000,000 over the semester, which is twice as much as last year. And this included, let's say, the normative €30,000,000 that we have on a recurring basis as well as a €50,000,000 transformation CapEx, mainly, as I said, in Prasa and in South Africa as well as in Madepura in India. We also recently inaugurated Witness, our biggest and most sophisticated train modernization center in the U. K, which allows us to do some renovation on the fleet in this market. We are now at €100,000,000 spent out of the €300,000,000 transformation CapEx over the 3 years, and I definitely expect a ramp up on the second half year. Looking at the liquidity and gross debt, the company enjoys a sound liquidity position, over €2,000,000,000 which includes the cash available as well as the €400,000,000 revolving credit facility, which is, of course, fully undrawn. And on top, we continue to enjoy the flexibility with the put options we have on the energy JVs. You can see the gross debt continues to be reduced over time. It sits now at 1,500,000,000 euros at end of September 'seventeen. And we have actually reimbursed the €272,000,000 bond maturing in October last month. The next maturity will come next October and should follow the same path. Looking at the evolution of the net debt as a consequence, it's been reduced €100,000,000 over the semester. So moving from a €200,000,000 position at end of March to now €100,000,000 It benefits, of course, from the positive cash flow generation over the period. And basically, this cash generation allows to offset the cash we spend on the IT separation costs we have from with GE as well as the dividend payments that were performed in June this year. We have a slight capital increase that you can see on the chart of €30,000,000 including Indian Railways contribution to Madepora for €11,000,000 as well as €20,000,000 stock option subscription. So this, of course, has positively contributed on the reduction of the net debt. And we have similarly actually enjoyed an increase in the equity level of the company, reaching now a little bit under €3,800,000,000 benefiting from a net income of €213,000,000 generated over the period, some positive evolution of the pensions, thanks to the positive evolution of the interest rates in the UK, which is the main pension scheme that we have in the company, which basically totally offset the dividend payment as well as the ForEx evolution that we have, where basically euro has strengthened over all the other currencies worldwide by around 10% over the semester. This is it, Omid. Thank you, Amay Jose. On the project on cement system project, as I said, nothing particularly new. As you know, we have signed the Memorandum of Understanding on September 26. We have put in place the necessary teams to execute the deal as well as to start all the different procedures. The first one being the Work Council information, which has been launched in line with expectations. As you know, we should sign the business combination agreement after that this information process. And this should happen during the Q1 of 2018, the Q1 of calendar year 2018, so between January March 2018. And thereafter, we launched the actual process of authorization by the antitrust administrations around the world. So nothing new there. Things are moving smoothly, totally in line with our expectation and anticipation, knowing that, as we said, it will be a process which will last during at least 12 months. In terms of objectives, it will not surprise you. I think we'll these good results in terms of operational performance confirms our 2020 objectives. We continue to see the sales growth, which has been fueled by the large backlog. Adjusted EBIT to reach 7% and 100% cash conversion, knowing that this is something that we have achieved during the first half. That's something which we have achieved last year despite some cash outflow linked to CapEx notably, but something that we totally which confirms that the sustainability of our working capital. That's one thing which is extremely important for us is to stabilize our working capital to make sure that these large sums of money are stable. And that's what we have achieved over the last 2 to 3 years now, and we continue to do so thanks to our own efforts. Thanks a lot. I think it will be time for question and answer. We will now take our first question from Akash Gupta from JPMorgan. Please go ahead. Your line is open. Yes. Hi. Good morning, everyone. My first question is on sharp increase in GE Ports contribution, given that you have said previously that there is a formula of how the value of these puts will increase per year, which I think is 2% for 2 joint ventures and 3% for 1. So maybe if you can elaborate what exactly has changed in terms of how you revalue these put options? That's my question number 1. So in So in fact, as you know, the put options are used as edging instruments to protect us against the adverse effect of the negative results of the GE JVs. So not only those instruments, let's say, allow us to be used as a coverage for the any negative results, but they also get a remuneration. And it's the valuation is based on the Black and Scholes method for those of you who want to go into the nitty gritty of the details. And therefore, there is a content in the valuation, which is the value of time. And as time elapses and we get closer to the exercise date of the puts, this amortization of time speeds up, let's say. And therefore, let's say, we have an hockey stick in the valuation so that we catch up the execution value of those put options, which you already know is €2,600,000,000 in September 'eighteen. So we are basically ramping up the valuation that sits in the balance sheet to achieve that and the realization value by September 'eighteen. So you should expect a similar phenomenon in the second half of the year. Thank you. We will now take our next question from Dennis Dinklemeier from Goldman Sachs. Please go ahead. Your line is open. Yeah. Hi, good morning. Thanks for taking my question. I'd like to further clarify the terms of the GE option. Given the recent changes at General Electric, I just wanted to ask you to remind us of the outstanding terms of that transaction and if there's anything that GE could do to reverse the transaction or if there's any conditions that are potentially subject to the closing of Siemens and Alstom? Thank you. No, no, there is I mean, nothing has changed. And obviously, the changes within GE has no consequences on our contract with GE. So it's a put option that we have in our hands on 2 or 3 of the joint venture, as we know, the renewable and the grid 1. On the third one, it's first, it's a much smaller number because we're talking only €100,000,000 out of the €2,600,000,000 And here, it's a call from GE if we exercise a put on the 2 first one. So nothing has changed, and there is no it's totally in our hands for the 2 put options. We will now take our next question from Christophe Cajron from Societe Generale. Please go ahead. Your line is open. Yes. Good morning, everybody. Just coming back with 3 questions, if I may. First, coming back to the execution of the current projects, could you come back on your ability of increasing the profitability there? What are the main drivers behind to give more color on the achievement you have made in terms of profitability? This is my first question. 2nd question relates to the competition on the current environment. Did you see any pressure on prices still? And then could you give us a view on what's happened since the announcement of the potential merger with Siemens? And do you have seen any negative reaction from clients on what are the main reaction of the clients, but also of the competitive landscape with regard to this potential combination? And last question, could you come back on the WCR and the positive evolution there? And clearly, what are the down payments part of in terms of contribution as it is with regards to the inventories? And how do you see this metric evolving into the future? As Henri mentioned, this is a clear focus of the company. Thank you, Christophe. On the first question on execution, as you know, the first objective is first to execute in line with the customer objectives. So in terms of cost, time, quality, of course. And then we as execution goes, we can improve our cost base, for example, through redesign to cost or through sourcing activities. But clearly, the number 1, I would say, goal is not to have any problem. And if you have no problem, then of course, as you have set aside some contingencies, as you have set aside some money there, I mean, it allows you to improve the global portfolio. But classically, we are trying to improve a little bit everywhere and clearly avoid and we are trying to avoid any negative contract. And that's why it's so important that our large contracts, as you have seen, are executed properly, which is totally the case. We have not seen any, I would say, impact of the announced deal of September 26. It's also fair to recognize that it's early days. I mean, we are just 1 month after the execution, so we cannot as the announcement, so we cannot see any move on the market. We have not seen any negative positions taken from any customer. We have not seen any move from competition. We have not seen things on the market. So it has been very well received by our employees internally, both in Siemens and in ADSTOM, which I think is a very, very good starting point because we need to design this new organization together. That's very positive. It has been positively as well received by the customer. I think we have it confirms that both Siemens and Alstom are seen on the market as 2 very strong player and 2 with a very good reputation in terms of technology and quality. So I think it will add up to a very, very nice brand. So positive only positive things, and we have not seen any changes of any attitude of our customers or competitors. On the working cap, Marjorie? On the working capital, actually, it's been continuously improving. So when we look at the down payments, they've been relatively flat over the period, meaning actually the down payment consumption equals the new down payments received on the orders that we booked over the semester. And but clearly, we continue to get progress payments, let's say, on the projects under execution in line, let's say, with what we explained earlier, which is we try to have, let's say, a more linear or more regular flow of cash between the customers and ourselves during the execution phase of our projects. At the same time, so we are obviously continuing to grow the company and increase our capabilities. So hence, the effect and the increase you see in the inventories. It has also collateral effect, which is an increase in the payables since we buy more in line with the growth of the company. We also have a nice evolution of the trade receivables with, let's say, close to €150,000,000 decrease of the receivables in line, let's say, with the good cash collection that we've had over the period. Thank you, Jose. Next question, Alfred. We will now take our next question from Alfred Glaser from ODDO. I wanted to ask you, could you give us maybe a bit of an updated guidance on the transformation CapEx? How much you want to spend in the second half year and how much you want to spend next year? And then on the order intake, could you give us a kind of expectation what you see ahead for second half year? How much you might book overall for in the current fiscal year? On the order intake first, I think we said it already in the past. We don't I mean, there are not so many very large orders this year. So it's a question of phasing of the orders, nothing which could be alarming or could reflect a general trend of the market. We have not launched large orders as well. So it's just that none of them have really been booked by anybody so far. So we'll see it's always difficult to predict the timing of some orders. As you know, one last order is about the TGV, the future, which is the renewal of the very high speed fleet in France. Of course, if it falls before end of March or after end of March, it will change the fashion numbers. To be fair, it doesn't really change the operational aspect to it. But from a purely communication standpoint, it will change a lot, the total number. So we don't we are not expecting very soon some very large orders, which would be soft on that respect. Maybe, Maize, on the CapEx? Yes. Regarding the transformation CapEx, so as Henri indicated, you see we are clearly starting production in both South Africa and India. And therefore, we are now clearly having an acceleration phase of the investments. I expect definitely second half year to be twice as much, let's say, as the first half year in this aspect. Thank you. Next question? We will now take our next question from Gael Debre from Deutsche Bank. Please go ahead. Your line is open. Yes. Good morning, everybody, and thanks for taking the questions. Actually, I've been disconnected and missed the first set of questions. So I hope I will not make you repeat what you already said. But two questions, please. The first one is on the incremental margin, which was close to 17% in the first half. I think this is a much better drop through than what we had seen in the past couple of years when it probably ranged between 10% 14%. So was there anything unusually positive in the first half? Or would you expect to be able to maintain such a good operating leverage going forward? The second question is on the order performance because if I adjust for the 2 large contracts in Italy and Sweden in fiscal Q2, the flow of small and mid sized orders below €50,000,000 exceeded €900,000,000 in the quarter, right? So I think this is a record high level. So could you talk a bit about this, whether there is an ongoing change in the market or perhaps in your commercial approach towards smaller contracts or if it is just the usual volatility of the business that made it this way? Thank you. I think, Gael, on the first question, I'm not looking at precisely whether it was increasing by 'seventeen or 'fourteen. I mean, there is a nice ramp up of our actions. I mean, we said it, I think, 2 or 3 years ago that starting more or less now, all the operational measure will kick in after the time which was marked more by just the impact of the growth and the impact of the mix. Now we really see the impact of the cost reduction measures. So on that front, it's a good ramp up, and I don't expect it to slow down in the future. So this is in line with our objective and in line with what we expected from the plan. Positively impacted by the fact that, as I said, we have no issue on our project execution, which are well executed. And therefore, we have no negative news coming from that. So it's a combination of the cost reduction measures kicking in and the good execution of the projects, so should not stop in the future. On the order intake, it's true that we are increasing the small and midsize orders. It's difficult to say whether it's a trend of the market. It's clearly something that we are pushing, and our geographical organization, our localization help us in getting more small and midsize orders. It's clear that it's much easier when you are closer to the customer to get this kind of order than when you are far away. At the same time, I mean, it's a little bit early days to know whether the numbers you are quoting is a recurring number. I mean, we'll see it in the coming quarter. But it's true that this is something that we are pushing internally is to not only add the big order but also to update to their gardening, as we call it. Okay. If there's no other questions, I mean, thank you for having attended this call. I mean, Selma and Julien, of course, at your disposal to answer any further questions. And I think our next meeting or call would be on January 17, 2018 for the Q3 orders and sales. And I wish you a very good day. Thanks. Bye bye, everybody. Ladies and gentlemen, this concludes the Alstom conference call. Thank you for your participation. You may now disconnect.