Q1 17/18 TU

Jul 13, 2017

Earnings release

Ladies and gentlemen, welcome to the Alstom Conference Call. Today's conference is being recorded. I now hand over to Henri Poupart Lafarge. Sir, please go ahead. Thank you. Good morning, ladies and gentlemen. Welcome to the conference call on orders and sales for the Q1 of this fiscal year. As you have seen on the press release, Assam has achieved a solid commercial performance over this Q1 with order intake of CHF1.9 billion compared to CHF0.9 billion last year. Some commercial successes of the quarter. 2 contracts for almost 100 light rail vehicles for Toronto and Ottawa in Canada. We are the 1st Metro system in Vietnam, which is a new country for us, so it's another territory. Similarly, a contract for regional trains in Senegal, which is a new country, but also for Germany, which is not a new country. We have received an order for the fleet modernization for Los Angeles after having been awarded a number of modernization contract in the East Coast. It's one of the first one on the West Coast. Finally, also to be noticed, we have recorded a part of a Metro system contract for Manila in Philippines. If you may recall, this is a contract which has been discussed for quite a long time, but we said now coming to force. And again, this is a first country for us. In terms of delivery, we continue organic growth and the sales averaged €1,900,000,000 up 5% organically or 6% in actual numbers compared to the Q1 of last year. And this is, as you've seen, perfectly in line with our 2020 objectives. If you look at the deliveries of the quarter, the sales were mainly fueled by the deliveries of regional trains in France, Sweden, by the active trains in France and in Italy, by the progress significant progress of Realmetro in Saudi Arabia. And I told a number of times that Riyadh Metro will be one of the major contributors this year of sales as well as Travert project for the last deliveries of the first batch of trains. We are continuing to deliver the maintenance contract in the UK, and we are starting the Dubai Metro. It's a very fast project, and we are already trading sales on the Dubai Metro. So at the end of June 2017, the backlog reached €34,000,000,000 which again provides a strong visibility on future sales. The book to bill 1 is the backlog has decreased. This is due to the ForEx impact, but we continue to fuel the future activities. Interestingly, during this quarter, we have launched several breakthrough technologies. I think it has been a very, very good quarter for that, quite unusual if you look at the number of technologies that we have released. And these technologies have addressed the evolving needs of both operators and passengers. One of them, for example, is Matria, which is the 1st multimodal supervision solution for the global mobility system, so moving on to smart mobility, smart city. We have also a very important strategic cooperation with Airbus on cybersecurity, which is becoming an increasingly important factor in all our system, and we are very pleased and honored to team up with Airbus, which has unmatched experience in that matter. Last but not least, I think Astom has been one of the first company in Europe to obtain the ISO 37001 certification for our anti bribery management system. And I think this is a nice confirmation of our day to day fight against corruption in the world. So thank you. These were the main events of the quarter. A good quarter, as I said, both in terms of commercial momentum, in terms of deliveries as well as in terms of innovation. So thank you for your attention. And now I suggest we switch for question and answers. Thank you. We'll now take our first question from Akesh Gupta from JPMorgan. Yes. Hi, good morning, Henry. My first question on my only question is on signaling. Maybe if you can provide some more details there. I mean, after orders down last year, Q1 was also down heavily on both orders and sales. And maybe if you can talk about what's the factor and what should we expect for the rest of the year? Thank you. Thank you. It's fair to recognize that sales were down for 2 reasons. 1 was more kind of trading of some large contracts, particularly in Toronto, as it is not a trading of some contracts. So nothing, I would say, particularly to be worried about. There was one other factor, which is unfortunately more consistent, which is a low level of signaling activity in North America. I think I had already the opportunity to point it out. We are today at a low level in terms of freight activity in North America in general, both in terms of new locomotives, as you probably know, as well as in terms of investment on the network. So we are relatively at a low point on this market. And as you know now that we are quite present in freights in North America. This has an impact on our sales and on our order intake. Yes, both are impacted. Apart from that, this quarter in terms of order intake does not include the very large contract. So that's still some large contract being tendered. So it's difficult as always to predict what would be the order intake level this year. So I would say that for both order handset, there is an element of volatility, but there is also an element of low tide in North America. Thank you. We'll now take our next question from Dennis Dinklemeier from Goldman Sachs. Good morning. Thanks for taking my question. I have a question on consolidation, also related to the signaling business. There's some news flow this morning that Astra might be interested in purchasing the mobility assets of Siemens. Could you make any comments on this? And if you cannot comment this, would there be a fit in terms of the assets between Siemens and Alstom? Thank you. Well, I didn't know about that. Frankly, I think 2 weeks ago, Bouygues was supposed to sell his share to Bombardier. 3 weeks ago, Bombardier was supposed to merge with cement. So I think that there are plenty of rumors on the market. And I think I put that on the big theme, which I have said, which is correct, is the fact that there will be there should be or there could be some type of consolidation on the market and that has done one way or another will participate to this consolidation. I think the main criteria for consolidation is definitely the first that there is no do or die type of deal. As I said a number of times, we are growing. I mean, over the last few years, we have grown from €5,000,000,000 to more than €7,000,000,000 So we don't feel any urgency to do anything. So we are not forced to do anything. I think it's so therefore, anything that we do would create some value, and we need to look at what kind of complementarity is between the different businesses. So I'm not going to discuss one or another, which will fuel any kind of stupid rumors. But I can tell you that our criteria was to make sure that we create value through the complementarity of our different platforms, whatever we do in the future. But again, nothing urgent, nothing we are very well placed today. We are enjoying a very good momentum. So no so I have not we look at that, but the rumors, but nothing to be commented there. Thank you. We'll now take the next question from James Stettler from Barclays. Please go ahead, James Stetler from Barclays. Your line is now open. Sorry, I was on mute. Yes, good morning, Ovi. In the absence of any further comments on consolidation, just on orders, is there anything else we should be aware of as we look into Q2, any big large contracts? And in terms of the phasing of sales, I mean, obviously, it was a bit more volatile last year from quarter to quarter, 5% being the full year target. Should we is there anything we need to be aware of, any intra quarter or any volatility as we go through the year? Thank you. I see, James, that you are driving me towards quarterly guidance. But I would just say in terms of order pipeline, I think I said it sometime, there is we did €10,000,000,000 of order intake in the last year. The €10,000,000,000 is not a magic number. As we speak, there is no very large contract, no gigantic contract for which we have been for example, which we have been awarded and which would be close to be totally booked. So that means that this takes time. So by definition, it will not materialize in the next quarter. So I don't expect any large contracts to be booked in the next quarter because otherwise, this would have already been awarded. In terms of sales, there is lower level of volatility. There's some kind of volatility in the sales. We said that, for example, for Prasas, we have delivered 20th train from Brazil. There will be a slowdown in terms of sales delivery, but we don't expect major volatility, certainly not on a yearly basis, not major ones and a little bit more on the quarterly basis, but not major ones. We'll now take the next question from James Moore from Redburn. Good morning, everyone. Henri, Marie Jose, one on the business and a couple on consolidation, if I can try. In terms of the revenue mix in the quarter, the Systems division seemed pretty strong and signaling was soft. I'm just thinking about margin mix. Do you think that runs any implications for the first half or the year? Or can mix carry on at sort of expanding 10 or 20 bps year on year? On consolidation, please allow me to try. But one of the questions is antitrust. And when we had Bombardier ADTRANS, it was about European market shares. You think there's political will to consider global market shares in the event of any combination? And secondly, if I could try, is it better to participate and enjoy cost synergies while running the risk of losing some revenue? Or is it better to watch others come together? A few on this operational matter. First, you're right in terms of revenue mix. This year will be particularly strong in system. As I said, Riyadh will be important this year. Dubai is important. So it's so fast. I will not give I mean, this is not I mean, this kind of mix impact of systems, signaling and so forth is not of such another of magnitude that it will impact our margin progression. So as I said, we're not going to give guidance on the quarterly or half yearly type of margin progression, but we reiterate our margin guidance for 2020. And the fact that I said that this would be gradually improving and I'm not changing my statement because of this mix. Because again, it's a better system mix. So the system will weigh quite a lot, less signaling, which is a minus or pluses and a minus. The net of the 2 is not significant enough to inform the global picture. On the consolidation, you have two points. On the European view, frankly, I don't know because up until you test the water, it's impossible to know whether the European Commission will change its global policy. And it's true that if you look past the policy of the European Commission was not to look at European market, if not sometimes national market to analyze its competitive landscape. We would probably be happy that they go for the global landscape. And there was also a rumor, as you probably know, that CRRC, the Chinese company, would buy Skoda. So if the open commission can take a global view, this would also put some kind of limitation to this kind of move. So we have the quick answer is that I don't know if this should be the trend, but up until you say the water, you don't know. On your question about cost and revenues, it's a very good question. This is why also there have been not so many consolidation in the past is that in our industry, this is already I mean, apart from consolidation, this is already one of our objectives, which is, of course, to drive economies of scale. And this is, I would say, a never ending effort, which we are pursuing within Alstom, and it's a difficult effort. So by saying that, I tell you that we should be very careful. If you are to compensate revenue dis synergy with cost synergy, which would come from some kind of economies of scale and things like that, is the best which is not easy to take. Because again, economies of scale because I think I've discussed that with some of you, the variety of technical requirements, the variety of administrative authorization and so forth. Equity of scale is something that we are pursuing, I mean, day after day, but it's not easy to grasp. Which is explaining also why you have actors on the market, which are very different size in that if economies of scale were so abused, this would not be the case. But this is the case because it's not so abused. Thank you. We'll now take the next question from Gael DeBries from Deutsche Bank. Yes. Hello. Good morning, everybody. Can I have a couple, please? So the first one is on the tender in pipeline. Do you still expect the Meca Metro contract and also the contract for very high speed trains in France to be booked by year end? And the second question is about the Prasa contract in South Africa, which I think contributed to about 5% of sales last year. And I think you previously said that the contribution should be pretty limited this year now. But given the completion of the 20 sales trends in July, was there a meaningful contribution to sales growth in the Q1? Look, on the order intake, I mean, on the very high speed, the partnership with SNCF is doing extremely well. So we are progressing on the definition of the trend. And I think it's proved to be a very nice way of partnering and collaborating with SNCF. We are still targeting the order the end of the financial year. But of course, this will have to be confirmed, but this is still I would say this is still the plan. On Maca, there are of course more uncertainty. So it's still a priority for the government and the Kingdom of Saudi Arabia. Having said that, we have discussed that for a number of times. So we are the government is still working on it, but I will not give you any kind of debt for that. This has to come first and this has to be finalized. On the on Prada, yes, I mean, this is typically that's typically why I'm reluctant to enter into too many details because on one hand, you are right that the past asset will go down in terms of contribution. On the other hand, as I said, Riyadh and Dubai are going extremely fast, for example, to give other examples. So this is a mixed portfolio. And even though if you just focus on one negative, you would conclude that there would be a global impact, which should not be the case. So there is a global portfolio. There is some kind of volatility because one milestone of Riyadh or one milestone for Dubai is significant even considering the global picture. But in terms of flow, we are continuing to grow on the back of the deliveries of our backlog. And of course, some projects have higher sales in 1 quarter, lower sales in the 1 quarter, but the portfolio impact, if I may say, mix everything. We'll now take the next question from Akesh Gupta from JPMorgan. Yes. Hi. Thanks for taking follow-up question. My question is on leverage. And let's say, if you have a good attractive deal on table, then what is the maximum leverage that you can consider for a deal given the prepayment and concern from customers if you have very high leverage? The optimal balance sheet is a balance sheet whereby you have on the balance sheet a net debt position of close to 0, so cash free debt free, precisely because we know that we have volatile working capital. We know that we are partially financed by our customer. So I believe that we need to skip a strong balance sheet, strong being more debt free, cash free. As you probably recall, we have a lot of cash coming in September 2018 through the put if we want to exercise them. And therefore, I don't see that as a limitation today in our deals potential. And as I said at the beginning, in Yahoo, there is nothing here. So I don't think it's a little bit theoretical. But in our own, I would say, assessment, debt free cash flow is what should be achieved. Thank you. Maybe your last question? We'll now take the last question from Dennis Dinklemeier from Goldman Sachs. Please go ahead. Good morning. Another follow-up question on the business. With regards to your orders in emerging markets, you've mentioned, for example, Senegal and Vietnam, where new countries that you're entering. Could you please comment on the requirements for local content and I. E. How much CapEx you expect to spend in these new countries going forward? Thank you. Thank you. We believe that globally speaking, we are at the end or close to the end of our globalization. So we don't expect any large investment in any new country today. These particular cases that you are mentioning are actually financed by French financing. So it's either localization content, this is in France, for both Dakar and Hanoi. So we will produce these trends, respectively, in Rachofern and in Valencia. But as I said, in terms of geographical coverage, we have now supply chain per continent, so I don't expect any large investment. Could be of course, when you install yourself in the country, you have some small investments but limited, nothing compared to what we've done in the past. Okay. Thank you very much. I think thank you for your attention. Thank you for your time. Again, a nice quarter for us, Tom, nice in terms of order intake, commercial momentum, nice in terms of delivery. And as I was emphasizing also nice in terms of innovation. So I'll be pleased to meet all of you soon for our next announcement. Thanks a lot. Have a nice day. Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now