Q1 16/17 TU

Jul 13, 2016

Earnings release

Ladies and gentlemen, welcome to the Alstom Conference Call. I now hand over to Mr. Henri Poupras Lafarge. Sir, please go ahead. Thank you. Good morning, ladies and gentlemen. Welcome to this conference call on our Q1 results, orders and sales. As you know, our Q1 comes from 1st April to 30th June 2016. You have all had the press release, which has been published this morning and which gives you figures by geography and by product. I'll be very short. In this quarter, Alstom booked only small contracts with no order above €100,000,000 This led obviously to an exceptionally low level of orders of €900,000,000 which, of course, does not reflect the commercial activity, which indeed has been quite strong during this Q1. And we expect this commercial activity to translate into orders in the coming quarters. For example, you may have noticed that we have communicated on regional trains in Italy or on the extension of the metro for Dubai 2020. As far as sales are concerned, we are continuing to show a good organic growth. The sales have reached 1,700,000,000 euros up 7% organically or 9% in actual numbers compared to the Q1 of 2015, 2016. Sales deliveries were mainly driven by regional, high speed and suburban trends in France, regional trends in Italy, Germany and Sweden and, of course, the progressive ramp up of the Praza project in South Africa. We have as well some maintenance of high speed in the U. K. As well as signaling projects in Canada. All in all, I would say that these good sales momentum as well as the commercial activity give us full confidence to confirm all our guidance for the coming years and particularly our 2020 objectives. I think this is what we could say on this Q1 activity. And now I will switch to the Q and A session. I am together with Marie Jose Delonfion, our CFO, at your disposal if you have some questions. Thank you for your Question is coming from Akash Gupta, JPMorgan. Please go ahead with your question. Yes. Hi, good morning, everybody. I have 3 questions, please. My first question is on service sales. And I can see in your release that service sales has gone down from 3.93 in Q1 last year to 3.61 this year. I'm wondering if you can help me understand what are the moving parts here and what should we expect for first half given services profitability is higher than the group average? So that's the question number 1. Question number 2 is on in the press release, you talked about acquisition and partnership in the month of April. And I'm wondering if you can give us some number on cash flow impact in those partnership and acquisitions? And then the final question is on Brexit. Just say some thoughts on how that will impact financing condition for your customers, particularly in Europe? Thank you, Akash. On your I will take your last question first on the Brexit. Of course, it's very early days. I mean, it's early days for everybody on this topic. So we have not seen any signs of impact of the Brexit on our market. We could say that the first consequence of the Brexit is a movement in currency. All our sales are local in the UK. All our sales are actually in service, in infrastructure and in signaling. So we are not exposed from any kind of either competitiveness issue or hedging issues. We are U. K. To U. K. Of course, there will be a translation impact, but which is relatively minimal. As far as the big projects are concerned like HS2 or these ones which will require some heavy financing, again, it's too early to say. We are monitoring the situation quite closely. One could say from a kind of general perspective that uncertainty will probably lead to kind of slowdown of these big projects. But to be fair, I have not seen any sign of that. So this is at that stage pure speculation. On your first question of service, yes and indeed, if you look at last year, there was a huge growth in Service Business. And we said that this was partially explained by large renovation contracts in the U. S. So this is now being reversed. And we have now a slowdown of this renovation contract, which have been delivered last year. I will not comment on the profitability side, just to tell you that these renovation contracts are not necessarily the ones which are the most profitable of our service portfolio as it's closer to a new build type of activity rather than a kind of long term maintenance type of activity. On the partnership, I may hand over to Marie Jose on the partnership and the acquisitions. Okay. So, Akash, I confirm we've communicated on, in fact, 2 main acquisitions for value, which is roughly €10,000,000 So the first one is the purchase of the 50% share of Nexans. We had a JV with Nexans in Morocco called the Cableence for some components, which we acquired back. It's a small size activity, mainly to basically diversify our sourcing and have a second source of supply on this component. And the second acquisition, which is more significant, is a company called CTLE in South Africa, which was acquired in April, in fact, to support the execution model and the localization that we have in South Africa to execute our Prasa project. So this is in fact a company that today retrofits and maintains the fleet in South Africa. It's roughly 400 blue colors that are in a manufacturing site roughly 10 kilometers away from the site where we will erect our greenfield factory to manufacture the Praza project. Thank you. Next question? The next question is coming from Daniela Costa, Goldman Sachs. Please go ahead. Hi, good morning. Two things from my side. Could you maybe remind us regarding sort of free cash flow for transport, how should we think about the volatility of that throughout quarters? And then the second thing, can you give us some more details about Dubai and Italy in terms of the share of Alstom? And also what else is there in tenders beyond those that could be potentially like large projects, not necessarily saying that they're going to go to yourselves, but just so that we know what are the big things out there? Okay. Thank you, Daniela. On your first question on free cash flow, I mean, of course, this is other than sale quarter, so I'm not going to go into the details. You probably remember both our guidance in terms of long term guidance of 2020, which is to convert 100% of our profit into cash. We have also detailed some of the short term impacts, both of the exceptional investments that we are currently pursuing in particularly in India and South Africa as well as some legacy cost or cash out, which relates to the separation with GE. We have also said and I confirm that there is a volatility in our cash flow. This volatility is due to large down payments, which can occur from for some contract, but also from progress payments because we have in large contracts progress payments not only down payments, but from time to time progress payments, which can be of significance. So I do confirm that there is a volatility in our cash flow. Our intention, and as you know, this is one of the main focus of the company is to generate, I would say, regularly some cash taking into account this short term volatility. In terms of orders intake, I think we have said that basically the Dubai extension order was around €2,600,000,000 for the total of the project and half of it is for Astell more or less. So as we have not communicated our number, I'll let you do the math. But that's around this number. On Italy, it's a little bit more complex, because there have been some communication by the customer on the total value of the frame contract, which is around €4,500,000,000 But these frame contracts include 3 contracts, actually, one for diesel trains, one for high capacity. Diesel trains and high capacity have been won by competitors. And for medium capacity, which is our part of the contract. In addition, this is basically 150 trends. In addition, there will be a portion which will be firm and a portion which will be optional. So at the end of the day, the orders which will be booked for regional trains will be of several 100, but not a very large contract. And this is yet to be finalized with the customer. So if you take there is 150 trends for us and 300 out of 400 more heads out of 500. So you can make a proportionate amount that works more or less, €150,000,000 as compared to €500,000,000 for €4,500,000,000 And then out of this proportionate amount, there is a portion, maybe onethree of that, which will be for the 1st batch. Sorry for the lack of precision, but we need to continue to discuss with the customer. On your other question on the commercial momentum in general, there have been orders which we have disclosed in the past, but for which there have been some communication like in Philippines, like in Egypt, like in Maca, in Saudi Arabia, where we are also a preferred bidder. So there are some orders for which we are preferred bidder, for which we are still discussing, and it can take a number of months to come to a conclusion. There was also a very large one in the U. S, Amtrak, high speed trains for which we are still waiting for the final answer. So there are a number of contracts for which we are waiting final answers. Then there are contracts which are more in early stage of tendering, particularly in Australia, particularly in France, where we are talking about the new suburban trains, double deck suburban trains, which for which we are waiting some news between during next autumn. So there are still a number of tickets. We have also a large contract in Netherland, for which we are waiting also the final confirmation. So we have a number of projects at different stages. Some of them like Italy and Dubai, we are just completing the contracts. Some of them we are still negotiating. Some of them we are waiting for the answer to the bids. But all that make us confident that the yearly number for order intake should be in line with our expectations and should be in line with our growth perspective. Thank you. Next question? The next question is coming from Guillermo Peigne, L'Ocho, UBS. Please go ahead. Good morning. It's Guillermo, UBS. Maybe 2 questions, if I may, less than 1 by 1. First regarding your revenue growth, I think reported figure is 9%, organic is 7%. So I structure and currency. So how much was the currency contribution and how much is just acquisitions, if I may? Thank you. That's for how you say? So in fact, in the revenues, we face some adverse ForEx effect compared to last year. I would say mainly 2 currencies play a role for us. It's the pound, obviously, with the recent evolution of the currency, roughly 10% compared to last year and as well as the South African currency, which, if you recall had suffered a significant decrease last year during the summer. So obviously, quarter 1 compared to quarter 1, we were still on a high level last year. So roughly, I would say currency impacts us in the magnitude of €60,000,000 negative. And then in terms of scope, we have obviously the contribution of GE Signaling mainly since obviously the acquisition and joined our scope only in November 2 last year. So this contributes to roughly €70,000,000 of revenue for the Q1. Thank you. Next question? The next question is coming from James Stetler, Barclays. Three quick questions. Can you talk a bit about how the execution is going in terms of PRASA? I guess you're now starting to build that plant, how things are progressing. In terms of another integration GE signaling, how is that going? How is it performing versus expectations so far? And then just when you talk about these tenders, any change in the competitive environment in terms of conditions that you have observed? Thank you, James. On Prala, I think there is nothing to report. The trends are arriving 1 by 1. So from Brazil, as I had already the opportunity to say, the tests are going extremely well. So we are now I mean, we are now quite secure on the quality of the train itself. And I think all the manufacturing in Brazil is now under complete under completion. This is going well, and we have started to erect the factory. And things are moving, I mean, nicely there. There is nothing, I would say, to be reported. But I think I'm going to put a webcam in dermatas so that you can follow closely this contract. But I will report each time on this one. So you see, it's going very nicely. On the G signaling, I mean, there is obviously some good news and not so good news. The good news is that the integration is going extremely smoothly. So this is now well in Alstom. The good news is that really they bring us a lot of expertise in terms of product and there is a number of things that we can learn from GE for our product business in signaling. There are also different ways of of channels to the market, and this is quite interesting and enriching for us. The not so good news is the fact that the U. S. Market has been down, particularly the freight market. And hopefully, with the return of the oil price a little bit up and some positive signs coming from the oil industry in the U. S, this will come back to a better situation. As far as the, I would tell you, European type of technology, CBTC and ER TMS, we are now merging our product family, and this is going smoothly, I have to say. So overall, positive timing of the U. S. Market, not optimal, but I think it will come back quite soon. In terms of tenders, to be fair, most of the tenders I am talking about are actually relatively all the tenders. I mean, when we are talking about these big tickets that we are waiting, whether it's Macau, whether it's Netherland, whether it's Amtrak. And these are quite old tickets. So these have been, I would say, tendered a number of months, if not years ago. We have not yet we have not seen huge competitive changes apart from the global change that we have seen over the recent years, which is a globalization of a number of factors and particularly the Asian actors with Rotem being more active worldwide, CRRC being more active worldwide as well. And I mean, this has not been unnoticed in the U. S, for example. Apart from that, for the in Europe, we still we have kind of a stable situation among the different players. So I don't see any change in trends in Europe itself. So no particular change in the recent period, but a general movement of globalization of a number of factors, which as you know, we are answering by being local and this is the way we are playing our cards. Okay. Thank you. Next question. The next question is coming from Martin Welkke, Citi. Please go ahead. Hi, it's Martin from Citi. Just a couple of questions. Firstly, coming back to the GE Signalling acquisition. You mentioned, I think, dollars 70,000,000 of revenue acquired there. From memory, that was a $400,000,000 annual revenue business. And you mentioned that your U. S. Freight is down, but presumably there's some seasonality in that number as well. If you could just clarify, is this quarter sort of a seasonally low quarter for that business anyway Or was that drop relative to sort of $100,000,000 run rate in a quarter really that badly affected by the freight market? So that was the first question. The second one, I'm not sure how much you'll be able to comment on this. There were some articles in the newswires a little while ago last month, I think, about some disputes over the final payments for GE Signaling for working capital and so forth. I mean, could that be a substantial amount in terms of the difference? Or is it more of a technical point? I'll give it to Marie Jose. Okay. So on GAC, we had mentioned that the volume of activity of G signaling was decreasing compared to the, let's say, initial discussions we had when we started the transaction with General Electric, mainly due to the market evolution in the U. S. If you go back to our publication end of March 16, we actually communicated on the contribution of G signaling for the first 5 months in Alstom. So we disclosed the number of €130,000,000 for 5 months of activity. So when you compare right now with 1 quarter of €70,000,000 it's not actually massively different. For sure, there is no recovery yet in the U. S. And therefore, we are still on a low number in terms of contribution from this activity in our numbers. Regarding the dispute we've got with GE, it's in fact part of the, let's say, a price adjustment that is part of the contract. So basically, there is a price adjustment on working capital. We've made an notice to put an notice to GE. There is a process to actually agree on the adjustment on this working capital level. The process is actually progressing. Hopefully, we can come to a conclusion either together or through an expert. And so nothing, let's say, abnormal on this process, I would imagine. The adjustment that we are asking for is today not incorporated in our So no let's say, no impact to be expected from this claim. Thank you, Mario Z. New questions? The next question is coming from Gael Debre, Deutsche Bank. Please go ahead. Yes. Hello. Good morning. Thanks for taking the questions. The first one is on the signaling contract in Egypt and the metro contract in the Philippines that you had signed quite a long time ago now and that have not yet been booked in the backlog. So can you perhaps give us some update on this? Just trying to understand what's going on here. The second question is on the Africa, Middle East sales deliveries, which actually were down 6% in Q1 on a year on year basis and also down more than 50% compared to Q4, so sequentially. So since you're now executing on the South African project, what's driving the weakness here? Thank you. So thank you, Gael. First of all, I'm going to meet in 2 hours the customer for Manile. So I'll answer after this meeting. But no, to be say you say both for the Manile contract and for the Egypt contract, yes, there are some difficulties to come to a final conclusion and to come to the notice to proceed. I'm not going to comment. These are different difficulties and different ones for both contracts and several of them for each of the contracts. So I don't want to enter into the detail of these two contracts, but suffice to say that it will not be booked before now a number of months. I mean, you should not expect it in the coming in the very short term. And this is again, I mean, we are not just to enlarge a subject, Typically, the contracts may takes time to come to again to a notice to proceed. And at the same time, sometimes we are bound for external communication by some events like some signature, some visits and so forth. So we are not necessarily hiding the communication behind some of the projects. And it's hard to recognize that sometimes these projects are communicated quite at early phase. Sometimes they are communicated only when they are booked. So it's I can imagine that this is a little bit perturbing. In Middle East and Africa, I will answer to your question. But before that, I will say that in Middle East Africa, we have a number of very large contracts, such as Praza, such as Riyadh, so system contracts, such as Morocco. And therefore, it creates some volatility in the sales. So if I wanted to answer to your question, I would say, yes, we have as compared to last year, we had a lot of sales on the Maracont VVA Speed Train project, which we are not talking about anymore because it's over now. But it's the, I would say, numerical reason. The general reason is that the fact that it will be ups and downs because we have large contracts with large milestones. So let's not focus on 1 quarter, particularly for this geography, which is again quite bumpy. We had also in Azerbaijan, we had delivered some metro in Baku. But all that is a negative, and you could wonder why don't we have more positive. It depends on the milestones on the different large contracts. Okay. Next question? The next question is coming from Andrew Carter, RBC. Please go ahead. Hi. Good morning. I had another couple of questions sort of around Sterling and Brexit, if I may. Firstly, just in terms of that the question about sort of sensitivity to movements in the currency. I have had quite a few questions on this. And I realized, I think, to an earlier question that you mentioned that the translation impact was relatively minimal. But both sales and profit so that we can sort of better understand that impact? The next one was, I guess, just thinking about 2 sort of related issues. 1 was in terms of the CapEx plans that you've got. I was wondering whether any of those plans include work that you're doing in the U. K. And if given what's happened, there are any sort of changes to those items in your budget for CapEx over the next couple of years? And then maybe just sort of quite a specific one relating to some of the work, the service work that's being done in the U. K. Are there any is there any of the service that you're doing that is sort of like like relatively, I'd almost say like things like cleaning services or anything like that, sort of relatively simple business in the U. K. That's using a lot of people and that might possibly be impacted if we were to see quite a lot of U. K. Sorry, non U. K. Citizens, I. E. EU systems, decide to leave the U. K. In the coming months? Because we have heard some businesses already talking about issues such as that and saying it's going to impact their employment plans. Thank you, Andrew. I will give the floor to Maisothere for these U. K.-related questions. Okay. So regarding the Brexit, we've actually indicated that roughly 10%, a little bit less than 10% of our volume of business is done in the UK. So basically, if we simulate a 10% drop in the currency, we get roughly €70,000,000 impact in terms of volume in our revenues because most of our business in the U. K. Is actually as it's cost also based in the U. K. That's why we said actually most of the effect for us is a translation effect rather than a P and L effect. So the businesses' concern are mainly service and signaling since these are the 2 main activities we today operate in the U. K. And when we simulate actually their contribution to profit versus the total profit of the group, I would say potential impact could be 10 basis points on the adjusted EBIT of the company. So it's a pretty low impact in terms of conversion for Alstom. Regarding the CapEx that we are performing in the UK, we've actually we are looking, as I mentioned in the closing of last year, at lease contracts that we may have in various geographies from the time Alstom conducted a very large program of leasing of their facilities. So right now, in fact, I'm looking at the premises that we use for service. And it's fair to say that we have decided to exit a leasing contract that we have in the U. K. And build our own, let's say, depot for maintenance activities. This is a pretty limited amount of investment. So nothing I mean, it's part of our recurring CapEx, I would say, nothing particular there. Thank you, Jose. Next question, please. The next question is coming from William Mackey, Kepler Cheuvreux. Please go ahead. Good morning, Henri and Marie Jose. Thank you for the questions. A couple, please. Just looking, first of all, at the order intake within Europe, I noticed the book to bill down there in the Q1. Could you, when we come back to your business activity and tender activity, provide a little color on your expectations for order year? Secondly, on revenues, strong revenue recognition, it seems, in Europe in the Q1. To what extent, given the timing of projects and the execution of those, is that revenue growth sustainable to the following quarters in the year ahead? And also lastly on Systems, when I look at Systems, I noticed there's almost no order bookings. You've talked about Dubai. Is there a tender pipeline there which gives you some confidence you'll be able to replenish some of the orders that will be booked this year as we go through the rest of the year excluding Dubai? Okay. Thank you for my question. On Europe, first, the European market is sustained. We have, as you said, a good commercial activity, including in Europe. So we have discussed about Italy. I have mentioned as well the Netherlands. We have also a number of midsized contracts or small sized contracts in Germany, which is more kind of recurring business for us. You may have heard about the large tender in Spain, which is coming as well in the summer. In France, as I said, we have this large double deck suburban trains. So all in all, I don't want to give too precise guidance on order intake because it's quite bumpy, as I said. But I would expect for the full year a sound level of order intake in Europe as well as in the rest of the world. So we should have and where I say sound is that we are targeting a book to bill above 1. But again, there could be some bumpiness, but there is no signs of slowdown of the market. And when I mentioned good commercial activities, this was typically including Europe. I think in terms of sales, maybe Marie Jose you can say a word on sales and maybe I should take the orders in Systems as well. On Systems, these are typically large contracts. Dubai is the largest one and will probably remain the largest one for the year. We don't need to have many Dubais, let's say, to replenish our order backlog. If you look at our sales in terms of systems, typically, these are this kind of order of magnitude, but still, we expect 1 or 2 other system business to come before the end of the year. So we should have Dubai plus 1 or 2, but Dubai should be included in our full guidance. So regarding sales, actually sales remain at a very robust level. I mean, the top 3 countries we see for Europe are the same as last year. So France, UK and Italy, I would say Germany very close to those top 3. And in fact, there we see the volume, I mean, basically being in line with the delivery of the not adjusting the objective that we gave, which is roughly we expect an average organic growth of 5%. And at this point in time, I have no other comment to make on this average number. I think we cut the mic to Guillermo, so maybe you got another question. Exactly, sir. We have a follow-up question from Guillermo. Sir, please go ahead. Thank you. I think you alluded to some extent to it, but I was wondering about regarding your mix and I understand these kind of changes quarter to quarter and probably a little bit more consistent throughout years. But with bigger systems and signaling and to some extent smaller contribution from Asia Pacific as we move forward. Middle East will be volatile with South Africa. But I wanted to check about mix going forward on this on your backlog. And then is it this year, 2017, the year you start to feel how the mix improves to a great extent? Thank you. On the mix, as you said, there is some bumpiness. And I think I said it during our full year results. I mean, we had last year a particular high growth in our Service, Signaling and System activities. This was above both our expectations and I would say the long term trends. So as I said, you should not expect some further change in mix or huge change in mix in the coming period after this large shift. So we still have rolling stock being less than half of our business, and we continue to target this and to target rolling stock going to 40% at the end of 2020, but it was at 46% last year. So again, a big chunk of the change has been done last year, and we continue to progress towards our goal, but at a smaller pace. I think this was ending our conference call. Thank you for your attention. I think this was a nice activity during this Q1. I'm very pleased that the Q1 of the so called new Alstom for the 1st year of the new Alstom as a complete year is starting on a good momentum. Thank you all of you and see you in the coming weeks and in the coming period. Thanks a lot.