Q3 15/16 TU

Jan 14, 2016

Earnings release

And gentlemen, welcome to the Alstom Conference Call. I would like now to hand over to Mr. Patrick Cron. Sir, please go ahead. Thank you very much and good morning ladies and gentlemen. Welcome to this call on orders and sales for the 1st 9 months of the current fiscal year coming from the 1st April to the 31st December 2015. The press release which was published this morning gives you figures by geography as well by timing. During the last quarter, we booked a strong level of orders at €2,400,000,000 The main successes included regional trains in Belgium, high speed trains in the maintenance in Italy, electrification and signaling project in India, locomotives in Switzerland, region trains in Germany, metro extension in Panama, as well as tramways for NICE in France. This list highlighting that we've got commercial successes in all geographies and all product lines. The backlog remains strong after this strong order intake at €28,700,000,000 at the end of December 2015. This is over 4 years of sales and it includes around 1 third of service contracts. Also interesting to mention that the pipeline remain active with as we have indicated here and then a number of large projects in all continents. We mentioned eLocos in India, high speed in North America, as well as a large metro system in Middle East as some potential big tickets in our pipeline of opportunities. The sales were up 8%, 3% organically on these 9 months compared to last year. And we expect this organic growth to continue at a similar pace, 3% on an organic basis for the end of this fiscal year. Over the quarter, the sales were basically fueled by deliveries of suburban and regional trains in France, regional trains in Germany and in Italy, Tramways in Algeria as well as the execution of a maintenance contract in the United Kingdom. As you have seen in the press release, we confirmed our medium term outlook. Concerning the main events of the quarter, needless to repeat, but I do so that on the 2nd November, we closed the transaction with GE. As a consequence, GE's signaling business joined the Alstom perimeter and have been consolidated over these 2 last months of the quarter. You also noticed that in December, our shareholders approved public share buyback offer which is currently going on with 99.9% of vote in favor. Another technical detail is that this is expected to be my last call, because as announced, I will leave the company at the end of this share buyback program in a few weeks' time. And the Board has indicated that it will appoint Henri Paul Lafarge as my successor both as Chairman and the CEO. So time will come soon to say goodbye and wish the best to Henri who will undoubtedly rely on your support. But before I do so, I suggest that we now move to the Q and A focusing obviously on Q3 sales and orders. I remind you that the review of Alstom's strategy now refocused on its transport activities will be done by Henri and his team during an upcoming Analyst Day, which has been announced and will be organized on the 30th of March in Villebrand. Thank you for your attention. And I now am ready alongside Henri and Marie Jose Doncion, our CFO, to answer your questions. You have the floor. Thank you. We have a question from William Mackey from Kepler Cheuvreux. Please go ahead, sir. Yes. Good morning to you all. Thank you for taking the questions. A couple. First, at the time of closing the GE transaction, you said with a little more time under your belt, you would give us more clarity on the contribution from Rail Signaling. Could you specify the contribution in the quarter to from the GE Rail Signaling acquisition? And also what we should anticipate on an annualized basis for that business, please? And then secondly, you highlight a number of larger opportunities. You mentioned the Elocos, high speed and Middle East. I mean, what is your expectation of the conversion of the tender pipeline into firm orders at this point? Should we be expecting them to close before this fiscal year end? Or is it more of a 12 to 18 month window? Thank you. Well, thank you. Willy, on the thank you for the two questions. On the Signaling business from GE, obviously, this will be included in the general presentation, which will be made. Just for you to know that over the 2 months of consolidation, the sales by memory were around 60 €1,000,000 If you consider that on a 2 month, it's €30,000,000 per month. This is not totally outside of the picture that we gave you in terms of sales contribution and size of the business. So €30,000,000 per month. Don't try to make calculations with the number behind the comma, but this is basically the global nature we mentioned. So this is in line with what we can expect on the larger horizon. Now you mentioned I mentioned and we already talked about some big projects, typically projects in North America for high speed, typically e locals in India, typically Metro System in Saudi Arabia. As you know, these big tickets, this is ongoing discussions to finalize these different contracts, But I will never commit myself on a specific timing for the decisions to be taken. It may go fast. It may take long. Again, I frankly don't consider that it would change the life of the company if it happens 1 month earlier and 1 month later. So it's absolutely difficult to say whether this will happen before the end of the fiscal year. If you want to guess, probably less likely than more likely. Now this will come in the coming periods. But again, my after 13 years in this company, I've been burnt in trying to give guidance on orders for a specific quarter. We expect this project to come on stream. Whether it will come after 3 months, 4 months, 6 months or 9 is very difficult to say. So I don't want to speculate. We have no reasons to believe that things are not going in the right directions. But at the same time, it's not engraved in marble. There is not a sequence which is engraved in marble. The customers has to go through its own specific decision making. In some situations, you have to set up the financing. You have so basically, these may take more or less time. And you know that in some of the countries that I mentioned, sometimes speed is not the number one characteristic. So difficult to say, frankly. But moving again, I mean, no headache about the outcome, but no will to be specific on the timing. One short follow-up, if I may, which actually relates to capital structure. Just post the tender offer, the capital structure of the company looks like it will be very, very inefficient due to the high cash and cash equivalent balances in comparison to the debt. We have discussed this in the past. But over recent months, have you found any other measures that you may be able to take to improve the efficiency of the structure of the balance sheet, I. E, by retiring the higher yielding debt versus the cash balances over the next 2 years? Thank you. Look, what we have said and this is I mean, they have no reasons to make any different statement is that we have we on the basis of the accounts as published the last time, that mean that's end of September, the company and we made 100 times the calculations together, the company is globally debt free cash I mean, net debt free. That means the cash in hand is more or less balancing the gross debt. Now, we said that we don't want to leverage the company stupidly. We also said that we want to keep the ability to address some growth opportunities if there are. And we also said that we will consider, if it makes sense economically, to do things which would make economic sense. So what you are suggesting is, will we buy back some outstanding order we have not taken any commitment on that point and decisions will be taken, not by me, but by Henri and by Marie Jose on an opportunistic and economic base, if it makes sense for the company and these shareholders action will be taken. If it doesn't, it won't. So we absolutely don't want to give any signal of any decision taken because no decision has been taken so far, and this will be considered in due time. But again, there is nothing new under the sky compared to all the discussions we had prior to the share buyback on that point. Thank you. We have a next question from James Moore from Redburn. Please go ahead. Yes. Good morning, everyone. Good morning, Patrick. I've got 3 questions or questions on 3 topics, really. Organic sales growth, it looks, if we look at it quarterly, like it slowed from 5% to 1%, and you're talking about only 3% for the full year. Think the question is, is this just delivery phasing given you have a good backlog? Or is there some sort of slowing in any short lead time book and bill business? That's the first question. Secondly, given your previous answer on signaling, I guess we're annualizing at something like $400,000,000 or EUR 360,000,000 I think signaling sales were about $500,000,000 in 2014. So that's a 20% drop. And I really just wanted to ask, is that the effect of the strong dollar? Or is there some organic decline in the G Signaling business? And is the Ifo margin of G Signaling still running about the 8% you previously talked about? And finally, a broader question, if I could. I guess this is your last conference call, Patrick. So could you perhaps say a few words on what you think your most important achievements were during your time? And what do you think Henri's biggest challenges will be? That's any other nice question like the third one, James? No. Okay. Thank you. Just the one. Okay. Thanks for that. No, look, I think that on the so called soft growth of the sales in Q3. It's a fact. I mean, we were at 4% on H1 and we're at 3% on at the end of Q3 for the 9 months. But again, I warned long ago and I did that rigor recurrently that there is obviously not the same type of volatility that you find in orders when you look at the sales. But still when the milestone fall on a specific and a given period, it falls on this period and not on the next one, etcetera, etcetera. So you should not be overexcited if you get the plus 10% on a specific quarter and not over pessimistic when you get 1%. There is some volatility and you should accept it. We have given 5 years guidance, which is a medium term guidance. It doesn't mean that it has to be that year on year, quarter after quarter. We have years not that long ago, which are above this 5%. It will be around 3% this year with the assumptions that we have in hand for Q4 and what we have achieved on the 9 1st months, it doesn't change. It doesn't change what is in the backlog and what is expected to happen in the backlog. So we have not experienced any type of slowdown, but we have a backlog. We have some big tickets, which will move ahead. We talked about and will grow and ramp up. I mean, these big tickets starts by nature slowly and ramp up gradually. At the same time, we have the service businesses, which have much longer horizons. The backlog is a real one. The backlog is strong and there is no change in the substance of the backlog. But again, when you look on a given slice, it can give some diversity in the picture. But again, I don't I would not be over concerned by this number. No, the G signaling business is what it is. I mean, you talked about we mentioned about the $400,000,000 $60,000,000 in 2 months is not over is not that different. As you know, this business has a product business, which represents a large part of it, which has which obviously is related to the reality of the freight market in the U. S, but is there. And then we have some project business, which he has tried to develop. And that obviously, we will continue to act because the combination is one of the this is one of the area where the combination will have its full sense also. And this has some volatility as well. So that's Ori will again detail the reality of the I find the reality that we'll give you some details about the signaling business. So I mean, you'll see. And again, the 2 months number is not that differently is not that different from the kind of recurrent current level that we can see. On the margins, you don't expect me to talk about margins in this Q3 or others and sales. On the good things I've been able to do, I kept being patiently answering your questions. I think this is one of my strong achievements. In addition to that, no, look, I think that we have found the proper solution for the future of the energy business of Alstom regardless of what one can read in the press these days. And I think it's great for this business. At the same time, we have absolutely sound transport activity, which has a bright future in a market which is not easy, but there are no easy markets. And with again the balance sheet and the backlog, which markets and with again the balance sheet and the backlog, which gives good hopes for ongoing successes. The rest are just some details. Thank you. Our following question is from Alfred Glaser from ODDO. Sorry. And by the way, one classically talks about transition. I think that you have noticed that the transition within Alstom is done on a seamless and very smooth way. And I'm happy this is happening like that. Sorry, Alfred. Yes. First of all, congratulations to all your achievements in all these years at Alstom. And then I wanted to ask Julius on coming back on organic growth in the transport business. By what time or which year do you expect to reach the midterm target level of making at least 5 percent organic growth given that it mostly derives from your backlog, you'll be only ones to have visibility on this at that stage? And second, one question on demand. In the Middle East and especially the Gulf states, obviously, the low oil prices are depressing budgets and therefore are likely to put into question a number of infrastructure projects. Do you see any kind of outfall of this in your negotiations for new projects with the local authorities? Thank you, Alfred. On the first one, medium term guidance is a medium term guidance. So if I want to ironically answer, I would say this will happen medium term. I think that the backlog is strong. The backlog sound. The big projects are going to ramp up. The service activities are there. So I think that this will gradually move upward. So we are not going to go from 3% to 5% overnight. At the same time, you should accept some volatility in these numbers as well. And again, the backlog is there, the contracts are there and will be executed and bring this growth, but this is going to happen gradually. The second one is on the Middle East. Maybe, Henri, you want to give a comment? On the Middle East market, but it's actually not only on the Middle East market because there are a number of countries which are impacted by the oil price decrease. Today, I mean, the situation is of course mixed. But in the main, I would say that the projects the ongoing projects are being negotiated and are going through as normal. As normal being like Patrick has mentioned being not necessarily respected week by week, but this is something which is normal in our business which are negotiations, things are being delayed, accelerated and so forth. So in a way, we can say that we are even a little bit surprised by the continuity of this negotiation in the current macroeconomic environment. And one could be more concerned than the reality. Now on the new projects, this is the acid test would be more on the new projects and the timing of the new tenders. There are still some talks on new tenders, whether it's in Dubai, whether it's in Saudi Arabia and so forth. So here as well, I will not say that the world has stopped, but we'll see when the time goes, if the tenders are actually going to the end of the tenders. So no nothing particularly worrying in the concrete sense, but of course high level of attention considering the situation which currently going on. Thank you. No collapse. As Henri said, it's clear that at one point in time, stress on the budget has consequences, but we don't see empty chairs in the discussions we have. And at the same time, this is the this is, if I may, the negative part of the coin. We also know that the drop in the oil price improves budget conditions in some oil consuming countries, which exist also on the planet. And therefore, this gives also a positive tone on some budgets, which will be positively impact. So again, we will monitor. And the difficulty that you know very well us and you know our market, the difficulty is that there is no normative speed in the development of a project in the negotiation in the upstream side. So it's difficult to say whether it's slowing down compared to something which is not normative. So that's the but we monitor. We have the next question from Andrew Karcher from RBC. It's Andrew from RBC. I had two questions. I guess the first one was just talking again about the organic sales growth in the period. And I wondered if you could just talk a little bit more perhaps about where which of the geographic regions may have growing a little bit faster than the overall average and which ones might have been growing a little bit more slowly, just to get an idea as to sort of the geographic developments in the business. I don't think that's something that's talked about in the statement today. And then the second one, I was going to run the risk of mentioning margin, for which I do appreciate that you might decide not to answer. But I just thought in sort of broader terms, given that we are seeing quite a lot of sort of pressure on sort of raw material prices, be it relating to steel or sort of electrical steel or copper or what have you. Could you just talk to us a little bit about sort of some of the contract structures? I mean is there actually the possibility that you could see the business benefiting a little bit from the low raw materials? Or is that something that more mechanically you would actually expect to sort of be passed through to the customer? Good morning, Andrew first. On the first question and the organic growth, the 3% that you see is actually an average of very different growth pattern. And as we have said, I think a number of times, we are growing much faster in the emerging world so to say, I. E. In Asia Pacific, in Middle East and in the Americas in general talking about sales and on the back of the very high level of orders intake in these regions in the recent period. As you know, our sales are more like 3 quarter in Europe 2 third to 3 quarter in Europe and the rest in the emerging countries whereas our orders were close to fifty-fifty in the recent years. So of course, it generates a very high growth in these emerging countries, which is in this quarter not enough to compensate the slowdown in Europe, When particularly in Europe in our definition of Europe, you include Russia and Eastern Europe. And of course, Russia has been quite slow during this quarter. So it's just a balance between the 2, which is not as high as the 5%, which is at 3%, but still with a very high growth rate in emerging countries and the slowdown in Europe. But again, it's not necessary downward review to former expectations, etcetera. It's a mechanical mix of what has been trading over the quarter. That's for sure. So, phasing on the this is if I compare, of course, which is of interest of class compared to last year, then if you want to compare with expectations, whether sub projects, the phasing of sub projects are higher in that one region or another, it's another debate. But I think as compared to last year, this is what we can say exactly. The second one Andrew on your on the lower costs of raw material, etcetera. I would say, again, our policy is basically on key elements such as raw material as well by the way as economic exposure on ForEx, we hedge. In other terms, we cover our risk through escalation clauses or through back to back in the number. So I would not assume that reduction of the steel price, the copper price or aluminum price or whatever has a mechanical impact on our P and L and our margins. So that's the point. The second one is nevertheless is that when the components that we use have a price which goes down, it basically reduces the price of what we sell. So that basically makes the overall value proposition cheaper. So this is something which helps our customer and therefore is positive in the general decision making picture that we have in front of us. Because if the if the steel goes up, our trains price will go up in our next rotation. If the steel is cheaper, the price will include this market reality. So basically, no impact on our P and L in other terms. We basically don't benefit from that for the reasons I just mentioned. It cannot work on one direction and not in the other one. But at the same time, it makes the trends cheaper. So that's basically the good news, not necessary for the P and L for the reason I mentioned, but for the overall activity. So it's cheaper for a customer to buy a train. Good. I understand that we have no identified additional question. So now time has definitely come for me to say goodbye. Thank you for the support. I know that I have not been over these 12 or 13 more specifically years always giving you good news. I'm happy that the last period has been one with a mix of good news, which has been significantly higher than the mix of good news that I had in my original years with Alstom and with you. So again, thank you for your support. And Ori and his team will come back next time for this strategy review and for the communication. Thank you very much everybody. Thank you, Mr. Com. Ladies and gentlemen, this now concludes today's conference call. Thank you all for your participation. You may now disconnect.