Q3 14/15 TU

Jan 21, 2015

Earnings release

Ladies and gentlemen, welcome to the Alstom's conference call presenting its 1st 9 months orders and sales for the fiscal year 2014 and 2015. I now hand over to Mr. Patrick Croon, Shenzhen and CEO. Sir, please go ahead. Yes. Thank you very much, and good morning, ladies and gentlemen. Welcome to the conference call on order and sales for the 1st 9 months of the current fiscal year. We are talking from April 1 to December 31, 2014. And obviously, I'll give you a specific focus on the Q3 from October to December. The press release published this morning gives you figures by geography. I will just focus on the orders and then say a couple of words on the sales. During the quarter, as you have seen in the press release, I think we booked a sound level of orders at €1,600,000,000 The main commercial successes this quarter included signaling systems in Romania and Egypt as well as a full metro system in Mexico. So you can see that the commercial performance over the quarter has been strong. The book to bill is above 1. When you compare to last year's Q3, it's below. But you remember that last year's Q3 included the 3 Metro lines that we won and booked in Riyadh for €1,200,000,000 while this year, with this quarter, we had a sequence of small to medium sized orders. So a sound and good flow of orders. If I look at the sales, they are up by a solid 10% organically over the same quarter of last year and the Q3 again. This growth was mainly fueled by delivery in regional and main trains in France, Germany and in Italy as well as by high speed trains deliveries in Switzerland, Poland and Tram West delivery in Dubai. That's for the two numbers of the quarter and the consolidation for the 9 months. If you look at the main events of the quarter, in December, as you remember, the shareholders approved the transaction to sell our Ston's Energy Businesses to General Electric with a strong majority. Over 99% of the votes were in favor of the transaction, and this approval is obviously another positive step in the process, which is progressing in line with our expectations. The filing for competition authorities and regulatory authorizations are ongoing. Filings happen this week, as you have seen in Europe, and we expect everything to be done before the end of the month on this field. If I you remember also that during the shareholders meeting, I mentioned that Alstom Energy negotiated a number of ancillary commercial agreements To be more specific, as indicated in the press release, this will provide Alstom with around €400,000,000 of additional proceeds. Before switching to Q and A, I would like to conclude with the outlook. We confirm basically our guidance for the full year with high single digit organic growth of the sale and an operating margin after corporate costs exceeding 5%, and we also confirm our free cash flow guidance. We maintain also our medium term guidance as indicated previously and stated in our press release. That's for the short end production. And ladies and gentlemen, Jean Jacques Morin, our CFO Delphine, Bro and myself are now ready to answer any question you may have. So the floor is yours. We have a question from Daniela Costa from Goldman Sachs. Please go ahead. Yes, good morning. Daniela Costa, you have the floor. Thank you. Good morning. Can I ask 3 things basically? First, I'm just wondering if you could give us any idea of discontinued operations in terms of how did they perform on orders on sales on the power side? And then the other 2 on the rail side, you had a very strong order intake still. Can you give us an idea of whether you think you are gaining market share basically and a bit of how market share is evolving or the competitive positioning is evolving by region? And then just on your prior comments before, I guess you've mentioned that you one of the potential capital allocation priorities post the deal and post the buyback would be further to play on the consolidation of the rail market. I was wondering if you could give us some comment by areas rolling stock, signaling, etcetera. Where do you see the what areas have the most attractive fundamentals, I guess? I'm not asking where you're going to acquire, but in terms of market outlook in your view. Thank you. Thank you. Thank you, Daniela. A few comments on the various lines that you mentioned. On the Rail part, the sales part by the continued operation, which was the second question, well, it's difficult to comment on market shares on a quarterly basis. I don't think you should overplay a quarterly order by a few 100000000 ups and downs. I just I'm happy to report that we continued to have a good flow of orders over the quarter. And again, we have a very strong first half, thanks to the jumbo contract in South Africa. And the message here is it's not over and the opportunities continue. So whether we are gaining market share or not, I am not really in a position to elaborate on the basis of a few quarters. So just I mean the market is sustained. It's a competitive market. We have good products in hands. We have a good value proposition, and it happens that it works in a number of geographies and for a number of cases. So that's the point. If I go on the first comments, look, we don't disclose detailed number on discontinued operation. We do so at the end of the year. There is no specific change compared to the trend we have found. I mean, to be totally transparent, the sales continue to suffer from the lack of big tickets booked over the last 2 years. And in terms of order intake, obviously, the transition period doesn't help. So I mean, this is what I said when we talked about it last time, and this is something that I can confirm. So obviously, my objective is to move as big as we can towards the completion of the transaction because it's the interest of our activities to be transparent. But I must acknowledge at the same time that it's not in my hands. This is being reviewed by a number of authorities all over the world, and we are doing what we have to do to support. But at the end of the day, this decision is not mine, and we continue we are exactly in the track in which we anticipated to be and things are moving in line with our expectations, as I said earlier. If I go on the 3rd question, which is what we are going to do with the cash andwhat are the opportunities of M and A. I said last time and I've not changed either today, but we have exactly the same approach, which is we are not in a must do mode. So we will look opportunistically and with strong hygiene on where does it make sense. The first consolidation element is in the signaling area where we are going to integrate the signaling business from GE. They confirm that although this business is smaller than ours, it's a good fit. Its materially substantial and it's a good fit both in terms of products and geographies. So this is good. The rest, we look on a case by case basis. If a project makes sense, we look at whether it has to bring something in terms of cost base, market access, technology, etcetera. So again, our priorities are in signaling, growing the Service business, and we look at opportunities as they come. But you have seen over the past that we have been selective and we'll continue to give for Biomis. So I mean, there is nothing cooking in the back burner, I want to be absolutely clear. All right. Thank you very much. Thank you, Daniela. Thank you. A question from James Stetler, Barclays. Please go ahead. Yes. Good morning, all and thank you for taking the questions. Can you maybe just talk about how you see the pipeline in terms of orders out there? How is the market developing and maybe signaling versus rolling stock. In terms of deal completion, are there any headwinds you could highlight towards the or which would hold up the completion mid year? And then finally, after this important conclusion of the DOJ investigation, what's happening in other markets? Are there any other significant items that we need to be aware of? Thank you. On the latter? Okay, fine. Understood. No, look, as far as the pipeline is concerned, I think that we have a solid pipeline. Does it mean that there is certainty about the timing at which a single project turns into a contract, this is not obvious. As you know, you know well our industry. So yes, I mean, we are not driving the pipeline. And the fact that the flow of Q3 has been good is showing that opportunities exist. At the same time, as I said, we have a massive backlog. So we are not jumping on any lousy opportunity just to get another. And this is if we are not sound, logical and selective in this type of backlog environment, we'll never be. So it would be a concern. And also the 2 pipeline is solid. On the deal headwinds, the headwind is that it's a complex and large deal. And therefore, it takes time to explain, materialize. Fine, that's what we have been doing. Now again, it's absolutely premature to say whether or not there will be a difficulty here and there. As not we are moving ahead in line with our expectations, and I think we have a solid case. And this is why we decided from the origin to move ahead with GE. And again, we believe that we have a very complementary portfolio, and this is an ideal match, I would say, from a competition standpoint as well. So that's where we are. On the DOJ story, which have been commensurate in length and I'm not going to provide additional information. We are I won't comment on ongoing investigations. There is nothing new under the sky that is absolutely public and totally transparent. We again, I prefer that we have solid processes in place that this has been the progress that has been done It were recognized by the DOJ itself. We have, as you know, no request from the DOJ for any monitor subject that, as I'm expecting, we complete the ongoing one with the World Bank positively. And again, this is my expectation. So again, that's where we are. On ongoing investigations, I cannot and won't comment. And on the files which are being filed, as you know, trials take a substantial time. So nothing you should be aware in addition to what you are currently aware. Great. Thank you very much. A question from James Moore, Redburn. Please go ahead. Yes. Good morning, everybody. It's James at Redburn. On the Global Rail Alliance, firstly, how much work has already been done with GE to set this up? Or are you waiting for the deal to close? And secondly, what is the synergy potential to Alstom transport from this alliance that's on the Global Rail Alliance? And then on GE Signalling, could you say what the margins will look like under Alstom accounting as I've seen from other deals that may not be the same as GE's accounting? And finally, on the margin in the backlog, I don't know if you this is a question for you Patrick or for Transport CFO, but I saw some challenges at your Canadian competitor where European escalation clauses and deflation meant that they have over recognized sales and had to cut profits by 100 basis points assuming they couldn't pass it through. I don't know if your accounting or your contract terms are same or different. And if you could explain that that would be interesting. But do you have any similar issues that could have a negative impact on the transport profitability from that trend of deflation and escalation clauses? Well, on the 2 first questions concerning James, concerning GE, on the Rail General Alliance, we have we are not in a competitive in a competition stand. So we have started some interaction. It will ramp up as the deal gets closed. So I mean, this is something where which is not based on commitments. It's a deinductification of a number of areas where we have a joint interest of interacting. So if you want me to give you a synergy number, it's a 0. It cannot be negative because it's based on goodwill. So anything which will happen will be positive and will have good news. But there is absolutely no way that I comment on something where there would be synergies while it's not a firm contract. It's a list of areas in which cooperation makes sense and makes sense for the 2 parties. And therefore, we'll see as we move forward the way we materialize, if you are skeptical on the merits of such a global alliance, which I'm prepared to accept. So you can be skeptical on everything, including this one, take 0. And again, I don't think there's one thing I can guarantee, it's not negative because it's based on the 2 parties' willingness to do something together, and there is a reason. And helping and on all the items that I mentioned, notably during the shareholders' meeting, it makes sense to do things together. So that's where we are. On the signaling story, again, we have not communicated in details on neither the margins nor the synergy. We'll do in due time. And again, there is nothing new currently. We are working in parallel with DAS on the energy side. We are working on the signaling one to prepare the future integration, but there is nothing more I can say. Last point, James, is on the escalation clauses. I'm not going to compare whatever we do to whatever others can do. I said from 15 years ago that when we have long term contracts, we have closes, which protected us from cost increases and a number of in a number of areas. And this is reflected through an escalation in price, which is expected to pass through the cost increases that we may experience over time based on the number of indexes, etcetera. And there are as many such examples as single contracts as this is obviously discussed and negotiated with the customers. And each one is more or less specific. My we my message to you is that we don't see any reason for these escalation clause not to protect us in the future as they did in the past. So we have no reasons to believe and have not identified any such worry that we may face any shortfall in our backlog in the assessments of margins, which are in the backlog at completion of the projects of the said backlog. So I have no issue on this escalation clause whatsoever. Thank you very much, Roger. A question from Gael De Gris, Societe Generale. Please go ahead. Yes. Thanks very much. Good morning, everybody. There has been a significant geographical shift in orders over the past few years with the book to be like looking now particularly depressed in Europe. So maybe with the likely decline in European sales and probably the expected pickup elsewhere in the coming years, could you help us understand a bit more how the mix on the margin could possibly play out? And in relation to that, how much more restructuring do you need to do in Europe in the next 2 years or so? And could we expect margins in Africa or in Americas to be one day equivalent to those you used to have in Europe? Thanks very much. Yes. Look, first, yes, if you look at the deliveries currently, the deliveries are have a strong during the quarter and even probably the 9 months have a stronger European content because we are ramping up a number of deliveries in a lot of geographies, by the way. Because when you say there is a shift in the orders we take, yes, I mean, there is bumpiness in the orders we take. I remind you, and you know that very well because you know the company very well, that 2013 was a record year for us in order intake in Europe. 'fourteen, I've shown a switch, but 'thirteen, if you remember, was an all time high in the orders intake coming from Europe. And we notably had something in met by memory, and I may be wrong, but I don't think out of the €7,000,000,000 that we might have had, we had €5,000,000,000 in Europe, which is massive. So and it didn't mean that there were no opportunities outside of Europe, as one may have felt at that time. So please and the fact that we have a big European content shows that it is illustrated, by the way, the orders we have taken during this period among others now. First point. So there will be the orders that we take outside of Europe will turn into sales materialize outside of Europe, obviously. But this trend, the shift will be progressive. So don't consider it. We move from one to the other that strongly. The second remark is don't assume that a non European order is an order with a bad margin and the European order is an order with a good margin. I even it may be slightly different. We made it transparent, although I'm not going to comment contract by contract, that we have in Europe a number of starting product lines or building platforms, which wait on our accounts. And notably, we developed some regional trains. We have a lot of variety of trains being developed for our intercity offering, which makes a lot of sense as we move forward from a product strategy. But where, obviously, the start of the project is not as fruitful as the ongoing one, the average and the end entails. So don't over assess the fact that the switch from Europe to another continent is by nature destroying margins. This is not the case. So the switch that I'm seeing in the that may happen in which will reduce the heavy weight that we have in Europe for H1 and for the Q3 Q1 is not going to be mechanically hitting the margins. And should it have been the case, I would definitely not have been in a position to confirm any guidance. And as you see, I think so. So yes, the sales are very European centric. The others are not. But again, this translates some specific situation that we had a period ago. Very much. And what about the restructuring you potentially still need to do maybe for the second half of next year? Look, we said we are not going to give advanced notice of any such events. I mentioned that we have a capacity issue in one of our French factories in Belfort that we need to address. We are still working on the best ways to do so. And again, what I think is we'll see where the orders come and how they do come. But I mean, the gradual evolution is something which helps us in terms of adapting. We have a flow of people in and out, and that helps addressing these capacity adjustments wherever necessary. So nothing new under the sky again on that point. Okay. Thank you very much. Thank you. A question from Andrew Carter, RBC Capital Markets. Please go ahead. Good morning, Patrick. It's Andrew at RBC. Good morning, Andrew. Good morning. I had a couple of questions. Could you provide a little bit more information about the ancillary commercial agreement with GE and the EUR400 Or is it something more Or is it something more to do with sort of brands and technology and going to be payment coming in over several years? The next one was just in terms of I guess it's a specific question on the regulatory approvals. Have you acknowledged have you had sorry acknowledgment of the application from the Chinese authorities Mofcom yet? And then the final one was just in terms of the recent moves in the Swiss franc. Does transport have any factories that we should be aware of in Switzerland? And is there a risk that the currency movements there would have an impact on the results? Thank you, Arnaud. On the ancillary agreements that I mentioned, the bulk of what we are going to get is basically increased cash that we get promptly, and there might be a few tens which are going to come from a slightly more extended period. But basically, this is focused towards closing for what I just said. On China, to be fair, I'm not 100% sure whether the filing has been done or will be done. As I said, all filings are going to be completed before the end of the month. So each of them is among the 20 to 30 jurisdictions to which we have sent the filing. And the third point on transport factories, we have an absolutely marginal footprint in transport in Switzerland. So I mean, it's not material. It's absolutely not material. Thank you very much. Thank you. A question from William Mackey, Kepler Cheuvreux. Please go ahead. Yes, good morning. Thank you for taking the question. A couple please. First of all, we've noted earlier in the call the book to bill being below 1 within Europe for nearly 20 months. But you highlighted the strength in 2013. Could you throw some light on how much of the backlog sits within Europe today, firstly? Secondly, outside the movements in the Swiss currency, we've also seen shifts obviously in Russia and in Brazil. More broadly across the operations, is there any particular currency movement you would want to make us aware of that could impact performance of the business into the year ahead? And lastly, just going back to your guidance, which you've stuck with for this year, given the better than expected Q3 revenue recognition, we're now looking for a slowdown and a sharper slowdown of growth expectation into Q4. I mean, which particular areas of the business should we see that coming from? Is it mainly Europe? Or are there other areas too? Thank you. Thank you very much. Well, on the I'm not going to detail the backlog by geography. We don't disclose that. When the as you know well, the company as well, on the I just don't overplay what happens on a period of time. What happens what we are seeing today is we had 13, 18 months ago, we had very strong European orders. Now we have got a very nice set of orders coming from emerging markets. For me, it's the simple message that we see opportunities in both geographies, emerging markets where we have substantial activity and developed economies as well where they need to transport people, refresh aging equipments and improve efficiency and comfort. So the message is we have opportunities in many areas of the world, and we are currently having in our backlog a number of substantial projects in Europe as well. So that's Europe is not dead, and emerging markets will continue to provide opportunities. Concerning currencies, there are obviously currencies evolution all over the board, and you've seen that reflected in the organic variations versus the actual one, but this is not. We have a strategy of being both global, but also present, so where the action is. And this is why we have developed our business in the various geographies. So the way we have set up our footprint being close to where the demand is protects us from the economic impact of variations of currencies. It's a kind of natural hedging, if I may. At the same time, when we get profit on a geography where the money where the currency is getting devaluated, it has a translation impact, an accounting impact on the euro value of the profits that we made in ruble, in reals, in rand or other currencies. That's what I can tell. So the ruble obviously hits the performance of TMH because it's translated in euro from the ruble value. It's a fact. Then there are things going in the two directions. We are also in dollar zone with a positive dollar evolution. So all these plays ups and downs, nothing really new under the skies. Again, our strategy of having a broad footprint close to the demand is, for me, the right one and gives us the best protection against what you mentioned. If I go on the last point you mentioned, we have confirmed our guidance. So what does it mean? Look, if you it means first that the reference point was high last year. If you look at Q4 of last year, it was close to €1,700,000,000 And by the way, this €0.1 7,000,000,000 was close to 30% above Q4 of last year from on an organic basis. So that what does it mean again? It means that the sales of the orders on the specific quarter should not be overpriced. So we have a Q4 reference level of last year, which is high. So therefore, it's having a guidance of a single digit high single digit growth of the sale doesn't mean that the boat is going to sink in Q4. It just means that the Q4 reference of last year was particularly strong. And when we commented Q4 last year, we said don't get over excited. It will not grow on a quarter per quarter basis by 30% year on year, but one should accept the ups and downs. So there is it's no issue of slowdown whatever. Don't overplay what happens in the single quarter, if I may. Thank you. That's very clear. Can I one follow-up, short follow-up? In the last months, we've seen some lobbying efforts in France towards the government, I think, around releasing orders for regional trains. And there's evidence of pent up demand given the historic numbers of the potential for sale of regional trains. We've also recently seen some orders released to Bombardier. What is your interpretation of the situation in France with regard to the release of finance or the regional authorities' willingness to look to an upgrade or renewal program in the near term for regional trains? Well, as you know, the regional trains are bought from SMF, but used by the French regions. We have launched a regionally program, which is a very comprehensive program as it will give us a set of single deck trends, which will be very helpful not only for the domestic market, but also overall orders in this program, but this is a long term program. Overall orders in this program, but this is a long term program, and we expect opportunities to come. The same time, you mentioned the competitor have been selected, have been getting orders. These were double deck trains, and these double deck trains were bought by the regions. I hope that we'll follow the same track. Again, we have sold today a bit over 200 trains this line of intercity single deck, what we call Coradia Polyvalon trainsets. There is we are not shy. And if others come and buy, it will be a good news for us. Now if and when this will come, I cannot comment. So I think, again, that when you look globally, we have a very nice flow of orders, and I don't complain about the overall performance that we have in this sector. Thank you very much, Patrick. Thanks. A question from Andreas Willi, JPMorgan. Please go ahead. Yes, good morning, everybody. I just one question left on Transmush Holding in Russia. If you could comment on the business there, both in terms of if there's any pressure from domestic business in terms of conversion of backlog or so given the situation there and whether there has been opportunities now that you can export more from Russia given the much lower or your partner can export much more from Russia given the lower cost base. Maybe you could give us some indication how the business is doing from an operational basis. Thank you. Well, thank you for this question, Andreas. As you have the answer while asking the question. In Russia, we are facing 2 phenomena, 2 trends. The first one is a general slowdown associated with the slowdown of the economy. I think you will be surprised to see a different situation. That's one. And the second one is that this company makes money and the translation of the profits generated in Russia when they are converted from rubles to gives a reduced number. You don't have the same profit in euro. It's 75 routes per euro versus when it's more surface. So that's the 2 impacts we have. So yes, we are expecting a slowdown in the upcoming sales of Transmash Holdings, and this should hit the profitability of Transmash Holding, both in robust and translated in Europe. At the same time, as you say, we are working with Transmershoarding on number of opportunities outside of Russia, highlighted by the deal we have done with Kazakh Railways for some locomotives. We are working on other geographies with them. So this obviously, the ruble situation would help in terms of evolution of the cost base. But I mean, the short term, it is probably negative in terms of impact of the prevailing situation in Russia, and it would be absurd to expect anything different from what I'm telling you. So we address, I think, the localization strategy is again a good one. And the way we'll move forward is we see the strong company will adapt where necessary. And again, so there will probably be a slowdown in sales. But again, my view is that the prospects, the medium- to long term prospects are solid because of the magnitude of the need in the domestic market and the opportunities that exist around, as you mentioned. So we shouldn't expect write down of the book value beyond just the translation impact? You should not expect write downs of book values. Thank you very much. We have the last question from Olivier Snow, Exane. Please go ahead. Yes. Good morning, Patrick. Thank you. Just wanted to come back first on the foreign exchange. Maybe you can just remind us roughly the I mean the Alstom still has probably more euro costs flowing through the P and L than revenue. What in the typical net transaction exposure here? And discuss how much a benefit you see from the current euro level going forward from a competitive standpoint? And secondly, talking about the filing progress, I think I heard you saying you'll file everything before the end of the month. Do you already foresee that given the progress even if it's in line with your expectation some of the countries' response will fall after your targeted closing I. E. You can already foresee that you will need to use the close which allow you to close the deal with only 85% approval. Is it Sophie? You can already anticipate. And I just wanted to check on the specific buffer in the deal with GE of the 15%. Is it I mean you must have a list of countries that you see at risk here of taking longer. Is it always possible to actually from a regulatory standpoint to close the deal overall and separate the necessary assets for later closure in general? Thank you. Okay. On the currency situation and also you know very well the company Olivier, so I'm just going to state generic comments. Again, our strategy has been to get our footprint close to demand. So basically, we have a position which is quite naturally hedged. At the same time, we are basically a material I'm talking about transport. We are massively we are an exporter outside of Europe. So basically, the softening of the euro improves our competitive position as we move forward. I mean, I could not explain to you that the yen has improved our Japanese competitors' position when it occurred and not come to the same conclusion as far as we are concerned. So we are not a euro company while the others are whatever currency company, but we have a strong component of euro, which again, we export from Europe a bit from France between onethree and half of what we manufacture. We are a net exporter out of Europe, etcetera, etcetera. So again, I'm not overplaying the short term impact of the euro because we have a policy of hedging that you know. But at the same time, on a long term basis, a more realistic euro value is definitely helping European exporters, which we are probably a part of. On the second part, which is the filing, we don't anticipate I'm not in a position to give any forecast, any comment on any view on ongoing reviews done by third parties, namely regulators. So it would be absurd, and I try to remain logical when talking to you. This is going. This is ongoing. The only thing that we saw in my view and that was important when I looked at the deal from its origin with GE was that this deal is based on complementarity. Wherever there are overlaps, they are limited. And I think that the competition view should support the deal. We will see if this analysis is right or wrong. It's a big deal. It's a complex one. So the fact that we have the file that has been provided to the European Commission is several tens of thousands of pages. So it's not it's a material file. The 85% story for the year for those listening is the following. We have a provision which allows us to close the deal with GE even if we don't get 100% of authorization through a kind of carve out of the businesses which are not yet cleared to a second stage closing while getting all the proceeds at the time of the main closing, as you know and as explained in detail in previous discussions. If I look at the objective there is not because we have flagged a specific problem in a specific geography. I think that it's quite clear that we are in global market. But if for any reason a jurisdiction takes more time than the other ones, we just don't want to have a kind of overrun because in one specific small country, the decision has taken more because, I mean, they meet every 29th of February and the next one is late to come, you see. So that's the reason why. So I'm not speculating on having a problem anywhere. I don't know. I hope not. I believe not, but it's not my decision is there. And the 85% story is closed, is a protection against a delay in the country where we have extremely limited and non strategic exposure. And in these cases, to answer your light the second part of your second question, yes, in general terms, we can make the carve outs and wait for a few months before a few weeks or a few days or a few hours for the subsequent filing to be clear, yes. Okay. Thank you, Patrick. We have no more questions. Thank you. Okay. So I understand that there are no more questions. Thank you very much for your time. We will obviously keep the link with you. Should you have any questions, don't hesitate to ask Delphine and her team and Georgak and myself are obviously as well ready to answer any concern or questions or issues you like. Thank you very much for your time. Ladies and gentlemen, this concludes the conference call. Thank you all for your attending. You may now disconnect.