Q1 14/15 TU

Jul 23, 2014

Earnings release

Ladies and gentlemen, welcome to the Arstens Conference Call on Orders and Sales for the Q1 2014, 2015. I now hand over to Mr. Patrick Creum, Chairman and CEO. Sir, please go ahead. Thank you very much. Good morning, ladies and gentlemen, and welcome 2014. You have seen the press release published this morning, which gives you all the figures by sectors and by geography as well as variations both on an actual and organic basis. If I start with the orders, you see that the orders for the Q1 stood at €8,200,000,000 as compared to €4,000,000,000 last year once restated for IFRS IFRS 11, so €8,200,000,000 compared to the €4,000,000,000 last year after the accounting change, IFRS 11. This record performance obviously includes a contract for suburban trains in South Africa, which was booked in the transport numbers for around €4,000,000,000 We also received a good flow of orders in Renewable Power and in Grid. At the end of June, the backlog stands at €56,000,000,000 representing 33 months of sale. Let me start with the orders in Transport and then address the Energy activities. Transport orders reached a record high of €4,800,000 in the 1st quarter. And apart from the jumbo South African contract that you know about, the sector also booked contracts for signaling systems in Spain, light rate vehicles in France and Tramways in Algeria. Coming to the Power area. Thermal Power received $1,500,000,000 of orders, down 3% on the Q1 of last year with no very large project booked. Thermal Oil Services maintained a strong commercial activity, supported by its broad range offering. Renewable Power showed a solid start of the year with bookings around €700,000,000 up 29% as compared to last year. Among the orders were notably offshore equipments for onshore, sorry, equipments wind equipments for Brazil, onshore, obviously. As far as Grid is concerned, it registered the robust level of orders of around €1,200,000,000 which includes in particular 2 HVDC contracts in Canada and South Korea to the difference of the previous year where no such HVDC orders were awarded in general in the market. A focus now on sales, which stood at €4,300,000,000 showing a slight decrease on an organic basis, minus 1%. Transport sales showed a strong organic increase of 17%, driven by the execution of its record backlog as well, to be fair, as a favorable basis for comparison. You may recall that the Q1 of last year was relatively weak in sales and even below the previous year's numbers. So I mean don't extrapolate this level of sales growth for the rest of the year. This being said, we expect that Transport will achieve a good performance this year with sales to grow at a sustained pace. Turning to the Power and Grid activities. Thermal Power sales were down 10% on an organic basis, and this is basically due to the impact of the weakness in new built orders over the past quarters and the timing also of milestones on large projects despite a sales growth that was achieved in Thermal Services. So again, an impact which is basically on newbuild. Renewal power decreased by 10% on a like to like basis. And in this case, it's impacted by some administrative constraints in Brazil, which is delaying some milestones recognition in some wind projects in this country. Finally, grid sales decreased by 5% on an organic basis, but we expect the slow start to be compensated over the rest of the year. A word before giving the floor to you concerning the transaction with General Electric. You know that following the recommendation by the Board, we initiated we know, I tell you that we initiated the first implementation stages, including notably the Works Council consultation information, the discussions with GE of the finalization of the JV agreements and the Signaling acquisition, and we also initiated the merger and other regulatory authorization processes. We expect to call for shareholders' meeting before the end of the calendar year for a decision on the deal. This is the end of my short presentation. Thank you for your attention. And Nicolas, Delphine and myself myself are now at your disposal to answer your questions. Thanks again. We have a question from Karl Friedrich Stoll from UBS. Please go ahead. Yes, good morning. It's Frederic here from UBS. I just wanted to ask about the South African rail order. What should we assume in terms of revenue ramp up and revenue progression over the coming years? Yes. Okay. So as you know, this deal covers 2 aspects. The first one is a new bid order for something like 600 suburban trains. And the second one is maintenance contract. So again, this will take time in terms of sales recognition. The rolling stock contract will run between 2015 and 2025, and the maintenance contracts will even be more expanded because it will run from 2015 to 2,033. So we basically expect this €4,000,000,000 contract to be split over a period of 10 to 15 years and with a progressive ramp up. So to be frank, the first 2014 is nothing and 2015 will be a slow amount, a low amount. So it will gradually grow to something which will then represent something like 300, 400 per year. That's more or less the €4,000,000,000 divided by 10 to 15 years. Okay. Thank you very much. Again, nothing new under the sky. We are moving in line with expectation, the construction of the factory because you know that we have local content commitments as usual in this country and that the construction of the factory, which is in a place east of Johannesburg is going to start in 2014. The factory will come on stream a year later. So all this takes a little bit of time to ramp up as expected, but we are fully in line with our expectations and our program. Great. Thank you very much. Thank you. The next question from Olivier Espoo from Exane BNP. Please go ahead. Yes. Good morning, everybody. Good morning. Maybe first question, it's worth reminding everyone on the cash distribution step. Can you remind us the sequence of events in the cash distribution between GE, your decision and the state, French state, Davie. Second question, maybe understanding a bit more how you will communicate and what you will communicate on over the next sort of 9 months possibly regarding the rail as the transport business outlook and key metrics when we can expect to know a bit more about that. Then also the energy JVs, more detail on these and eventually cash returns. So maybe a bit more of a program of what we're going to hear about and when? And maybe lastly on the transaction itself, what do you see as the critical path here or the most uncertain timing? Because when I think about it, it looks to me as this transaction could close quite early in 2015, but I'm not sure if where is the risk really in your assessment in terms of timing? Thank you very much. Thank you very much, Olivier. So I think the questions are not exactly focused on the Q1 numbers, but still valuable ones, which needs to be answered. I start with your second point, which is a general view on what are the next steps in our communication. As we said, we are expecting to call for shareholders meeting to decide on the transaction. By the end of the year. This will depend on the number of events, the ongoing discussion with GE on the JVs and on the signaling acquisition, etcetera, the finalization of all the government's elements, the filing and approval by the French state of the transaction and obviously, something which has been consultation information of employees, representatives that we do at European level but also in a number of national councils. And that takes a little bit of time. But let's say we go by the end of the year to this shareholders stake. Again, I cannot commit in a matter of weeks, but this is the horizon that we have in mind. I don't expect that I will go to a shareholders meeting to request their approval without having put on the table some views about the future of the transport business, which the group with de facto refocus and 2, by giving a flavor on flavor by giving some elements on what cash is going to go back to the shareholders. So this is something that we have in that point in time. So again, I think that I will go for shareholders meeting by giving all the final details on the transaction where it stands at least and by with some elements on the what is the equity story of the New Alstom and 2, what is the type of balance sheet that we are looking for and thus what type of cash return can be expected for the shareholders. I cannot it's difficult for me to say, look, guys, first approve the transaction and then we talk about money. I think you may write some naughty comments on such a stance. You wouldn't, but maybe some of your colleagues would. The second one is relates on the cash on the sequence of events and the cash distribution. Again, what is expected to happen is we are working currently on the best way for the cash returns to be effective, adequate, etcetera. But basically, the idea is we get the closing with General Electric. We get €12,400,000,000 €35,000,000,000 of money from General Electric. We will reinvest part of it in the JVs. The number is yet to be defined because it will depend on the financial structure of the JVs. If there is debt on the structures, therefore, the amount which is going to be invested may be lower than the 2.5%. I mean, we are talking about around 2.5 on a debt free, cash free basis, then we have to discuss with our 100s in paying for the g signaling. And then we will return cash to the shareholders either by we return cash through the appropriate process. That's the way things would go. Now on your third point, Olivier, which is the timing. Among the and about the risks or the risk there, I think that in such a major transaction, there are always timing issues. And for us, even though the first half quarter has not been bad in order intakes and therefore show that the machine is still turning, is still in the move. We don't like a transitory period and would like it to be behind us. But at the same time, we have to go through some complex process. As far as we talk about the timing issues, as you know, we have to go and get approvals in several tens of countries, maybe 30 countries, and the competition authorities. And this is classically something which is triggering these eggs here and there, not necessarily because you have a problem. We're confident, and all the studies we have done are showing that the merits of the deal with the and I mean, the competition issues are not blocking stone in the road, but should not be a blocking stone in the road. That's not my decision. So it is 1. And 2, you know that sometimes in some countries, it takes more time than expected or hoped. So we'll take all measures to mitigate. But again, my view is that the closing should be expected, we said, in the first half of 2015. And in my view, it has no chance to be very early in 2015. Now we may be positively surprised, but I'm today more in the first half, and first half means somewhere between January June. And it's for me, I think it will take time, and there's no reason to believe that it will be early unfortunately, early in 2015. We do whatever we can for this to happen as soon as possible. But it's not always in our exclusive hands. Just in terms presentation of the financial statements of the future company, after the closing, you will obviously have a transport business, including its corporate structure, which will be fully consolidated and which will be 100% of the sales and orders of the company. And of course, EBITDA and so on. And you will have 3 energy GVs, which will be and will, of course, integrate the G signaling. And you will have 3 energy GVs, which most likely will be equity consolidated in our accounts, therefore, contributing only to the results, the net result of the company. In between, we will apply accounting standards according to the progress of the execution of the transaction. Thank you. Just a follow-up on Patrick answer. The French state with its voting rights only steps in after the cash return strategy has been set up in stone? Not exactly. They step after not the cash return strategy is defined, but after the cash is returned to the shareholders. Okay. Fantastic. Thank you. I don't know if it's fantastic, but that's a fact early. That's the reality as expected. Thank you. That's my view then. Thank you. Okay. Thank you. The next question from Martin Ricchi from Deutsche Bank. Please go ahead. Good morning. It's Martin Ricchi at Deutsche. Just a question on the transport outlook. I appreciate you can't give a more detailed outlook until the end of the year when the corporate cost structure and so forth is perhaps better defined. But in the short run, when you look at the orders you've been taking recently, are the gross margins and the terms and so forth of the transport industry in line with what we've seen in recent trends? Or have been any changes to the market dynamics for the recent order intake? Thank you. Well, again, we will give you a guidance later. I will not comment. When you look at the numbers of Transport, I mean, the backlog is 4.5 years. So this is €25,000,000,000 So it takes the recognitions take time. What is obtained today as a contract, we talked about the PRASA. You see that this will be executed between 15% 25%. The market has not changed. We have seen some good volumes opportunities. But at the same time, the market remains under price pressure. I've said that last time, and it has not changed in between. In addition, when you look at the margins, it depends also on the mix of what is traded, the share of the rolling stock versus the rest of the business, So it's a mix. And with what I want to give you in appropriate time, and as you've seen, it's not years away, but I want to give you a comprehensive view of what is the equity story of this Alstom Transport activity and basically what type of medium- to long term objectives we could expect in such a business, and we'll have the opportunity. We will probably establish an Analyst Day around that ideas. We'll see at what point in time how we communicate and where. So I want to I'm creating the appetite, so keep it for a while and I'll try to satisfy it. Okay. Thank you. Next question from James Moore from Wedbush. Please go ahead. Yes. Good morning, everyone. Good morning, Patrick. I've got two questions if I could. You mentioned transport to grow at a sustained pace this year and in the statement not at the 17%. And I think most of us are around high single digit organic sales growth for the back of the last 9 months of the year. I just want to understand is that still achievable for the last 9 months? Or have we somehow over delivered a bit in the Q1, so we need to move the rest of the year down towards mid single digit levels. So just trying to understand a bit of the shape of the growth in transport. And secondly, on the competition regulatory issues, you say your studies suggest it should be okay. But can you say if the EU Competition Commission or any other antitrust authority have given any oral confidences that the GE combination is passable? Okay. On the second one, the answer is obviously no. We have initiated contacts and will go through the normal filing and no authority will give any type of ruling on that matter regardless of whether there is a case, no case or anything. So it's not the way it works. We have made studies. We will explain the situation to all the competition authorities, and we are confident that it will go through. But again, this is a judgment that I share with myself, and we'll see whether it's proved to be the right one. We have initiated we are working on the filing, etcetera. But at this stage, it's absolutely impossible to give any feedback, neither formal nor informal, just because we don't have any. On the James, on your first question, I am not going to give a precise guidance for the year. When I looked at what happened last year and even the years before, the only message I want to tell you is the following. You look at last year, we had a soft first half and we had quite a high last first quarter, sorry. And we had quite a high 4th quarter, which is probably among the very high quarters that we have had in the past. So again, when you compare quarter on quarter, you should accept that it's bumpy. And you should accept that in all circumstances, the Q1 comparison is favorable for us because of the reference, and the Q4 will be tougher because of the reference as well. So you will have to get a view on the global year. I think it's going to go on the sustained path. I'm not pace. I'm not going to quantify the sustained path. Base, By all means, it has no way to be anywhere close to what we see on Q1 versus Q1. Now I'm not going to say whether the 9 months will be more or less single, medium. However, I think we'll need to grow. I think it will grow at a nice pace, but nothing to do with this type of level that we see in Q1 and Q1. So you have to wait a little bit. Sure, sure. That's helpful. But can I just try and follow-up on that? And I know you didn't give a number, but I'm not sure you will succeed, but I have no problem that you try. I'll try. So the €1,500,000,000 ish of revenues that we saw in transport in the quarter, I mean last year we had the different shape to the quarter. When you say sustained path, are we talking about a sort of smoother year of euro millions of revenues in the quarters? Is that what you're trying to signal? No. I'm trying to signal that it will be positive, it will be by no means in the area of the Q1 on Q1. So and again and more, no chance. But you can try again in the next question. No, again, when you look at Q1 versus Q1 last year, we were down. Last year, for instance, was the only quarter where we were down compared to the previous one. Now we are the 1.5 is a good number. And it's it's up what will happen in the rest of the year, we'll see it's not feasible for the future of the business. It's life. We say it's going to grow. I mean, be prepared that there will be bumpy numbers from quarter to quarter, both on orders and on sales. Thank you very much. A question from Gael De Bruy from Societe Generale. Please go ahead. Yes. Thanks very much. Good morning, everyone. Maybe one question for Nicolas on IFRS 11. If I look at the 5.6% margin in Transport last year for example in H1, how will it be affected by the restatement for IFRS 11? We will detail that during H1 publication when we actually publish a full set of financial statements. But I would say this is a moderate impact to you. So we are not talking about massive changes. As we talk to numbers, we have to be specific and the euro is a euro, but it's not turning light into night or night into light. Got it. Just so that I can get a sense the direction maybe, will it be a bit down compared to 5.6%? Well, you remove actually some sales, some top line due to the fact that entities are going to change from proportionate consolidation to equity consolidation. So you remove some sales on the numerator, while it's in the range €200,000,000 on the sales on a full year basis. Yes. And on the impact on the margins, I don't have the specific number on the back of my head, but I doubt it's make any material change to the numbers you are used to. Okay. Thanks very much. The next question from Arnaud Schmidt from Natixis. Please go ahead. Yes. Good morning, everybody. Thank you. Two questions, if I may. 1 on transport. Will you expect a significant contribution from new platforms within that division on the full year? And what and could there be a material implication on the IFR margin? And second question relates to Grid. You give us an idea of the magnitude of the 2 large orders? And what has been the organic growth of base orders in Q1? Thank you. Thank you, Arnaud. Can you may I be rude enough to ask you to repeat the first question? I didn't get the start of it, sorry. Sorry. That's related to transport. Would you expect a significant contribution from new platforms on this year? And what will be the implication on margins from that respect? Thank you. Yes. Okay. Yes. On grid, easy answer. The new the 2 HVGC programs represents more or less €300,000,000 to €350,000,000 in the grid numbers. But again, grid has had a decent very decent first quarter because we had these 2 HVDC contracts, 1 in Canada, 1 in Korea, 1st of a kind as far as we are concerned in Korea. That's a good commercial success. And the second one is we had a number of standard products, which were also successfully obtained in the Middle East, where we continue to have a good sequence of events. On the new products, yes, there will be some significant ramp up from new platforms. And one I'm talking about is Regulus because we are starting the delivery of the new Regiolys strains that are targeted for the French regions. And so we'll give you on the first half all details about that. Thank you very much. A question from James Slater from Barclays. Please go ahead. Yes, good morning and thank you for taking my First of all, could you just give us an update, what is happening with Transmash, especially in these turbulent times? The second question, how is your cost cutting proceeding in the transport area? And just finally, as a more general question, if you look at the cash performance of the group overall, I mean, how is transport compared with that? Has it been better or worse in Power over the past years? Okay. First question, Transmash. Transmash continue to do well. We know that in some in Russia, you may have seen there has been some slowdown in the growth patterns, and this has put some constraints on some equipment budgets by a number of customers, but we globally are doing well in Russia, and Transmash Holding is moving ahead. So it's turbulent times, but we continue to do business. And it's important for us that Transmash Holdings has a very distinct contribution to the full year of 'thirteen, 'fourteen, and we expect it continues to deliver in a favorable way. As far as the cost proceedings are concerned, we continue our cost programs, and these cost programs applies across the group. I told you that in our so called D2E program, the transport part of it was in line to its size when we were talking about targeting €1,500,000,000 of cost reduction. You take the share of transport in the overall portfolio of the group, and I mean, you get the numbers accordingly, which again, we are talking about the target in April 2016 compared to a cost base 12%, 13%. As far as transport is concerned on the free cash flow, we talk about that when you give the general guidance and we talk about the general picture of the company. And I when I was asked about that point in the past, I used to say that we used to have it's not a fundamentally different picture that in this business that we have elsewhere. We know that there is some volatility in the working capital. Our job is to obviously generate the cash that is needed to treat the future of the business. And again, we'll comment on that when we'll talk in general about transport. I think we should keep focused on Q1. And I slipped by talking about GE, which I understood as a fair target for questions. But I won't go into details about what would be cash flow or that type of stuff. We'll address in due time. Thank you very much, ladies and gentlemen. I understand that I have either satisfied you in my answers or just spared you. I hope it's the first option. And I thank you very much. We'll keep in contact. And again, the next event will be for the half year accounts early November, 5th November, as Delfin rightly reminds me. Thank you very much. And for those who are bold enough to take a summer break, I wish you a relaxing break and expect to see you on the battlefield again after summer. Thank you very much. Ladies and gentlemen, this concludes the conference call. Thank you all for attending. You may now disconnect.