Ladies and gentlemen, welcome to the Alstom conference call on orders and sales for the first quarter 2014/15. I now hand over to Mr. Patrick Kron, Chairman and CEO. Sir, please go ahead.
Thank you very much. Good morning, ladies and gentlemen, and welcome to this conference call on the orders and sales for the first quarter of the current fiscal year. I'm talking for the period from April the 1st, 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 first quarter stood at EUR 8.2 billion as compared to EUR 4 billion last year, once restated for IFRS 11. 8.2 compared to the EUR 4 billion last year, after taking into account 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 EUR 4 billion.
We also received a good flow of orders in renewable power and in grid. At the end of June, the backlog stands at EUR 56 billion, representing 33 months of sale. Let me start with the orders in transport and then address the energy activity. Transport orders reached a record high of EUR 4.8 billion in the first quarter. Apart from the jumbo South African contract that you know about, the sector also booked contracts for signaling systems in Spain, lightweight vehicles in France, and tramways in Algeria. Coming to the power area, thermal power received EUR 1.5 billion of orders, down 3% on the first quarter of last year, with no very large project booked. Thermal services maintained a strong commercial activity supported by its broad range offering. Renewable power showed a solid start of the year with bookings around EUR 0.7 billion, up 29% as compared to last year.
Among the orders were notably Onshore equipments, wind equipments for Brazil. Onshore, obviously. As far as grid is concerned, it registered a robust level of orders of around EUR 1.2 billion, which includes in particular two 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 EUR 4.3 billion, 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 first quarter of last year was relatively weak in sales and even below the previous year's numbers. 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. This is basically due to the impact of the weakness in new build orders over the past quarters and the timing also of milestones on large projects, despite a sales growth that was achieved in thermal services. Again, an impact which is basically on new build. Renewable power decreased by 10% on a like-to-like basis. In this case is 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. We expect this 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 the first implementation stages, including notably the works council consultation information, the discussions with GE on the finalization of the JV agreements, and the signaling acquisition. We also initiated the merger and other regulatory authorization processes. We expect to call for a 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. Nicolas, Delphine, and myself are now at your disposal to answer your questions. Thanks again.
Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. We have a question from Carl-Fredrik Tjerning from UBS. Please go ahead.
Yes, good morning. It's Carl-Fredrik 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?
Yeah. Okay. As you know, this deal covers two aspects. The first one is a new-built order for something like 600 suburban trains. The second one is a maintenance contract. Again, this will take time in terms of sales recognition. The rolling stock contract will run between 2015 and 2025. The maintenance contract will even be more expanded because it will run from 2015 to 2033. We basically expect this EUR 4 billion contract to be split over a period of 10 to 15 years and with a progressive ramp-up. To be frank, the first 2014 is nothing, and 2015 will be a slow amount, a low amount. It will gradually grow to something which will then represent something like EUR 300 million-EUR 400 million per year. That's more or less the EUR 4 billion 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 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. All this takes a little bit of time to ramp up as expected. We are fully in line with our expectations and our program.
Great. Thank you very much.
Thank you.
Our next question from Olivier Esnou from Exane BNP. Please go ahead.
Yeah. 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 diving in? Second question, maybe understanding a bit more how you will communicate and what you will communicate on over the next sort of nine 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 return. Maybe a bit more of a program of what we're going to hear about and when. Maybe lastly on the transaction itself, what do you see as the critical path here or the most uncertain timing?
When I think about it looks to me as this transaction could close quite early in 2015, I'm not sure where is the risk really in your assessment in terms of timing. Thank you very much.
Thank you very much, Olivier. I think the questions are not exactly focused on the Q1 numbers, 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 a 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, et cetera, the finalization of all the government elements, the filing and approval by the French state of the transaction, obviously something which has been started, which is the consultation information of employees representatives that we do at European level, also in a number of national countries. That takes a little bit of time.
Let's say we go by the end of the year to this shareholders step. Again, I cannot commit in a matter of weeks, 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 on which the group will de facto refocus, two, by giving a flavor, by giving some elements on what cash is going to go back to the shareholders. This is something that we have in that point in time.
Again, I think that I will go for a shareholders' meeting by giving all the final details on the transaction where it stands, at least with some elements on what is the equity story of the new Alstom and 2, what is the type of balance sheets that we are looking for, and thus what type of cash return can be expected for the shareholders. 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 statement. You wouldn't, but maybe some of your colleagues would. The second one relates on the sequence of events and the cash distribution. What is expected to happen is we are working currently on the best way for the cash returns to be effective, adequate, et cetera.
Basically, the idea is we get the closing of the transaction with General Electric, we get EUR 12.4 billion, EUR 12.35 billion 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 EUR 2.5. We are talking about around EUR 2.5 on a debt-free, cash-free basis. We have to discuss with our JV partners what is the best setup for the corresponding JVs. We expect that we spend some hundreds of EUR in paying for the GE Signaling, and we will return cash to the shareholders, either by we return cash through the appropriate process. That's the way things would go.
On your third point, Olivier, which is the timing. About the risks. I think that in such a major transaction, there are always timing issues, for us, even though the first 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 transitory period and would like it to be behind us. 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, the competition authorities, and this is classically something which is triggering delays here and there. Not necessarily because you have a problem.
We are confident, all the studies we have done are showing that the merits of the deal and the competition issues are not blocking a stone in the road, but should not be a blocking stone in the road. That's not my decision, the authorities' one. 2, you know that sometimes in some countries, it takes more time than expected or hoped. We'll take all measures to mitigate. Again, my view is that the closing should be expected, we said in the first half of 2015, and in my view, this has no chance to be very early in 2015. We may be positively surprised, but I'm today more in the first half, and first half means somewhere between January and June. For me, I think it will take time, and there's no reason to believe that it'll be early, unfortunately, early in 2015.
We do whatever we can for this to happen as soon as possible, it's not always in our exclusive hands.
Just in terms of 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. Of course, EBITDA and so on. You will have three energy JVs, and transport will, of course, integrate GE Signaling, and you will have three energy JVs, which most likely will be equity consolidated in our accounts, therefore contributing only to 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 in after not the cash return strategy is defined, after the cash is returned to the shareholders.
Okay. Fantastic. Thank you.
I don't know it's fantastic, but that's a fact.
Reality check.
That's reality as expected. Thank you.
That's my view then. Thank you.
Okay. Thank you.
The next question from Martin Wilkie from Deutsche Bank. Please go ahead.
Good morning. It's Martin Wilkie 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. 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, the backlog is at 4.5 years, so this is EUR 25 billion. The recognition take time. What is obtained today as a contract, we talked about PRASA, you see that this will be executed between 2015 and 2025. 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, et cetera.
It's a mix, and 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. 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. 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 Redburn. Please go ahead.
Yes. Good morning, everyone. Morning, Patrick. I've got two questions, if I could. You mentioned Transport to grow at a sustained pace this year, in the statement, not at the 17%. I think most of us are around high single-digit organic sales growth for the back, the last nine months of the year. I just want to understand if that's still achievable for the last nine months, or have we somehow over-delivered a bit in the first quarter, so we need to move the rest of the year down towards mid-single digit levels? Just trying to understand a bit of the shape of the growth in Transport.
Secondly, on the competition regulatory issues, you say your studies suggest it should be okay, but can you say if the European Commission Directorate-General for Competition or any other antitrust authority have given any oral confidences that the GE combination is possible?
Okay. On the second one, the answer is obviously no. We have initiated contacts, we'll go through the normal filing, no authority will give any type of ruling on that matter, regardless of whether there is a case, no case, or anything. It's not the way it works. We have made studies. We will explain the situation to all the competition authorities, we are confident that it will go through. Again, this is a judgment that I share with myself, we'll see whether it's proved to be the right one. We are working on the filing, et cetera, at this stage, it's absolutely impossible to give any feedback, neither formal nor informal, just because we don't have any. 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, we had quite a high first quarter, sorry, we had quite a high fourth quarter, which is probably among the very high quarters that we have had in the past. Again, when you compare quarter on quarter, you should accept that it's bumpy, you should accept that in all circumstances, the fourth quarter, the first quarter comparison is favorable for us because of the reference, the fourth quarter will be tougher because of the reference as well. 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 going to quantify the sustained path pace.
By all means, it has no way to be anywhere close to what we see on Q1 versus Q1. I'm not going to say whether the nine months will be more or less single, medium, however. I think it will grow at a nice pace, nothing to do with this type of level that we see in Q1 and Q1.
Is that?
Sorry, you have to wait a little bit.
Sure. That's helpful. Can I just try and follow up on that? I know you don't want to give a number, but.
Please try. I'm not sure you will succeed.
Okay.
No problem that you try.
I'll try. The EUR five-ish billion of revenues that we saw in transport in the quarter, last year, we had the different shape to the quarters. When you say sustained path, are we talking about a sort of smoother year of EUR 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, but it will be by no means in the area of the Q1 and Q1.
Thank you.
Again, and more, no chance. You can try again in the next question. 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. The 1.5 is a good number. What will happen in the rest of the year, we'll see. It's not ideal for the future of the business. It's live. We say it's going to grow. Be prepared that there will be bumpy numbers from one quarter to quarter, both on orders and on sales.
Thank you very much.
A question from Gael de-Bray from Société Générale. 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?
Well, we will detail that during H1 publication, when we actually publish a full set of financial statements. I would tell you this is a moderate impact to-
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.
Just so that I can get a sense of 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 several entities are going to change from proportionate consolidation to equity consolidation. You remove some sales on the numerator, while it's in the range of EUR 200 million.
Yeah
On impact on the sales on a full year basis.
Yeah. On the impact on the margins, I don't have the specific number on the back of my head, but I doubt it makes any material change to the numbers you are used to.
Okay. Thank you very much.
The next question from Arnaud Schmitt from Natixis. Please go ahead.
Yes. Good morning, everybody. Thank you. Two questions, if I may. One on transport. Would you expect a significant contribution from new platforms within that division on the full year, and could there be a material implication on the IFO margin? Second question relates to Grid. Could you give us an idea of the magnitude of the two large orders and what has been the organic growth of base orders in Q1? Thank you.
Thank you, Arnaud. 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 this year, what will be the implication on margins from that respect? Thank you.
On Grid, easy answer. The two HVDC programs represents more or less EUR 300 million-EUR 350 million in the Grid numbers. Again, Grid has had a very decent first quarter because we had these two HVDC contract, one in Canada, one in Korea. First of a kind, as far as we are concerned in Korea. That's a good commercial success. 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. One I'm talking about is Régiolis, because we are starting the delivery of the new Régiolis trains that are targeted for the French regions. We'll give you on the first half all details about that.
Okay. Thank you very much.
A question from James Stettler from Barclays. Please go ahead.
Good morning, thank you for taking my questions. First of all, could you just give us an update what is happening with Transmashholding, especially in these turbulent times? The second question, how is your cost-cutting proceeding in the transport area? Just finally, as a more general question, if you look at the cash performance of the group overall, how has transport compared with that? Has it been better or worse than power over the past years?
Okay. First question, Transmash. Transmash continue to do well. We know that 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. We globally are doing well in Russia, and Transmashholding is moving ahead. It's turbulent times, but we do business, and it's important for us that Transmashholding had a very decent contribution to the full year 2013/2014, 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 EUR 1.5 billion of cost reduction.
You take the share of transport in the overall portfolio of the group, you get the numbers accordingly, which again, we are talking about the target in April 2016 compared to a cost base 2013. As far as transport is concerned on the free cash flow, we'll talk about that when you give the general guidance, we talk about the general picture of the company. When I was asked about that point in the past, I used to say that it's not a fundamentally different picture 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. Again, we'll comment on that when we'll talk in general about transport.
I think we should keep focused on Q1, I slipped by talking about GE, which I understood as a fair target for questions. I won't go into details about what would be the 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 dispelled you. I hope it's the first option, I thank you very much. We'll keep in contact. Again, the next event will be for the half year accounts early November, the 5th of November, as Delphine rightly reminds me. Thank you very much. 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 completes the conference call. Thank you all for attending. You may now disconnect.