Alstom SA

PAR:ALO

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Alstom conference call. I would now like to turn the call over to your host, Mr. Henri Poupart-Lafarge. Sir, please go ahead.

[Henri Poupart-Lafarge]

Thank you. Good morning, ladies and gentlemen. Welcome to our classical conference call on orders and sales for the first quarter of the financial year 2019 -- 2018-2019. First of all, I'm pleased to introduce to you, Laurent Martinez, our new CFO, who's sitting just next to me and will be happy to answer to any questions you may have.As -- just as a reminder, as you know, we have adopted the new IFRS 15 norm for revenue recognition since the beginning of the financial year. So all the numbers, which are published today are under the new norm, and I want to thank the financial team for having done this change smoothly. We have restated last year the numbers, of course, for comparison reason, but as I said at the end of last year, it's difficult to predict exactly what would be the full year restatement. So if we note, take the first quarter of last year as being a sign of -- project this number has been a sign of the full year momentum for last year.Coming back to our number for this year. First of all, as announced, as anticipated, the commercial momentum for the first quarter is particularly good at EUR 2.6 billion for orders intake. Notably, as you know, we have recorded the new driverless line in Montréal.We had also other orders in France, which are what we call the tram-train or in our platform's names, Citadis Dualis. Some newer contracts for Sydney for the long-term maintenance contract for metro of Sydney. As you have seen, signalling is increasing again, and we have recorded notably, the on-board equipment for Norway. And finally, we have, for the first time, penetrated the German market on tram with the award of tram for Frankfurt.The book-to-bill was, indeed, strong at 1.3, and this is due to the order because at the same time, the sales have grown significantly at EUR 2 billion, in line, and we confirm it, of course, at the end of my introduction, but in line with our expectations for the full year at EUR 8 billion. The sales were up 17% organically or 14% in actual numbers because, as you have seen, IFRS 15 numbers of last year are lower than the IAS 11 numbers.As for the end of last year, the sales are mainly fueled by the system projects in Middle East and, in particular, Dubai -- why, in particular, Dubai and not Riyadh, because Riyadh was already quite a high contributor last year. So in terms of growth, it's mostly Dubai coming. We have also, and I was there last week, a nice ramp-up of activities in South Africa because, as you know, we are now up and running in our new factory in South Africa, and therefore, we are starting to not deliver the trains but build the trains under IFRS 15. In fact, to build the trains have been recorded in our sales.In the quarter, we had 1 or 2 events of a very different nature. On the first one, which is extremely a very, very positive news, is that TMH, our partner in Russia, has merged with Locotech, which is another Russian company in service. TMH was only on rolling stock. Locotech is operating or is maintaining most of the -- the majority of the locomotive fleets in Russia. They are merging together to maintain a level of shareholding at 20%. We are going to reinvest EUR 115 million in the global entity in order to reach this 20%. This is extremely good news for TMH because, obviously, the business model of TMH has to be on the 2 pillars of rolling stock and service. It's very good news for us as well, and it will allow us to enlarge our platform for service activities and leverage all our capabilities in maintenance, predictive maintenance, and all the efforts that we are doing to improve the maintenance capabilities of Alstom.Last news, quite presently, extremely important for us as well. As you know, we have launched our hydrogen train, and we have received the homologation from the EBA, which is a German homologation, which is probably one of the toughest, if not the toughest, in Europe. So this is extremely good news, and we will prepare service now with passengers for September onwards.This was a -- the quarter event for us. Of course, with these results, financial results, we confirm our sales for the full year at around EUR 8 billion and the EBIT margin up to 7%. And this good commercial momentum and these good activities should allow us to continue to outperform the market growth for the future and to gradually improve our profitability.Last but not least, some word on our project with Siemens Mobility. As you know, in the last quarter, we have filed for the merger control in the European Commission. We have filed for a number of jurisdiction but -- in particular, for the European Commission on June 8. On July 13, so a few days ago, the European Commission has announced that we will go to Phase 2, to initiate Phase 2, which is not a surprise. I mean, this was absolutely known, and this is a classical process, very common for this kind of file. Finally, 2 days ago, the General Assembly of Alstom and the shareholders of Alstom have approved the transaction with a very, very large majority of more than 95% of the votes.So now the transaction remains, obviously, subject to the approval of all the antitrust authorities, and we still and we confirm that we expect the closing for the first half of 2019.So thank you a lot for your attention. Now I suggest that we switch for the questions, and Laurent will be pleased to answer to you. Thank you. Operator, maybe we can open the floor for questions.

[Operator]

[Operator Instructions] Today's first question will be coming from Guillermo Peigneux calling in from UBS.

[Guillermo Peigneux-Lojo]

It's Guillermo Peigneux from UBS. And I wanted to ask, actually, one question, one follow-up. First, on the momentum of orders. Is there any reason to believe that any specific region or going into the future, you will see a little bit less of a momentum in order intake as we progress through the year? Or as you see it at this point in time, the tendering activity is as solid as it has been during the last 2 quarters? So that is the first question. And then the second question relates actually to the antitrust communication. I see this as in line as well with the typical Phase 2 commentary. But do you -- would you -- or were you a little bit impacted or surprised by the language used in the communication? Or that was also quite standard under your expectations?

[Henri Poupart-Lafarge]

Thank you. So 2 different questions. On the commercial momentum, nothing new on this subject. As I said, I think last time, we still have a low situation in Middle East, Africa and, in particular, in Middle East because of the time to relaunch some of the projects, which have been altered because of the oil price drop. So if you look at our geographical breakdown, we are basically no order in Middle East, Africa during this quarter. And this is not only because of us. It's the market has been very low during the first quarter. We expect it to come back gradually in this region. So it will take time. We have a very good first-mover, I would say, countries like Ivory Coast where we're discussing metro for Abidjan, like Nigeria where we have signed a letter of intent in Lagos. So this is progressing. So progressively, from a few countries, it's becoming a complete geographical -- new geographical market. So this will -- but frankly, the time -- we discussed that, I think, in May, I mean, the time for the new projects to be transformed into orders is longer than just 6 months or 1 year. So it takes time to recover. Similarly, in the Americas, the North America and, in particular, Canada is doing very good. Not only due to the large order that we have booked but also in terms of global commercial momentum, whilst Latin America, impacted by the Brazilian crisis, is not as strong. So the -- and Europe is more, I mean more stable, classically. And Asia is still -- Southeast Asia is still very positive. And we have recorded an order in Taiwan for Wanda. We will -- we have been awarded, sorry, contract in Taiwan, and we will record it for H1. So it's no, I think there's no particular trend as compared to the, my comments, at the last quarter. Globally, very good markets with a little bit of slowdown in countries, which are impacted by particular crisis, whether it's financial crisis or political crisis. As far as the antitrust is concerned, no, I mean, I'm not going to comment on all the press releases or the comments of the European Commission. These are standard practices. No surprise. Thank you.

[Operator]

We'll now go to Mr. James Stettler of Barclays.

[James Edward Stettler, Managing Director]

Just a follow-on here. I mean, I was a bit surprised by the language from the European Commission in terms of talking about no risk of a new entrant coming into the market when we've seen Hitachi come in or we see CRRC trying to come in wherever they can. So I was bit surprised by that. And indeed, the comments on signalling, so a follow-on on that side. How difficult would it be to carve out activities if that is indeed what they will require you to do in signalling?

[Henri Poupart-Lafarge]

Thanks, James. No, I don't want to comment on the EC language. Just to tell you, I definitely think that CRRC is a very strong competitor; is present in most geographies in the world; has already been awarded some contracts in Europe and including during this quarter, a contract for [indiscernible] to [indiscernible]. So on that matter, I cannot say that I agree with the comment with -- on the European Commission but that's a continuous dialogue with them. I'm not going to speculate on potential remedies. I think it's much, much too much early days, but I'm confident that we'll find the right solution. Okay.

[Operator]

So we will go to our next question, which will be posed by Mr. Akash Gupta calling in from JPMorgan.

[Akash Gupta, Research Analyst]

My question is about impact of -- impact on special dividend of up to EUR 4 per share, which is -- which will be coming from GE proceed where you have said previously that this number will come down when you -- if you plan to invest in acquisitions. And therefore, I want to ask, should we expect a lower dividend after you announced investment of EUR 115 million in TMH in Russia?

[Henri Poupart-Lafarge]

Thank you, Akash, for the question. Mechanically, you are right. As I said and as I explained, the up to EUR 4 is related to threshold for the balance sheet. And therefore, yes, the fact that we invest EUR 115 million mechanically impacts this balance sheet, and therefore, potentially, and that's where there's a nuance, potentially the up to EUR 4 because it's a threshold, so it depends on other elements. So I mean, it increases the likelihood that the threshold plays a role. But it's not necessarily -- that it will not be necessarily the case. So it's still -- it is still possible that it will be EUR 4, and this is not prevented from being EUR 4. However, it is on the [indiscernible], which is impacting negatively, I would say, the balance sheet.

[Operator]

We'll be going now to Mr. William Mackie calling in from Kepler Cheuvreux.

[William Mackie, Head of Capital Goods Research]

A couple of questions. Firstly, on the orders, looking to the tender pipeline into Q2, a bit more tangible. Should we still expect that you can book the TGV du futur in Q2 order intake? And are other any specific tenders, which we should also consider significant in the foreseeable future? And then when we consider revenues and the bookings through the year, if we look at last year, obviously, there isn't a standard equal quarterly flow to your bookings of revenues from the backlog. So is there any typical weighting that we should normally expect as the year progresses on the revenue side, which may lead to you being in a good position to beat at least the guidance that you're giving typically with the strong Q4 I'm having in mind?

[Henri Poupart-Lafarge]

Thank you for the questions. On the pipeline, what we know is for Q2, there are a number of projects, which we have been awarded and which are planned to be booked on Q2. You are discussing about the TGV du futur, and we still expect and we can hope to have it, but it's yet to be confirmed, but it's still on the plan. We have other projects that you may have noticed, the Grand Paris, for example, which is a frame contract, so the first order itself will not be so large, but it's an important frame contract for us, and this should also be booked in Q2. So we have -- I was discussing Wanda, which is this Taiwanese project as well. So the pipeline for Q2 and if some of them slip to Q3, but the pipeline is for Q2 is still quite strong. On the sequence of sales for the full year, as I said, difficult to predict. What I know and I think I was quite direct in saying so that the Q4 of last year, which was exceptionally strong, I think it was at EUR 2.2 billion in under IAS 11, was also related to significant milestones, which were passed in Q4. And I was asked, by the way, if this would have had a consequence on the Q1 of this year. And I said at the time, that this would not have a consequence on Q1, and I think our numbers for Q1 confirms the fact that the very good last quarter of last year had no negative consequence on this first quarter. However, I don't expect today necessarily the same trend quarter-by-quarter as the one experienced last year. And this was, first, a different year, and secondly, a different accounting method. So there is no reason why we should expect a similar pickup at the last quarter. So at that stage, no. If we saw that we should revise our sales target, we would not have been shy and would have done it. But at that stage, we have no element to change that. We confirm just our guidance of around EUR 8 billion.

[Operator]

We'll now go to Mr. Martin Wilkie of Citi.

[Martin Wilkie, Director]

I think you said Martin from Citi. Just 2 questions. The first one is on the timing of the transactions. So when you filed with the European Commission, you had talked about a delay of several months, and you're guiding for a first half '19 completion. When we look at the ruling, they're due to rule by the 21st of November. I'm just wondering if you could talk about what's the timetable beyond November 21 that could take it into next year. So that was the first question. The second was unrelated. Just on the sort of steel price impact on how you're seeing the pricing of rolling stock. Now I know you don't give a pricing number, and like-for-like is obviously a very difficult thing to talk about in your business. But generally, with steel prices having gone up so much in certain regions, are you able to compensate for that in the pricing that you're getting in new orders?

[Henri Poupart-Lafarge]

Thank you. On the timing. First, you probably have missed that, but the European Commission itself has announced in agreement with us an extension of this Phase 2 to, I think, 21st of December, so instead of end of November. What will happen after that? We have fewer, I would say, mechanical things to be done to completely complete, I would say, the transaction with Siemens. In addition, there may be some steps to be taken to implement some of the agreement with the European Commission. So by the end of the -- end of December to first half of 2019, we are close to our target. So it confirms more or less our anticipated deadlines. But the end of Phase 2 is now scheduled for end of December. In terms of steel price. First, the commodity price, price -- cost in our price, sorry, is relatively limited, so we are talking 5% to 10% max. In -- on ongoing projects, as you probably know, we have [ indexation closures ], so there's a mechanical impact. And on new project, yes, we need to take this steel price increase in our quotation. It's -- I'm not saying it's below the magnitude of the cost estimate, but it's being passed through -- all the players have the same type of evolution. In -- I'd just take this opportunity to remind you that in the U.S., in particular, we have a very strong Buy American Act, and therefore, we are supplying and we are buying all what we do in the U.S. from the U.S. And so we have no impact on the new tax regime -- from the new tax regime.

[Operator]

[Operator Instructions] We'll now go to Mr. Jonathan Mounsey calling from Exane.

[Jonathan R. Mounsey, Analyst of Capital Goods]

Just on the Grand Paris, so you mentioned that it's a frame contract, and could -- and the first order will actually be quite small. Could you give us a feeling on the actual scope in the end of what's likely to come on Grand Paris? And maybe a feeling for the timing, how long it'll take to really reflect the full value of that in the order intake? And then on the organic sales growth, 17% in Q1, you've -- you're still sort of guiding for 5% per year. Given the strength in Q1, we're not really thinking that this year is likely to be stronger. Is there not more to come from the Middle East and PRASA as PRASA ramps up, in particular?

[Henri Poupart-Lafarge]

Thank you. On the Grand Paris, first, here we are talking about the rolling stock. I mean, obviously, there are plenty of orders for different type of activities, which are placed by the Grand Paris. Most of them do not concern Alstom. Most of them are civil work, and most of the -- [ the debt ] is for the civil work, but we are interested by the rolling stock, which have won. But we are also interested by the systems, so the signalling, and we are interested as well by the infrastructure. So we have also, I would say, smaller contracts, which are booked from the Grand Paris. In terms of this contract of rolling stock, so normally, the first lot is 150 cars, which means around EUR 300 million, and the full frame contract will be for probably EUR 1.5 billion, around something like that at the end of the day. It would take a few years to be -- as you know, the Grand Paris is a very long project, which will take a few years to book the full contract. But the first one should be around EUR 300 million. Okay, in terms of ramp-up, most of the ramp -- in terms of sales, most of the ramp-up has already occurred. As I said already, if you compare with the last quarter of last year, we were already in full delivery of Riyadh, in full delivery of Dubai. Dubai, the last quarter of last year was already showing a stronger -- strong delivery. The first quarter of last year, no. Dubai is a very -- as I explain sometimes, it's a very stiff ramp-up. So nowadays, PRASA now is in full running mode today. There's nothing more to expect, I would say. That's why I'm reiterating my guidance because there is no further ramp-up to be expected. We are now up and running in -- on all these big projects. So we just reiterate the guidance to be same.

[Operator]

We'll now go to Alfred Glaser calling in from ODDO.

[Alfred Glaser, Analyst]

I just wanted to get back to the Russia investment that you've done. Could you please explain how you are going to benefit from the service business of Locotech as Alstom? And could you clarify what stake exactly do you own in the Russian companies? 20% or 33%? How should we understand this?

[Henri Poupart-Lafarge]

So the first question, I mean, it's -- in terms of maintenance, as you know, today, there's more and more, what we call, predictive maintenance, remote maintenance, and for all of that, the data collection is extremely important. So the fact that all of us are done we'll have a partner with whom we can exchange datas on a very, very large fleet will help us to basically digitalize, simulate all the operations of all these locomotives. And this will be extremely helpful for building our capabilities for our global maintenance. I mean, the size of the fleet is increasingly important. Not only in terms of spare parts and things like that but also in terms of monitoring and again, simulating the different -- wearing of the different elements of the locomotives and so forth. So it's -- it enlarge significantly our platforms. And that's how we do it ourselves, and now indirectly, as I said, we are accessing to a very, very large market, which is the Russian market, which is one of the largest market in the world, particularly for freight. So I think it's also, as I said, a very good news for TMH itself and, therefore, our partnership. We have -- as you know, we have 20%. So we'll have 20% of the totality of the business. So no more 33%, but 20%, of the combined business.

[Operator]

We will now go to Chris Quarante calling in from Societe Generale.

[Christophe Quarante, Equity Analyst]

Just 2 questions, if I may ask. First one is about the evolution of the adjusted EBIT as the start of the fiscal year seems to be really huge or important in terms of like-for-like growth. Could you just give us an idea of how the adjusted EBIT will evolve -- would evolve during this year? Second question is about the supply chain. Do you have any difficulties in the supply chain currently? If I look at your strong organic growth, is there any issue of potential bottlenecks that you may have regarding the ability of your suppliers to come in with the huge volumes that you are requesting currently?

[Henri Poupart-Lafarge]

So on the first element, yes, on adjusted EBIT, I mean, I've confirmed the guidance, and I see that there are a number of items to make me change my guidance, but I will resist to all these items one by one. And no, no, there is no reason to change that at that stage. It's -- we confirm now -- it was -- it's a very good performance. I'm not going to say the contrary. But this is not a surprisingly good performance. This was expected in our plans. So no reason to change the guidance. In terms of supply chain. Yes, you are pointing out a real challenge. I mean, the goals of the company, but not only this year, in the last years, have obliged us and has stretched some of our suppliers however just to invest a lot on the supply chain. If I have to point -- to pinpoint one specific element now, it's not necessarily related to our own goals but probably the fact that the automotive industries is picking up again. So it increases some challenges on some of the supply chain, which we share with automobile industry, notably in terms of electronics and things like that. So yes, this is one of the challenge of the company today, which is -- which, I mean, is part of our competence and our capabilities to manage this challenge, but it's a real challenge.

[Operator]

As we have no further questions at this time, let me turn the call back over to Mr. Poupart-Lafarge for any additional or closing remarks.

[Henri Poupart-Lafarge]

Okay. Thank you very much for your attention. Thank you all for your time. Thank you for your trust. Our next financial event is on November 14 for the H1 results. And of course, we will give the comparison with the last year under IFRS 15. Meanwhile, I wish all of you a nice summer and a nice break, if you take some days off. Thanks a lot, and talk to you soon. Bye-bye.

[Operator]

Thank you, Mr. Poupart-Lafarge. Ladies and gentlemen, that will conclude today's presentation. We thank you much for your attendance. You may now disconnect. Thank you.