Alstom SA

PAR:ALO

Earnings Call Transcript 2022-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to First Quarter Orders and Sales Call. For your information, today's call is being recorded. And at this time, I will turn the call over to Mr. Laurent Martinez, Alstom's Chief Financial Officer. Please go ahead, sir.

[Laurent Martinez, Chief Financial Officer]

So good morning, ladies and gentlemen. Welcome to our conference call on order and sales for the first quarter of our fiscal year '21/'22. So moving to the third slide for the first quarter of '21/'22, we recorded a EUR 6.4 billion order intake. This exceptional order intake benefits from 3 contracts above EUR 1 billion in Denmark, Mexico and France. It demonstrates clearly the very positive momentum of the rail market notably in Europe, where we concentrate more than 70% of our order intake this quarter also proved as well our commercial strength based on our Alstom extended profile. If we look at our product lines, rolling stock orders intake at EUR 3.4 billion, very solid with various orders, both in urban and regional. Turnkey this quarter's dynamic with 3 contracts totaling EUR 1.4 billion, 1 in Athens, Mexico and Miami. Services order intake at EUR 1.1 billion was sound with maintenance contracts but also train operations and maintenance services. Last, signaling at EUR 0.5 billion, mainly coming from onboard signaling contracts. So this dynamic order intake is just to a consolidated backlog of close to EUR 77 billion. So let's move to Page 4 with zooming on some orders that we have been awarded this quarter, as you see on the nice pictures, starting with Denmark, where we won the largest railway contract in Denmark history. First firm orders of 100 Coradia Stream regional trains as well as 15 years of full service maintenance agreements for a total value of EUR 1.4 billion. And this as part of framework agreement with DSB valued at a total of EUR 2.6 billion. In Germany, we are paving the way for automated train operation in the highly frequented Stuttgart network and we will equip 118 regional trains with signaling technology. In Americas, with our new portfolio, we have been awarding new signaling technologies for automated people mover system in Miami, and will provide 10 years of operations and maintenance services for the Skyway automated people mover system at Houston Airport. We'll also supply 60 new Flexity street cars for the city of Toronto Last but not least, we'll supply the Tren Maya, a flagship train for Mexico, built in Mexico for a total of EUR 1 billion by combining the strength of our platform, X'Trapolis, from Alstom Legacy, components portfolio from ex Bombardier, and our site in Mexico in Sahagún.Looking ahead, why this quarter was exceptional, we do see a very robust standard pipeline in all regions. So let's move to page 5. Turning to the sales. This quarter, our sales reached EUR 3.7 billion, which is 33% growth compared to last year Q1 which was impacted, as you know, by COVID. Our sales in ramp-up in Rolling Stock is reaching EUR 2.2 billion and shows a positive ramp-up aligned with our production step-up. In services at EUR 0.8 billion, we have a continued positive level of activities, signaling at sales at EUR 0.5 billion evidence a sound level of execution. Finally, on systems at EUR 0.2 billion, we are continuing to ramp down as expected, driven by Middle East system projects nearing completion. So all in, as you see, a solid sales execution for this quarter. So just to wrap up on the key messages for our Q1 '21/'22, excellent commercial momentum this quarter, driven by a few large orders and a very dynamic markets, leading to a very solid backlog of EUR 77 billion. Sales persistent with the priorities we communicated during our CMD with H1 dedicated to project stabilization and production ramp-up in order to serve our customers. Overall, we do confirm today our outlook given during the Capital Market Day, 2 weeks ago. So thank you for your attention, and I suggest we switch now to the Q&A session.

[Operator]

[Operator Instructions] Today's first question is coming from Iris Zheng calling in from Credit Suisse.

[Xiaolu Zheng, Research Analyst]

I've got 2 from my side, if possible. So firstly, it's on the Rolling Stock sales, which has been very solid for the quarter at EUR 2.2 billion and you've mentioned that is how are the ramp up for production. And could you maybe unpackage this number a bit for us? Maybe how much of it is driven by the ramp-up on the Alstom side? And how much is from the BT side? I mean I do appreciate that it's not a consolidated company so that maybe you do not wish to distinguish opportunity. But just given that the free cash flow burn this year, it's going to be very associated to the industrial ramp-up of BT. So I just hope to kind of have a better understanding of how much this Rolling Stock sales is maybe driven by the fact that the industrial output or manufacturing at BT side is being ramped up? And also how much of it is from Alstom side? And secondly from my side is on the order intake or customers appetite when it comes to the service attachments for the Rolling Stock contracts because, obviously, you've got the Danish contracts with service parts attached to it. And would like to know kind of at now versus 2 to 3 years ago, how do you see the customers appetite has changed when it comes to having the Rolling Stock plus service contract? And also, what are the progress that kind of Alstom has made in order to get more traction with the customers once it comes to the service part of the orders and new business?

[Laurent Martinez, Chief Financial Officer]

Thank you very much, Iris, for your 2 questions. So on your first one, as you rightly point out, we are not splitting the sales between ex-AT and ex-BT. So it will be difficult for me to provide you a lot of precision on this subject. What I can tell you is that we definitively see a progressive ramp-up of our Rolling Stock activities as we indicated. We are investing today to prepare the future growth in the second half, definitively. To give you some color, we are definitively in ramp-up mode in the U.K. and in France, in India as well in the U.S. So these are, I would say, a few geographies where we are definitely ramping up. And again, there is indeed a mix of ex-AT and ex-BT projects. On your second question, Iris, which is a very good one. Indeed, we have more and more as a trend, customers, which are eager to have kind of one-stop shop commitment from the OEM, i.e., rolling Stock plus Services on a life cycle cost perspective. And you have seen that indeed for DSB for Maya Tren and for many examples. And if I look at a market trend, we see more and more of these kind of contracts where customers are asking a bundle commitment, Rolling Stock plus Services for a very long period of time. We are talking 15, 20, 25 years sometime. And on that, as Alstom, we are bringing, I would say, the knowledge of the design of the game. We are bringing on the table, everything which is as well digital services, predictive maintenance with our health hub platform, which is giving us a competitive edge versus our competitors. We move to the next question.

[Operator]

We'll now proceed to Akash Gupta calling from JPMorgan.

[Akash Gupta, Research Analyst]

Laurent, My one question is on Bombardier. And can you update us on the provision side and how much you are comfortable with the provisions that we have taken at the full year results? Or do you see there may be more need for provisions going forward?

[Laurent Martinez, Chief Financial Officer]

So Akash, we do confirm the level of provision that has been booked end of March 2021. So there is -- I would say, no reason to update on these subjects. If I'll be a bit more specific on the project stabilization, we are making meaningful progress on a number of subjects talking about, for instance, a BART in the U.S., SBB with reliability growth, Aventra in Derby, where we are developing and ramping up our production. So all in, I would say we are confident on our project stabilization path. We told that it will take time, but we are on these trajectories and there is no reason to update the provision, which stand firm as we booked in March 2021.

[Operator]

We'll now go to Gael de-Bray calling from Deutsche Bank.

[Gael de-Bray]

The first question I have is on the relationship between the very strong order performance you had in Q1 and obviously, the very strong negative free cash flow you guided for in the first half of this year. Because obviously -- I mean, the exceptional order intake, you've just reported includes several large orders. So could you comment on the absence of major down payments in relation to these large orders, I wondered if there has been any sort of structural change to the financing terms of the contract with customers perhaps less willing to pay in advance given their own cash constraints related to the pandemic.

[Laurent Martinez, Chief Financial Officer]

Thanks for your question. It helps to clarify this important point indeed. So I want to be very clear on this. There is absolutely no change of pattern whatsoever when it comes to the down payment in terms of customer behaviors. So there is, of course, contract by contracts, some contracts which have better down payments, some others which have lower down payment but in average, absolutely no change in the overall patterns of down payments. And if I look at our full year perspective, we are definitively in the type of average range of down payments that we had in the past. So stability on this and absolutely no sign, Gael, of change of behaviors on these subjects despite the pandemic.

[Operator]

We'll now go to Guillermo Peigneux, calling in from Union Bank of Switzerland.

[Guillermo Peigneux-Lojo]

Guillermo here from UBS. I wanted to ask about the pipeline, you mentioned that you do have a relatively good pipeline looking ahead. And I wonder whether you can name some of the projects or some of the tenders in which obviously, we could see over the second half of this calendar year. And then secondly, about the ramp-up. How far are you on the ramp-up as you see it for 20 this fiscal year?

[Laurent Martinez, Chief Financial Officer]

So looking at the tender pipeline, so definitively a strong pipeline ready for us for '21/'22 and this in all regions. So maybe just to give you a sense, good pipelines in Middle East and Africa, in Israel, in Egypt, where we are definitively gaining traction, definitively very strong in Europe. We can talk about Paris, Grand Paris lines, which will be on a decision in the weeks to come. We have, of course, the flagship HS2 projects, which should be as well for the final award and decision in the weeks and months to come. We have a number of options as well in Europe, in TRENITALIA, in France, in Netherlands, in Belgium. And looking at APAC as well, a very positive traction in Australia, in India, in Taiwan, where we are very well placed. So we are looking with confidence in terms of our pipeline looking ahead. Noting that our Q1 has been very exceptional driven by very large orders, as you have seen. To ramp up to your second question. So we see definitely a progressive ramp-up in terms of sales, Rolling Stock being a key driver, but not only Signaling -- on Signaling, we are targeting a high single-digit a CAGR over time. So that's something which will as well materialize. So that's very much the 2 key drivers in terms of progressive ramp-up for '21/'22.

[Operator]

Next question is coming from Alasdair Leslie calling in from Societe Generale.

[Alasdair Leslie, Equity Analyst]

Question around normalization of working capital at Bombardier. I appreciate that has many dimensions. But from what I understand, you also expect that's going to continue to be influenced by sort of stabilization of tenders and orders signed currently by Bombardier and you're still in the process of putting in Alstom's guidelines into those tenders. I guess previously, maybe Bombardier was perhaps prioritizing cash instead of margins. Now the margin profile is maybe okay which I think you've commented on, but maybe the cash profile on new orders still isn't where you want it to be. So what can you say about the cash profile on BT's current tenders and new projects and just how quickly you can reshape them?

[Laurent Martinez, Chief Financial Officer]

Yes. Alasdair, thanks for your question. So you're making a valid point because indeed the shape of our cash is very much predicated by the tenders. And we have defined, I would say, early in the integration process. What is the pattern of working capital we like, and we want to have on tenders. So everything which we are signing today into the new group is kind of framed by this working capital pattern. So overall, and to take a step back, indeed, we said that we will be as of September of '21 with a kind of a new normalized capital after the cash outflow of the first half. And then there will be a progressive cash ramp up. We are definitely confident to be cash positive for the second half of '21/'22, and then there will be a progressive cash ramp up over the years up to the above 80% cash conversion target we have been framing.

[Operator]

Next question will come from Katie Self dialing in from Morgan Stanley.

[Katherine L. Self, Equity Analyst]

I just wanted to clarify really a couple of points around the HS2 contract since we get asked on this one quite a lot. Firstly, is there any information you can give us on the down payment related to this contract, would it be wrong to assume something in the kind of 10% to 15% region? And also, can you clarify the situation on the 2 bids? Are we right to think that Alstom would benefit if the Hitachi Bombardier consortium was awarded the contract even though the technology involved there is part of the antitrust divestments?

[Laurent Martinez, Chief Financial Officer]

So indeed, we have 2 bids on the table on HS2, one, which is Alstom standalone as it was launched before the closing of the transaction and one which is a consortium between ex Bombardier and Hitachi. So we have kind of 2 chance to get the contracts, and we will see there is competition, and so we'll see the outcome of this, as I say, in the weeks or months to come. I will not comment, Katie, on the down payment specifics. I know it's always the commercial sensitive information to quote on this. But I would say that it's a standard kind of down payment that we have on these kind of contracts.

[Operator]

Today's last question is coming from Jonathan Mounsey from Exane BNPP.

[Jonathan R. Mounsey, Analyst of Capital Goods]

So maybe a different way of asking Akash's question around the provisions. I guess the difficult bit to provision for would be the -- I don't know if you call them fines or at least monies that you'll agree to either pay or take off the ultimate bill to the customers where the projects are in difficulties. So those are negotiations, which, as I understand, are yet to be completed. Could you maybe give us a bit of color around where the negotiations are most going to be acutely felt where we're likely to have to pay fines? And also possibly, is this what changed -- Is this -- it feels like in the last 6 weeks, through the CMD, the messaging changed and it feels like you're ramping very quickly on a number of projects in a way that you weren't describing to us earlier. Is that ramp-up and attempt to get these problem projects finished and therefore minimize the fines? And if you do struggle to deliver these projects, do the fines get larger, the longer it takes to resolve them? Just some color on all that, please.

[Laurent Martinez, Chief Financial Officer]

Jon, thank you very much for these 2 points. So in terms of your -- starting with your second point. In terms of the ramp up, the process is simple. We are redefining with our customers, I would say, a new baseline that we want to deliver. And this is the basis of our conversation with our customers, and we want to have and lay down a schedule, which is a credible one that we want to deliver. So there is no kind of rush to avoid more penalties. That's not the spirit we are in. It's all about having a stability in our project execution and prioritizing on customer satisfaction. On your first point, this customer negotiation conversation are indeed ongoing. I want to frame that overall consequences of these potential customers conversations are part of the provision we booked end of March 2021. And I would say that this will be a subject which will be continued in the weeks and months to come. We need to be to [indiscernible] in this kind of subject. But we are overall in the frame of our provisions. And overall, the important elements for us, again, is back on credibility in terms of customer deliveries and customer satisfaction.

[Operator]

The next question will come from William Mackie calling in from Kepler.

[William Mackie, Head of Capital Goods Research]

My questions would be directed or question directed around revenue growth and order acceptance. Firstly, you've kindly given pro forma numbers for the group last year. But just as a matter of clarity, can you -- I mean, the 32% or 33% pro forma growth is very impressive. Can you give us a flavor of the pro forma growth in the business areas? I missed that. And then specifically, after such a strong pro forma growth in Q1 against your baseline of EUR 14 billion. Can you at least now frame where you see the revenues in the full year should we expect this sort of Q1 to roll on through the whole fiscal year? Or do we see that the ramp-up is all skewed in H1, and we see a much more level profile in the second half of the year? So the question is around, I guess, how we should think about pro forma growth in the business areas and growth for the full year? And then specifically, a follow-up would be about your order intake within the contracts related to the BT platforms that you have signed, can you at least offer the group, can you talk about your expected level of gross margin on incoming orders in comparison to the existing gross margin, which sits in the backlog largely around the BT programs?

[Laurent Martinez, Chief Financial Officer]

So starting with your first one, indeed, on the 33% of growth Q1 2021 to Q1 '21/'22 is very much driven by the COVID impact, which has been impacting everyone on the Q1 2021. So to give you some color, definitively a large step-up in Rolling Stock compared to these numbers, a step-up as well in Signaling because this is where, I would say, the level of activities has been ramping up in the last months and as well as the most impacted in our Q1 2021. So that's for your first question. On your second question, indeed, which is a fair point as well as the base line of the EUR 14 billion and the trend for '21/'22. So definitively, we see a progressive ramp up on the Rolling Stock project moving ahead, I would say, in the quarter and second half of the year, as I say, on Signaling as well, there is definitively this high single-digit CAGR, which is our overall target, so that's definitively to areas where there will be a continued progressive sales ramp-up across the quarters. And finally, on your last question on the order intake. So we confirm that -- which is very positive, that the level of margin of our order intake is above our backlog margin. And that's basically getting into the virtuous circles we had in Alstom, where we get, I would say, healthy order intake, which is beefing up the margins of our backlog, and we are trading at a lower level because we are, of course, delivering at a faster pace, the low-margin contracts. So we are into this phase which is definitively positive.

[Operator]

At this time, sir, we have no further questions. Thank you.

[Laurent Martinez, Chief Financial Officer]

So thank you very much on my side for your attention. Our next event will be our shareholder meetings and which will take place on July 28. And I wish you all a very good day and a very good summer. Thank you very much.

[Operator]

Thank you, sir. Ladies and gentlemen, that will conclude today's presentation. We thank you much for your attendance. You may now disconnect. Have a good day. Thank you.