Alstom SA

PAR:ALO

Earnings Call Analysis

Alstom's Growth and Green Milestones

Alstom showcased a promising start to the fiscal year, with a solid order intake and sales, highlighting a strong market dynamic. Despite a softer first quarter, the €220 billion pipeline over the next three years reinforces investor confidence in the company's potential. There is an expectation of significant order intake growth in the Americas, particularly in the U.S. Alstom confirmed a book-to-bill ratio above one for the fiscal year 2023-24, with several high-profile deals set to be booked. Sales grew organically by 7.6% Q1 to Q1, bolstering the expectation for continued positive momentum and supporting the forecast for €1.7 billion in sales at zero percent gross margin. On the climate front, Alstom has committed to ambitious CO2 reduction targets and a major solar power agreement in Spain, ensuring 80% of their European electrical consumption comes from renewable sources. For FY23-24, Alstom reaffirmed an adjusted EBIT margin of approximately 6% and expects the free cash flow to be significantly positive.

Geographical and Ordering Trends

In the American region, particularly with the Philadelphia orders, there is demonstrable evidence of robust growth and potential in the U.S. market. Over the coming years, expectations are set for an average order intake in America to roughly double in comparison to the last three years. This persistence in growth parallels with an optimistic global outlook, underscored by substantial orders, including a turnkey project in the Philippines approximately valued at €1 billion and various others across Germany, Ivory Coast, and Canada that are poised to be confirmed within the current year. The upsurge in the order book is propelled by the high rate of orders tied with indexation - over 90% for the quarter - ensuring price adjustments in alignment with market conditions, thereby supporting the positive trajectory for margins in the midterm.

Sales Performance and Outlook

The company's diligent commitment to quality execution has fostered a 7.6% organic sales growth from Q1 year-over-year, particularly visible in the Rolling Stock category. This trajectory supports the full year's expectations and contributes positively across the company's four product lines. A commitment to work through the identified €1.7 billion in sales at zero percent gross margin is underway for the fiscal year '23, '24, with an emphasis on front-loading these sales earlier in the year.

Sustainability Commitments and Energy Strategy

The company's climate roadmap has hit a significant milestone with the Science Based Targets initiative (SBTi) validating its CO2 reduction goals, which align with the aims of the Paris agreement. The new targets outline a 40% reduction in Scope 1 & 2 emissions and up to 42% in passenger transport emission reductions by 2031. Further advancing the sustainability goals, a major solar power purchase agreement in Spain has been inked, signaling a substantial shift towards renewable energy, with the operations set to commence in early 2025 and anticipated to fulfill 80% of Alstom's electrical consumption needs in Europe.

Financial Health and Projections

Despite a challenging economic landscape marked by inflation, the company has demonstrated strategic foresight by shielding margins through order indexation and maintaining strategic contracts. The adjusted EBIT margin is expected to be around 6% for fiscal year '23, '24, with projected free cash flow trending significantly positive.

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to the Alstom First Quarter Orders and Sales. [Operator Instructions]

I will now hand you over to your host, Laurent Martinez, CFO, to begin today's conference. Thank you.

[Laurent Martinez, Chief Financial Officer]

So good morning, everyone. Welcome to this publication for our first quarter, focusing on orders and sales. I'm very happy to introduce Bernard Delpit, our new Alstom CFO, which he is joining us for the first time for this publication.

[Bernard Delpit]

Thank you, Laurent, and good morning, everyone. I'm thrilled to join Alstom first Q1 and to support this fantastic industry in this company in its next chapter. I very much look forward to speaking and meeting with you all in due course. In the meantime, I will turn back to Laurent to run through the presentation.

[Laurent Martinez, Chief Financial Officer]

So thank you, Bernard. And let's turn to the first slide on the order intake, confirming that our market dynamics is confirmed and our potential is intact with €220 billion of pipeline over the next 3 years. As you know, last year in order intake, Q1, we had a very strong order intake, thanks to the Baden-Württemberg orders of €2.5 billion, while this year, as we discussed as well during our full year release, the phasing of our large orders is rather back-end loaded.

On the regions, worth noting Americas with Philadelphia orders, which is a proof point of the strong growth and the potential we see in the U.S. market. As a reminder, we are expecting in the years to come, an average order intake in this region, which is roughly double compared to the last 3 years.

I want also to highlight the success on the large systems in Q1, which has been resuming after modest orders in the fiscal year ’22, ‘23. Happy also to report a good flow of base orders, illustrating the continuous management focus on this subject, which is important for our margins.

Two additional points for orders, which are positive. Number one, percentage of orders with indexation largely exceeds 90% for the quarter as per our target. And second, good quality of order intake in terms of margin, which continues to support our midterm trajectory.

So moving to some of the flagship orders for this quarter, starting with a turnkey project in Philippines for around €1 billion, illustrating about €700 million and a system project in Romania for Cluj. As you have seen in the recent press release, we have as well secured a quite large list of deals, which are not yet booked as we speak, including positive momentum on our flagship locomotive product Traxx. We have seen some announcements yesterday and regional train product Coradia Stream in Germany, but also Abidjan Metro in Ivory Coast and Quebec Tramway in Canada. All of that are expected to be booked within this year. We are therefore confirming our guidance of book-to-bill above on for the full year '23,'24.

So turning to sales. Overall, we continue our positive track on quality execution with a solid sales ramp up, as you see, of 7.6% on organic Q1 to Q1, notably with a good momentum on Rolling Stock. This sales growth definitively support our expectation for the year with a positive momentum as you see all across our four product lines.

We do confirm as well our good progress on our €1.7 billion of sales at zero percent gross margin for the full year '23, '24, progressing as planned on the execution, and therefore, expecting the sales to be front-end loading during this year.

Moving to our climate roadmap achievement on this quarter. First, we have announced on July 6, our CO2 emission target, which has been validated by the SBTi, which is a major milestone. And this consistent with the level required to meet the goal of the Paris agreement. In precise terms, this means that we have increased our ambition, taking into account the new size of the group, including Bombardier and committing now to 40% of reduction on Scope 1 &2 by 2031 [ph] and versus 25% in the [indiscernible] perimeters. And on the third scope, we are now committing to 42% on reduction on passengers and 35% on freight

On the second element, we have been signing a major solar power purchase agreement in Spain. So this will be a massive project since it will basically start the operation early 2025 for 10 years contract and will cover the equivalent of 80% of Alstom electric consumption in Europe, which is a major step to reach our target, as you know, of 100% of electric consumption from renewables.

So as a conclusion, we do confirm our financial trajectories, both for the year, but also for the midterm target we were setting out in May '23. Specifically looking at the fiscal year '23, '24, we confirm the adjusted EBIT margin at around 6% and our free cash flow to be significantly positive.

With that, I'm happy - we'll be happy to take your questions. Back to you, operator.

[Operator]

Thank you. [Operator Instructions] We will take our first question from Akash Gupta from JPMorgan. Your line now has been opened. Please go ahead.

[Akash Gupta, JPMorgan]

Yes, hi. Morning, Laurent. And first of all, thank you for the cooperation over the year-end. Wish you all the best for the new role, and welcome Bernard. Looking forward to working with you. The one question that I had was that you said that the zero gross margin sales would be front-end loaded. Can you provide us an up split between how are you currently anticipating it to fall between first half and second half? Thank you.

[Laurent Martinez, Chief Financial Officer]

Good morning, Akash, and thanks for your kind words. It's been a pleasure to work with you as well. So on the content of this zero percent sales contracts, the most important point is that we are delivering and executing as per our target. I remind as well that we have been settling all of the commercial issues already back in May.

Since we are declining, and we are moving from €2.3 billion of zero percent sales margin in last year to 1.7 in ‘23, ‘24, there is, by definition, a phasing, and this sales is indeed a bit front-end loaded in H1 versus H2, but a relative limited front-end loaded perspective overall.

[Akash Gupta, JPMorgan]

Thank you.

[Laurent Martinez, Chief Financial Officer]

Next question?

[Operator]

Thank you. [Operator Instructions] We will take our next question from Daniela Costa from Goldman Sachs. Your line now has been opened. Please go ahead.

[Daniela Costa, Goldman Sachs]

Thank you very much for taking my question. Hope you’re both. Just have two questions actually. First, I guess, lots of contracts that you have announced, sum-up, I guess, maybe over €10 billion that R&D [ph] had booked this quarter but will be booked soon. Can you talk - help us sort of calibrate that with first half to second half cash seasonality and whether this year should be different given the large amount of prepayments potentially in the second quarter? That would be my first question.

And then second question, just maybe if you could give us a little bit of an update on what has happened in terms of cost inflation and the curves, whether this year should be front-loaded or more back-end loaded? How are you seeing things? Thank you.

[Laurent Martinez, Chief Financial Officer]

Good morning, Daniela, thanks for your two questions. So on your first question, on the phasing of orders, so there is, as you have seen a relatively soft Q1. However, our pipeline is very strong, and we are very confident to confirm the book-to-bill above one for the full year.

When it comes to the phasing of H1 or H2 it's still uncertain from the announcement to the booking, there is a number of steps that we need to complete. So that's something that we will see. And that's back to your point on the cash, that would be one of the drivers, the phasing of the H1 and H2, having in mind that we are starting with a soft Q1 in terms of orders.

Second point, as I said, the zero percent sales margin will be more front-end loaded, which will have an impact on the global seasonality of our economics. And the third one is, indeed, we will have the usual seasonality of our activities between H1 and H2. So these are for the drivers on the cash for H1 to H2. Bearing in mind, Daniela, that our commitment is on the full year, as you know, and our commitment is confirmed with a significant free cash flow for the full year.

Second point, briefly on the cost inflation, as expected, to make it simple, no surprise on this. We are continuing to mitigate this inflation by signing orders with indexation contract and providing back-to-back close to our suppliers. So I don't expect any kind of issues on this matter, all as per target. Thank you. Next question?

[Operator]

Thank you. We will take our next question from Gael de-Bray from Deutsche Bank. Your line now has been opened. Please go ahead.

[Gael de-Bray, Deutsche Bank]

Thank you very much. Good morning, Laurent and good morning, Bernard. Hope you are both well. I have two questions, please. And the first one is for Bernard. I know it's still very early days, but I wanted to know if - or what you learned in the past few weeks of being with the business. Is there anything materially different from what you thought it would be? And I'm also curious to know what your priorities could be in the next 6 months. So that's question number one.

And question number two is on the - maybe for Laurent, if you could provide some update on the potential timing of the booking of the multibillion project in Toronto? Thanks very much.

[Laurent Martinez, Chief Financial Officer]

So maybe I start with the second one, Gael. So this is a flagship contract in this Toronto project. It's electrification of the Toronto area, which is a few billion euro contract. It will be basically booked by phase. We are at the early stage. So I don't expect for this year a large amount, this will be more starting as of the next fiscal year.

[Bernard Delpit]

On my side, Gael, as it's only my fourth week in this industry in this company, I wouldn't qualify my comments as plans, but rather fillings or observations. So first, I'm quite enthusiastic about what I've seen in terms of teams. Everybody is really dedicated, motivated and it's great to see that. And by the way, what they have achieved so far is quite spectacular in terms of building a global leader.

My second comment was - is to say that it's really a global company. I mean it strikes me versus what I've seen in my previous jobs. We are global, and that's really exciting to have such a global reach. My third comment is that I've been told that Alstom is a project company. And the project company is complex. It's specific in terms of accounting, in terms of management, it's true.

But considering also the scale of the company, we are in fact, in between a project company and a product company by the scale of what we are doing. And I think it's interesting to see - I'm not talking of the transition, but at least something more balanced than what I thought. I think that would be my three first comments.

It's - but early days in Alstom. I'm not really a fan of the 100-day theory. So only being there for one month, we're really at the early stage of my digestion of what Alstom is. So happy to discuss that when we will discuss H1 figures.

[Gael de-Bray, Deutsche Bank]

I know its very early days, but thanks very much for the comments here.

[Laurent Martinez, Chief Financial Officer]

Thank you. Let's move to the next question.

[Operator]

Thank you. We will move to the next question from Jonathan Mounsey from BNP Paribas Exane. Your line now has been opened. Please go ahead.

[Jonathan Mounsey, BNP Paribas Exane]

Good morning. Thank you very much for let me ask the question. And yes, I would just say good bye to Laurent. It's been great working with you. I think you've had some very difficult questions to answer over the last couple of years, and you were always were able to do that with great grace and calm and also welcome to Bernard, I look forward to working with you, too.

First question, maybe on the Russian asset disposals, it's been going on some time. Just wondering maybe an update as to whether they're making any progress. And Also, I know you wrote [ph] the assets down, but what are we really gunning for here on an exit? Is it basically going to be a nominal $1 sale? Or could we actually see some cash come in on the disposal of that business?

And then just a follow-up on the inflation. You mentioned the indexation. Can I just confirm if we put service to one side, I'm talking more about Rolling Stock specifically, when it comes to wage inflation, that remains not hedged, yes. You have to budget for that when you bid for the orders and hopefully get that mostly right. And as we jump to that, what do you think wage inflation is likely to be in the following year 2024, 2025?

[Laurent Martinez, Chief Financial Officer]

So thanks, Jon, for your kind comments as well and thank you for the partnership in the last years indeed. So on the Russian assets, we are very opportunistic on this one. As you know, we have been depreciating 100% of this. It's a participation, holding position on our side. So if at one point in time, we can make a reasonable deal, we'll make it. Otherwise, it's just wait and see, and there is no much progress on this matter as we speak.

On inflation, so to be very precise on the wages, the wages are part of the indices, which are covering our index contract, as a matter of fact, the largest part in terms of share. So we are fully protected for Rolling Stock, Services and Signalling when it is covered on wages inflation as well. And this is why our basic strategy on the midterm is to be immune from inflation and being immune from inflation being - is having index contracts and back-to-back close with our suppliers. And as I told, 90% of these Q1 orders are indexed.

So when it comes to the wages next fiscal year, so that will be a negotiation, which will be starting, as you know, from Jan to March, so it's very early days. I expect still a tense negotiation as inflation while easing remains high in many of our regions. So I guess this will be still a tense negotiation. Next question.

[Operator]

Thank you. We will take our next question from Guillermo Peigneux from UBS. Your line now has been opened. Please go ahead

[Guillermo Peigneux, UBS]

Thank you or taking my question, I joined by saying very well to Laurent and welcome to Bernard Delpit. It has been great to work with you and it will be great to work with you also. So my question is regarding the organic growth rate. Obviously, now over 7%, and I wanted to know how sustainable is this growth rate in the years to come. I guess at the moment, obviously, we are facing projects and deliveries. But I wonder that gap between 7 point-something percent and your guidance of around 5%. Is there a bottom neck that prevents you from reaching that 7%? Thank you.

[Laurent Martinez, Chief Financial Officer]

Thank you, Guillermo. Thanks for your kind words as well. Thank you so much. So on our organic growth rate. So we have been starting with a very good fit in Q1 with a bit of acceleration on the Rolling Stock, which is healthy. Overall, we are in line with our execution trajectory, so no surprise on this.

Looking ahead for the full year, Guillermo, we do not see any change in the mix. And we see indeed at least 5% organic for the full year based on our good Q1 dynamic. I will not, of course, bet on 7%, 8% on the midterm as a continuous basis. Next question.

[Operator]

We will take our next question from James Moore from Redburn. Your line is open. Please go ahead.

[James Moore, Redburn]

Yes. Good morning, everyone. Laurent, can I to say good luck. Thanks for all the excellent improvement in disclosure. And congratulations on holding the provision red line. And Bernard nice to have you with us, and I look forward to working together.

Can I just talk a little bit about the margin seasonality this year? I know it's early days, but is there anything compared to the seasonality that you expected or the traditional seasonality in the profitability first half, second half, you could note at this point?

And secondly, could we just talk a little bit about what's going on behind the trains revenue? It looks like it stepped up €170, 80 million [ph] Q-on-Q in terms of revenue? And is that the expected ramp-up going according to plan? And behind that, when you think about contract to contract and the important contracts, are there any things that are running a bit behind running a bit ahead that we should watch out for?

[Laurent Martinez, Chief Financial Officer]

Thank you, James, for your kind word as well, and thanks for the dialogue, very positive dialogue we had in the last 5 years. I take the complement of the redline [ph] of the provision. We set it back in May '21, and we did confirm that in the last 2.5 years, indeed.

So talking on your first question on the margin seasonality, H1 to H2. So we will have a sales seasonality related to the sales at zero percent margin. As I said, we'll have more sales at zero percent margin in H1 than in H2. So that will be mechanically weighting down on the margin on H1.

Second, we will have the global seasonality of our sales in H1 versus H2. As you know, we are always accelerating our sales in the second half while we are globally in ramp up. So that will be, I would say, two drivers that I see in terms of the margin dynamics between H1 and H2.

So talking about Rolling Stock evolution, indeed a strong Q1 with 5% up despite indeed the scope evolution, which was high [indiscernible] related, which was in the range of €100 million. So we are good on the organic growth in terms of Rolling Stock on the Q1 to Q1. So drivers, James, are very much Americas. We have a large step-up in Americas, both in North Americas and South Americas and as well Continental Europe, where we are still uplifting our ramp-up on the regional trains globally. So these are the two quick key drivers of our organic growth for the Rolling Stock that we are still expecting to continue to unfold during the rest of the year. Next question…

[James Moore, Redburn]

Very helpful. Thank you.

[Operator]

Thank you. We will take our next question from Delphine Brault from ODDO. Your line is open. Please go ahead

[Delphine Brault, ODDO]

Hey, guys. Good morning, gentlemen. Thanks for taking my questions. I have two. First, can you comment on the gross margin of the orders booked in Q1? And second, can you update us on the tensions you may still see in your supply chain?

[Laurent Martinez, Chief Financial Officer]

Yes. Good morning, Delphine. So thanks for your two questions. So on the gross margin on order intake, I'm very pleased by the quality of the order intake. I told you back in May, we are not about quantity of order intake. We are about quality of order intake. And the quality of order intake is threefold.

Number one is a profitability target. And on this, I can confirm that the profitability that we have been booking in our Q1 orders is consistent with the 8% to 10% profitability target we have on the midterm. The second parameter is the cash parameters, and we are not looking only at the down payment, but at the overall cash profile. And equally, I'm pleased by the quality of the cash profile of this order intake, which will be supporting our 80% cash conversion. And the third parameter is around risks, which are products and TNCs [ph] And this is where our selectivity and leadership position is, of course, playing a role to be productive on this part.

On your second question on the tension on the supply chain, we know that we've been passing the peak of the electronic component crisis from last year. It's still a tense and complex situation, but which is very well monitored under control, and I do not see that as a major risk as we speak. But still, something that we need to watch out not only on the electrical component but globally on our supply chain. But I would say nothing specific on this matter as we speak, Delphine. Next question?

[Operator]

Thank you. We will take our next question from Martin Wilkie from Citi. Your line is open. Please go ahead.

[Martin Wilkie, Citi]

Yeah, thank you. Good morning. Thanks for taking the question and also, Laurent, I would say good luck to your future role. The question I had was you've obviously pointed to ongoing success in passing through inflation and you also talk about the pipeline. And it does feel that surely at the margin, something is going to give in terms of either end consumers paying higher real ticket prices or government having to borrow more to pay per train.

Has there been any tension in the pipeline, so not in terms of your firm orders, but have any pipeline projects being delayed because of inflation pass-through governments are sort of backing away from certain contracts if they're going to be higher cost than they might have been a couple of years ago? Thank you.

[Laurent Martinez, Chief Financial Officer]

Thank you, Martin. Thanks for your word as well. Thank you so much. So on the pipeline, we do confirm the quality and the momentum of our pipeline. You know that we are updating our commercial pipeline on a quarterly basis. And you have seen that we confirm €220 billion with the same phasing as the last 3 months.

On a very concrete basis, we have not seen at all any evolution in terms of the dynamic due to the interest rate of the budgetary situation. I just remind that 70% of our pipeline is based on replacement. I've been in New York City with Marta a few months ago now. And if you look in Paris, if you look in Germany, there is so many replacements, which is needed, and this is something which is, of course, a must do for the stakeholders and a very strong backbone of our pipeline ahead of us. So to make a long story short, no impact whatsoever on this matter as we speak.

[Martin Wilkie, Citi]

Okay. Thank you.

[Laurent Martinez, Chief Financial Officer]

Next question.

[Operator]

Thank you. We will take our next question from William Mackie from Kepler. Your line is open. Please go ahead.

[William Mackie, Kepler]

Good morning, Laurent, Bernard. Yes, echoing everyone else's comments, but thank you for the journey and the improved disclosure and welcome Bernard. My two questions go to one question about orders in Americas. You've said that we should expect order intake in the Americas to be double the base of the last 3 years or average. Could you maybe scope what you mean as a base of the average for the last 3 years? And what provides you the confidence to make such an upbeat statement about the Americas?

And then secondly, when looking to growth for the rest of the year, could you provide a little more color on your expected growth rates across the business lines and what we should be penciling in with respect to the uplift in Rolling Stock, Services or Signalling and Systems? Thank you.

[Laurent Martinez, Chief Financial Officer]

Thank you, Will, and thanks for the comments on the improved disclosures. We've been working hard with Marta and the team to get there. So thanks for all of them. So on the order intake momentum in Americas, the backbone of it is definitively the push from the Biden infrastructure [ph] plan, which is starting to unfold in terms of concrete projects. There is a number of - as well private operators, which are starting to explore the high-speed territories and there is a very famous line from Los Angeles to Las Vegas, for instance, which is at play.

So overall, we see a potential of moving from around €3 billion per year of order intakes to around €6 billion. So that's basically the numbers we are talking about. Of course, this is something which will be unfolding in the years to come, and we'll see how all of this is developing. But the back of it is this rail momentum that we see in the U.S.

On the second point, which is the growth rate by product line for a full year basis. So just to have for you a sense, as I say, the mix should be largely unchanged compared to last year, which means as well that in terms of the growth rate we see all of the product line being around the average of the group. So the System, which has been done in Q1 will be basically catching up in the rest of the year. Rolling Stock, Service will be - and Signalling will get closer to the average of the group. So that will be something which will be a very nice wide spread of positive momentum across the product lines. Next question?

[Operator]

Thank you. [Operator Instructions] We will take our next question from Anap Alias [ph] from CIC Market Solutions. Your line is open. Please go ahead.

[Unidentified Analyst]

Yes. Good morning. Thank you for taking my question. And all the best to Laurent and Bernard in their new roles. My question is about the negative currency impact we had in Q1 on sales. I would like to know if it could have also some negative impact on the operating margin or if it's rather neutral?

[Laurent Martinez, Chief Financial Officer]

Good morning Anap. Thanks for your word, and thanks for your question. So as you know, we are fully hedged in terms of currency risk. So there is no impact on our profitability, thanks to our hedging mechanism that are in place on all our projects. To the next question.

[Operator]

Thank you. We will take our next question from Jonathan Day from HSBC. Your line is open. Please go ahead.

[Jonathan Day, HSBC]

Thanks. [indiscernible] Thank you very much and all the best and welcome to firm. I just wanted to ask a little bit about the footprint and capacity. I wondered if you could just talk a little bit about how you're managing capacity as you ramp up production on the rolling stock side and whether given the contract opportunities, like the one you mentioned in the U.S., you need to expand capacity and grow the operating footprint adjustments as well? Thanks.

[Laurent Martinez, Chief Financial Officer]

Good morning, Jonathan, thanks for your question. So on the footprint, we do globally have enough footprint and capacity to accommodate our ramp-up across our geographies. If I'm talking, for instance, Americas, we are having, as you know, a very large factories in Mexico, which is as well participating to the growth in the U.S. So we have basically all what we need to deliver this capacity globally. Overall, I reiterate our global industrial CapEx guidance, which is 2% over sales, which is our north compass when it comes to the CapEx investment for Alstom. Next question?

[Operator]

Thank you. It appears there are no further questions. At this time, I'd like to turn the conference back to our host for any closing or additional remarks. Please go ahead, sir.

[Laurent Martinez, Chief Financial Officer]

Thank you very much. So thanks all for this session. We are getting to the conclusion of this webcast. As this is my last call with you, and I thank all of you for your very kind words and comments which I share, I take the opportunities to thank you for these 5 years as the CFO of Alstom, which has been a fantastic journey. I've always highly valued the dialogue with you, our investors and with our sell-side analysts. And I wish now every success to Bernard and to the full Alstom team for the next steps of the development of Alstom, which is definitively the rail industry leaders. Thank you very much. And hopefully, talk to you soon. Bye-bye.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.