Alstom SA

PAR:ALO

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Alstom conference call.I now hand over to Henri Poupart-Lafarge. Sir, please go ahead.

[Henri Poupart-Lafarge]

Thank you. Good morning, ladies and gentlemen. Welcome to our classical conference call on our Q3 numbers. First of all, as still be -- still the case, Happy New Year. We're still in January, so I wish you -- all of you a very happy new year. Now I will comment a little bit, the numbers and the press release you have seen. And I will give you also one word on our proposed transaction with Siemens.So as you have seen on the press release, Alstom has achieved an excellent commercial momentum for the first 9 months. I would say again, with record order intake for the first 9 months of EUR 10.5 billion, which is to be compared with EUR 4.9 billion last year. In particular, this quarter, so during Q3, Alstom recorded EUR 3.4 billion of orders, and the orders were particularly strong in service which as you know is one of our strategic goal, which also as you know will be translated into sales over quite a long period. Notably this quarter, we have recorded the long-term maintenance contract for Riyadh Metro as a service contract. But we have also recorded number of trains in Luxembourg, in Germany as well as signaling contract in Mumbai for Mumbai Line 3. So altogether, as you've seen, the book-to-bill is much greater than 1. And therefore, the backlog of Alstom is also reaching a record level of close to EUR 40 billion on December 31.In terms of sales, totally in line with our expectations, and totally in line with our guidance for the full year. The first 9 months amounts to EUR 6 billion, up 18% organically and compared to last 9 months. Over the quarter, our sales reached as well EUR 2 billion. We are really in a EUR 2 billion quarter after quarter level. And this has been fueled again, I would say, in line with previous quarters, by the Dubai Metro Systems. Some deliveries of regular trains in France as well as usually the maintenance contract in the U.K., which is one of our main contract in our backlog.Again, book-to-bill, strong at 1.7 globally. So as you can imagine, we have extremely good visibility on the future sales. And I would say the visibility is increasing quarter after quarter.If you want to have some updates on some of our major contracts and some of the major milestones of our contracts, of course one of the main event was the delivery of the first train built in South Africa. You remember this -- or you know -- all of you know this very last contract after having manufactured 20 trains in Brazil, we are now up and running in South Africa, and we have delivered the first train from our new factory in South Africa, which is I think a fantastic achievement. We have also completed a number of trains in our factory in India, and quite notably, we have completed the delivery of our 20 trains for Sydney Metro out of our factory in India, which I think is also a significant milestone not only for Sydney, but as well for our factory in India in terms of maturity.For the outlook, of course, these good numbers are just confirming our outlook for the full year, which we have given since the beginning of this calendar year because of the change of -- on IFRS 15 as well. So we confirm sales from '18/'19 of around EUR 8 billion. We confirm as well the adjusted EBIT around 7%, even though we are not disclosing today some EBIT numbers. But we are confirming the guidance for the full year. And of course, for the medium term, our strong backlog and our visibility and improved, I would say, visibility for the future, allows us to confirm our guidance, our midterm guidance, which is to outperform the market growth, and to gradually improve profitability as well as cash generation, which of course is always the caveat on cash generation which we always remind all of you that we can have some volatility over short-term periods because of course of the nature of our project business.As far as the transaction with Siemens and in particular the antitrust process with European Commission, I can just remind you the few elements. As you know, on December 12, to answer competition concerns expressed by the European Commission in the statement of objections, Siemens and Alstom jointly submitted remedy package. And both companies considered that this package as appropriate and adequate to answer to the commission concerns while preserving the industrial and economic value of the deal. Since then, as you have seen, we had continuous dialogue with the European Commission, including some improvement of the remedy package to respond to the European Commission concerns. And of course, in the limit of preserving the interest of the deal. The proposed divestments have attracted significant interest from suitable buyers which indicates, which confirms the viability of our proposal. And now the European Commission decision is expected by February 18. And today, there is no certainty that the content of the proposal -- proposed package will be sufficient to alleviate the concerns of the commission. This being said, this merger would enable to create a European global leader capable face increasing worldwide competition in some case based on strong protected markets. And we consider that competition in Europe will also be preserved thanks to divested asset transfer which will then force existing competitors' landscape. It is therefore extremely historical and crucial decision for the rail industry in Europe.So I do not think there's any other comment to be made on the transaction. So I will probably propose you to focus your Q&A on the situation of Alstom. As far as the transaction is concerned, I think everything has been said. Thank you for your attention, and now I'm ready to take your questions.

[Operator]

[Operator Instructions] We can now take our first question from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

I think I have probably 3 questions, if I can. The first one is that obviously the signals from Brussels have been relatively negative in the past few weeks. So I suppose you start off, I mean, kind of preparing for plan B. And the question I have specifically about that is on the group's capital allocation strategy on a stand-alone basis. I mean, what do you see as an appropriate debt level for the group going forward? And is there actually any reason to retain more cash on the balance sheet if you are independent than if you were to tie up forces with Siemens? So that's question number one. Question number two is about the remedy package. I'm just trying to understand, what's the remaining pushback from the European Commission. And whether the concessions you offered are good enough in signaling or not, or if that's actually the case that you only need to work with the commission again to address their concerns about the high-speed train category and only this category? And then the final question is about, I mean, the very strong order performance you had in the first 9 months of this year. Clearly, probably the highest ever reported by the company. So do you think that the rail market is overheated to a degree right now? And do you see the risk of a catch-down effect as the pipeline of the large orders possibly dries up in the next year or so?

[Henri Poupart-Lafarge]

Thank you, Gael. A few points. I just said I will not necessarily comment on the discussions that we have with the European Commission. So I will not go into the details and this was your, I think, second question, which I will not probably answer. On the first one, as I always said, I mean, there is no plan B. We are working on the plan A. And frankly, there is no plan B as well because we don't feel the need to have necessarily a plan B ready. If plan A does not go, which again would be a strong disappointment, the company is extremely strong. And as you have said -- as you have seen, we have a very large order intake and we have extremely good positions. So we don't think that we need necessarily to anticipate any negative outcome of our current merger proposal. We'll see thereafter what would be the way forward. But as far as we are concerned, we are working entirely on plan A. On the order performance, I think -- yes, you are right. We have record level of order intake. Also, to be fair, based upon very large orders as well, which for me is also -- I mean, it's a positive news. I mean, you could see that there are some exceptional orders in it, which is true, like the very high-speed trains for France, maybe a little bit Montreal, although it's a more classical one. And also a lot of service contracts. Why I see it positively is that although if it was, I would say, only short-term orders, we could not record such a level of order because it's very difficult to increase our capacity at such a reason. So the way these orders will be translated into sales will take a lot of time when you talk about the very high-speed, it's 10 years. When you talk about service contracts, it's 10 years, starting in 3 years and so forth. So I don't think that the level of order intake is I would say total -- has a total correlation with the increasing level of sales, short term. In terms of rail market, I think the rail market is good in general. And UNIFE has confirmed a 3% growth year-on-year. So we are outperforming good market, definitely. But it's a good market. Whether it's overheating, I don't think so. I think that there are a lot of projects which still -- I mean, the demand is still there. I warned, I think in one of my previous conversation, on the fact that next year there may be fewer very large contracts not because of the overheating this year but more generally because of some geographical markets which had slowed down like Middle East, for example, and which have not recovered despite the slight recovery in oil price. So we see fewer very large projects. But again, not because of the lack of demand, not because of the lack of needs, but probably because of the momentum in a number of countries. Because as you all know, we need some financing for these large projects. So there could be a lack of financing in 1 or 2 countries. So no -- I mean, again, we are -- we have this very nice market where the underlying demand is untapped and will be untapped for a very, very long number of years. So there is no -- we are far, far from being the kind of cyclical market. The issue is just to answer to a very, very long-standing demand.

[Operator]

We can now take our next question from Jonathan Mounsey from Exane BNP Paribas.

[Jonathan R. Mounsey, Analyst of Capital Goods]

So as we understand there, I think Siemens CEO was standing up only this week at a conference and was I think mentioning that the issues that remain are not so much around signaling with the deal now, but around the high speed as has been commented on. And also, it sounds like the discussion is now obviously -- I mean, high-speed has caught your technology platform going forward for development of regional trains for metros beyond that into the future. Obviously, then it's very difficult to see either Siemens or Alstom wanting to divest that. So we move on to licensing options. And I guess it's probably what you've proposed. But the commission's willingness to discuss those options, do you think that's indicative of the idea that there's actually an agreement that could be reached or is it just procedural? Options that you offer have to be considered? Is there really any common ground here? Can an agreement ever be struck with licensing? And more than that, the date that's set, which is the 18th of February, it seems quite close given the complexity that we've arrived at in terms of the options. Is that date absolutely set in stone here or could we see the clock stop once again while the options that you're proposing are considered?

[Henri Poupart-Lafarge]

Again, on this discussion with the European Commission, I mean, there are lots of discussions. And again, I don't want to go into the details. On the timing, there is a general consensus, I would say, not to go to any prolongation of the discussions. Theoretically, probably it's possible. I mean, from a total theoretical standpoint, but I don't think anybody wants it at that stage. To be fair, we have discussed with the European Commission I think for the last probably 12 months minimum since we have filed. And I think, this -- at one point in time, I think this all potential proposal has been discussed. And I think now it's a time for decision other than anything else. So everything is known, everything is on the table and now it's time to make the decision. Thank you.

[Operator]

We can now take our next question from Alasdair Leslie from Société Générale.

[Alasdair Leslie, Equity Analyst]

So if I may, just try again one on the approval process and really follow-up in terms of the timing, just to get a sense of to what extent the clock is now running down. You just said obviously it's now time to make a decision. Kind of in view of procedural requirements, doesn't EC's decision normally need to come at least a month before the February 18 deadline? Is that different or could that be different in this case? And then also maybe can you just comment really about when the improved package was actually formally placed with the EC? Perhaps was that last week or just this week?

[Henri Poupart-Lafarge]

I think, considering the complexity of the file and of the decision, I think it's fair for everybody to wait for the formal decision to be taken. So yes, I would say when it's a simple file, you could anticipate 1 month earlier, as you said. But as it's a complex file, I think it's prudent and cautious for everybody to wait for the final and formal decision before anticipating. In terms of improvement, there is no one date of this improvement. As I told you, we had very nice and a positive interest from buyers. So this has also fueled and triggered some discussions around the terms and conditions of our package. So it has not been in one go. It has been progressive and several goes. So there's not one particular date. Okay.

[Operator]

Our next question -- we can now take our next question from James Moore from Redburn.

[James Moore, Partner of Capital Goods Research]

I understand you're limited on what you can say, but I suppose your shares are moving meaningfully up and down on seemingly very well-informed articles from Bloomberg and Amlak, so I'm going to try as well. I just wondered if you could confirm 2 things that is seemingly out there and then ask you one question. So of the confirmations, would you agree with the press reports and the Siemens management comment that signaling is fixed and issue is now very high speed? That's the first question. Secondly, on very high-speed, would you agree that there is some softening as reported that a 5-year license is too short, but maybe a longer one is a possibility? And finally, why not just sell TGV or Velaro as trains were never that great a margin business in the first place?

[Henri Poupart-Lafarge]

Thank you, James, for trying this one. No, I agree with you that this process of course is disturbing on our share price, definitely, and there are plenty of rumors and each day there is a rumor there are some movement sometimes in our share price. That's why I can just sort of say that look, guys we need to wait. It's -- there is only one day where the decision will be taken. So it's either everything on the thing. There is not a staged approach where we are clearing one part or the other ones or another one. So it's a complete view on -- a global view of the commission on the package. So no, frankly, I will not comment on any particular sub-element of a submarket or sub -- and it's very -- it's quite complex. So let's -- I totally share your -- the frustration and your frustration and you can believe me that my frustration is as large as yours. But it's a global decision and a global yes or a global no. It's not -- there will be nothing like a partial yes or partial no. So let's -- we continue to fight. We continue to promote our solution, which as I told you, we believe is appropriate, adequate and answers the commission concerns. But there is no such thing as a partial okay. Thank you, James.

[Operator]

We can now take our next question from Simon Toennessen from Berenberg.

[Simon Toennessen, Analyst]

My first question is on your signaling business. Orders have been down quite a bit now in the quarter. Obviously, there's some comp effect probably from last year as well but slightly down I think in Q2 as well. Can you just comment a bit on what you're seeing and expecting maybe in the signaling part going forward? And also, as we move into your next years, then is there any potential mix effect we should think about given obviously the higher-margin content there? Second question, just on your guidance, I was maybe a bit surprised you didn't upgrade your revenue guidance at least. Obviously, it's only part of your guidance. But looking at kind of the last 2 Q4s you had, you were quite a bit above the kind of 2 billion you need to get to your full year guidance for this year given the 6 billion you've done in the first 9 months. And obviously, your backlog is a lot stronger even this year. So why not upgrade a bit on the revenue side? And then lastly, just an update on tender activity, I guess this is helpful because you tend to talk each quarter about what you are seeing and then even where you see potential larger orders arise. Has there been any change in the past 3 months there you can update us on?

[Henri Poupart-Lafarge]

Okay, thank you for your questions. Yes, on signaling, you may recall that last year, we had a relatively low level of order intake in signaling, which is yes, translated into a kind of stable sales. This is, of course, a little bit disappointing. I'm not hiding it. We are recovering in terms of orders, as now they are increasing in absolute value. But clearly, we need to improve our commercial momentum in signaling. From a pure factual standpoint, I would say that the marginal decrease is leading to some contracts in North America and Latin America. But I would say if you step back and you take a global view, clearly, our performance in signaling should be better. In terms of mix, as you have seen, service is starting to grow. It takes a lot of time for service and it's always a little bit disappointing for you because it takes so much time between the order intake and the increase in sales. And also in the previous period, we had this issue of renovation contracts which were ending and which are also -- distorted the picture. We see service growing. So altogether, because as you point out, it's true that signaling is probably -- I mean, it's not probably, has a higher-margin content. And therefore, there's a negative impact of this small goals of signaling. But at the same time there's a positive impact coming from [ some, ] so altogether, I think it's relatively stable from a mix impact. Now in terms of commercial momentum, nothing has really changed as compared to what I told you, which is basically as I said, it's very positive momentum worldwide based upon the global goals of mobility in the world, in Europe and elsewhere on the drivers, you know, with unfortunately 2 regions which are still lagging behind: Middle East, which has a low level of tendering activity as compared to the past -- the recent past, of course, in the last 5 years, let's say; and also Brazil and Latin America, which is still relatively low as compared to recent past as well for totally different reasons. So -- but because of the lack of stability, let's say, financing stability in both cases. But no particular changes in the commercial outlook. Thank you. Next questions?

[Operator]

We can now take our next question from Alfred Glaser from ODDO.

[Alfred Glaser, Analyst]

I just wanted to ask you, talking about tender activity and business outlook, can you give us some indications, especially on Russia and overall, the former Soviet countries where you have your combined business with TMH and Locotech. And second, could you also update us on the ramp-up in South Africa and India and the planned production over the coming quarters, please?

[Henri Poupart-Lafarge]

Thank you, Alfred, for your questions. So on Russia, frankly, as I said, I think, previously TMH, our partner, is doing a fantastic job. And the market is recovering and TMH itself is doing a fantastic job. So you have seen that in our numbers. But the profitability of TMH has significantly increased and this has explained the increasing NEC as we call it. So there -- our share of the profit. And this is continuing. So there's a lot of good news coming from both the market and our partner in Russia. On the rest of CIS, I think all I would say, activities in Kazakhstan are continuing, and we have made some progress. And you have seen that we are consolidating our factory there, and we have progressed and this is explained by some order intake by the way we have progressed in Kazakhstan. We have not recorded orders, very large contracts in the region of CIS but the execution of our project in Azerbaijan is fine as well. So I think, very good news from Russia on that front and I would say continuing market momentum in the rest of CIS. In terms of our factories, 2 very different situation. India is now clearly up and running. Remember, we have inaugurated this factory, if my memory is correct, in December 2012. I was there. Now we have completed in India, Chennai, Lucknow, Kochi, [ Sri]. So we have completed 4 projects in India. So it's now, I will not say it's a totally mature factory, but it's already a factory with quite some experience. And we are starting the new contract, Mumbai Line 3, which has been as well awarded. So it's now a factory which is, again, a part of our global footprint and up and running at, I would say, Alstom standards. Very different, of course, is the situation in South Africa where as I said, we have just delivered the first train, which is of course, very good news. It means that the factory is now capable of delivering trains, but it's not at the level it should be for the future in terms of rhythm of delivery. So we still have to ramp up the factory and of course, it's one contract, so we are far from being capable of executing several different contracts in this factory. This is a factory which is entirely dedicated to PRASA. So I would say so far, so good, but 2 different cases. In both cases, by the way, there is one common element that the challenge whether we are in India or whether we are in South Africa, is more on the supply chain than our manufacturing capabilities. I think we have reached a significant competence in terms of transfer of technology in our own factories. So I think we are capable of manufacturing trains in our own factory using the global Alstom processes but it's fair to recognize that in terms of supply chain, we still need to strengthen, in both cases the supply chain. So that's our main goal. Thank you, Alfred. So now maybe next questions?

[Operator]

We can now take our next question from Ben Uglow from Morgan Stanley.

[Benedict Ernest Uglow]

I know it's not directly related to the sort of the regulatory angle, but Chinese competition, it's been a long time since we've talked about that. When I read the press and the sort of stuff that's coming out of various competition authorities, they do -- there does seem to be quite different views. On the one hand, some analysts are saying that the position of Chinese entering Europe has been frankly minimal. And then when I look at some of the stuff that's been going on between Deutsche Bank contracts, orders in Hungary and trying to buy ŠKODA, I would have thought that the threat of Chinese competition was more significant. How -- regardless of anything to do with the Siemens merger, how are you guys thinking about the long-term capability of new entrants coming into Europe?

[Henri Poupart-Lafarge]

Yes, thank you, Ben. I think it's -- you have summarized the situation. The CRRC -- but -- is -- and you have an increasing number of competitors in the world and CRRC has clearly a strategy of becoming global. And then you have 2 ways to look at it. You can look at the details and say, okay, they have entered into the U.S. but they didn't get an order last year and then they make a number of entries in Europe, as you said, relatively limited in size but quite significant in terms of strategic meaning, both because it's for example, a contract with DB because it's a contract in Hungary because it's -- they are still looking for acquisitions. So they failed on ŠKODA but we know that they are trying on others. So their strategy there, so if you step back, my view and this is -- this will not change regardless of Siemens merger or not it will not change the market situation in the market is -- the fact that CRRC has intention to enter into Europe. This is extremely clear, and I believe that they will succeed in doing so. And then the timing of it is of course of a lot of discussions and so forth. I mean, and they will -- it will take time. Whether it will go directly through a direct entry or through a merger or an acquisition of European manufacturer, this remains to be seen. But I do believe that they will manage to -- by one way or another, they will manage to enter into Europe. Hitachi has managed to do it directly by the way, through [ the tube ] directly who had an order in the U.K. You may remember an [ IPO ] a few years ago. But also through the acquisition of Ansaldo, so now Hitachi is quite present in Europe. So I think CRRC, and this is our assumptions, CRRC would manage to do it as well. But again, it's a question of timing, which has some importance in some, as you said, regulatory analysis. But frankly, for me, it's not the main point. Okay? Next question?

[Operator]

We can now take our next question from Katie Self from Morgan Stanley.

[Katherine L. Self, Equity Analyst]

I actually just have 2. I wonder if I could back to the first question on capital allocation. I know Henri, you said in the past that for you an optimal balance sheet is one with a kind of 0 net debt, net cash position regardless of the outcome of the merger. I just wondered whether that's still your view or whether there's any change there. And then my second question, different, is you talked a bit about on the call about the slower conversion from orders to revenue from service contracts versus other contracts. I wonder what we should be expecting over the coming years given the shift to IFRS 15 and whether that means that actually, the proportion of revenue we see from rolling stock contracts would actually increase sort of earlier in that phasing? Do you have any view there?

[Henri Poupart-Lafarge]

So thank you for your question. Yes, I said exactly what you said, in the past. And I just -- I mean, I confirm this statement. I think that in our business, we should not be indebted, so we should have 0 cash, 0 debt level. That does not -- that's a long-term capital allocation. Again, we have not looked at plan B, we because we are looking at plan A. So we need to define our strategy going forward in case -- in the unfortunate event if the Siemens deal was not being approved. If this requires some capital, then we'll come back to you to tell you exactly what should be our balance sheet starting. But that's again too early to discuss. In terms of IFRS 15, the IFRS 15 does not change fundamentally the way service contracts are being recorded. Little are being translated into sales. A little bit because we have for example some particular strong overhauls after 7 years, after 15 years, which will generate more sales under IFRS 15 then they were generating under the past IFRS 11. So you should not expect any stronger change in our translation into sales. I'm just outlining the fact that in our current backlog, our current order intake during these first 9 months, you have contracts like the O&M for Riyadh for example which would not generate any sales for 2 to 3 years because we need first to put the trains under operation and then you have the warranty phase and then you start actually to generate sales or order sales. But it is not related to the change of accounting methods. The other questions?

[Operator]

[Operator Instructions] We have an additional question now from James Moore from Redburn.

[James Moore, Partner of Capital Goods Research]

Henri, it's a question about contingent liabilities and I saw a couple were added in this year's annual report, the big one being the Brazilian situation that's sat there for some time. I'm just thinking about the possibility of these contingent liabilities either going away or turning into a cash outflow. Do you have any color on any of these that you could add?

[Henri Poupart-Lafarge]

I think there has been no -- and I'm turning as well to Laurent to make sure that I'm not forgetting anything. But you have no large evolution of these contingent liabilities in the last quarter. We're still are in the process. So you are talking about Brazil with, I mean, a number of -- we have commercial contingent liabilities, and we have also some of our past issues which are still hanging around. But there have been no stronger evolution in the last quarter. Maybe Laurent, you want to add something?

[Laurent Martinez, CFO & Senior VP of Finance]

No, there is no specific event into it. Some of these are very long-term procedures as well. So we don't expect any short-term impacts on our cash on this kind of events.

[Henri Poupart-Lafarge]

Okay. Thank you. Any other questions?

[Operator]

No, sir. There are no further questions. I will hand the call back to you to conclude.

[Henri Poupart-Lafarge]

Thank you. Thank you, everybody. I mean, as a conclusion, I will have 2 conclusions. One is of course, I want to outline the situation of Alstom and the fact that we are still enjoying a very strong commercial momentum, which is, I think the combination of good markets as well as, I think, the success of our strategy in the last years. And as far as the Siemens transaction is concerned, I mean, it's a very frustrating moment, as I said, for you. It's a very frustrating moment for us. We'll fight and we'll fight till the end. And we'll see what will go on and we'll keep you updated. And I'm sort of sorry about the fact that we cannot be more precise and more detailed, but I think it's such complexity that we need to wait now for the final decision. So thank you, everybody, and we'll talk again in the next call -- on our next call or earlier. Thanks a lot.

[Operator]

Ladies and gentlemen, that will conclude the Alstom conference call. Thank you very much for your participation. You may now disconnect.