Alstom SA

PAR:ALO

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Alstom conference call. I will now hand over to Laurent Martinez. Sir, please go ahead.

[Laurent Martinez, CFO & Senior VP of Finance]

So good morning, ladies and gentlemen. I would like to wish you, first, a very happy new year and to welcome you to our conference call on orders and sales for the first 9 months of the fiscal year '19/'20, with, of course, as usual, a specific focus on the third quarter. So I'm together here with Julie, Matthieu, and we welcome today Claire Lepelletier which will join us in the team. Claire, welcome.For the first 9 months of '19/'20, Alstom recorded EUR 8.2 billion order intake compared to EUR 10.5 billion last year, which is, as you remind well, was a result of our 2 major contracts of last year, the new TGV and the Montreal metro. During this third quarter, we achieved excellent commercial performance, orders reaching EUR 3.6 billion, above last year quarters. And these orders leads to a new record high backlog of EUR 43 billion on the 31st of December 2019, which is obviously providing us an excellent visibility on the future sales.This dynamic order intake occurred in the context, which is extremely favorable to the rail. End of the year, the European Union disclosed its Green Deal targeting climate neutrality for the EU by 2050 as you know, and with a specific target on the transport sector, which should decrease by 90%. Its emission in rail and public transport are obviously expected to be instrumental to this transition.In Germany, the number of domestic flights declined last year while Deutsche Bahn long-distance transport has increased for the fifth year in a row, consistent with the overall trend of European mainline. Quote you as well in the context was, as you know, the German government adopted a climate package with EUR 20 billion incremental investment for Deutsche Bahn and [indiscernible] measures to promote trains over planes.Finally, on the urban transport side, which is, as you know, our second-growth engines after mainlines, we see megacities accelerating investments into public transport such as in India or in Singapore.Back to Alstom where our orders were particularly important in Services and Signalling, and this fully in line with our Alstom in Motion strategy as well as in Europe and Asia Pacific. So let me pinpoint a few important contracts this quarter both in terms of size and technology.So first, Alstom was awarded a combined contract for rolling stock and maintenance for Perth, the largest orders ever received by Alstom in Australia for approximately EUR 800 million. Also in Australia, Alstom was chosen to manufacture driverless trains and the digital signalling system for the Sydney network extension. Both of these contracts strengthen our position in the country as the market leaders for the supply of high-level technologies.In the U.K., we had as well a flagship contract to refurbish and maintain high-speed trains, Pendolinos, for the Avanti West Coast line for EUR 755 million within a 7-year contract. It includes an upgraded program of the 56 Pendolinos, which is believed to be the biggest train upgrade ever undertaken in the U.K. This overall will focus on onboard facilities, and Alstom will maintain this fleet alongside a new train fleet recently ordered from Hitachi.In France, as you know, Alstom has been awarded, very proud of that, the renewal and automation of Marseilles Métro for EUR 430 million. On top of providing a modern automated signalling system, these new metros will be environmental friendly with 96% recoverability at the end of their lifespan, 25% less energy consumption than current metros.On the automation side, Alstom will provide its Urbalis 400 solution already deployed on 1,500 kilometers of metro line worldwide. As you may know, Alstom is equipping 25% of the CBTC metro automation in service over the world.Finally, also in France, we have been awarded a major frame contract in consortium with Bombardier to renew and manufacture the new generation of metro for Île-de-France Mobilités and RATP. This concerns -- part of this contract covers deliveries of 44 trains, but the frame contract is much larger with a total of up to 410 trains.Moving to the sales side. For the first 9 months of '19/'20, we reached EUR 6.2 billion, out of which EUR 2.1 billion traded in the last quarter. This represents 3% in actual and 2% organic growth year-on-year, consistent with the perspectives we've been giving you in the last Capital Market Day.Turnover was fueled by the very positive ramp-up of our major rolling stock project with 11% growth year-on-year. And on Signalling, we had a sales increase of 16%. All of this for these 2 products showing an acceleration compared to the first half. On the Systems side, we had foreseen decline by 22% due to fully traded contracts for Panama Metro in Latin America and contract nearing completion in Middle East, such as Lusail. Finally, on Services, we had a slight decrease of 2% due to some one-off maintenance events last year. Moving to the operational side. We had, as well, several major project milestone achievements this quarter starting with, again, Australia with the Sydney Light Rail, which commenced revenue services while Alstom is providing the full integrated light rail systems. The train of Sydney has been equipped with the latest innovative power solutions, including wire-free APS ground-based supply and HESOP energy recovery substation.In France and Switzerland, we started commercial services with the French-Swiss Leman Express with Alstom Coradia Polyvalent trains and onboard ERTMS digital solutions, which will enable cross-border operations. This Leman Express is the Europe's largest cross-border rail network in operation with 45 stations and 230 kilometers.Last but not least, the first line in Denmark equipped with both ERTMS trackside onboard solution and integrated with traffic management system has started commercial services. And this is, I can tell you, a significant milestone in Denmark's countrywide program to replace the current legacy railways signalling systems with the latest ERTMS standards, which will lead, as a conclusion, to a capacity increase in terms of passengers.So to wrap up on the key messages, we have achieved an excellent commercial momentum this quarter in the context of an extremely very dynamic market and this leading to a new record backlog of EUR 43 billion. Our sales are definitely consistent with the dynamic we had communicated during our Capital Market Day, i.e., ramp-up of our Rolling Stock and Signallings and expected rundown on Systems as some of our major system projects are being completed.Altogether, this puts us in a very good position to reconfirm today our outlook given during the Capital Market Day concerning the midterm as well as this current year '19/'20. The year '19/'20 fiscal year would be a year of stabilization of growth after '18/'19 fiscal year with exceptional sales and profitability growth. For '19/'20 fiscal year, the business cycle with the finalization of major systems contracts and the evolution of large rolling stock project will lead to a sales and margin growth lower than the other objectives set in the context of Alstom in Motion and to a working capital evolution impacting the generation of free cash flow.Up to March 2023, Alstom targets an average annual growth rate of sales around 5% over the period; an adjusted EBIT margin to reach around 9% in '22/'23; and as you know, conversion from net income to free cash flow above 80% by '22/'23; and finally, dividend policies with a payout ratio between 25% to 35%. Furthermore, Alstom will conduct a disciplined investment and external growth transaction policies to support its development and to create value.So thank you for your attention on this introduction, and I suggest that we switch now to the Q&A session. Thank you.

[Operator]

[Operator Instructions] I will now take our first question from Benjamin Szekeres from Goldman Sachs.

[Benjamin Szekeres, Analyst]

I would like to ask about free cash flow for the full year if you can provide any details. But maybe then about working capital. I appreciate you have mentioned that the evolution will impact free cash flow, and I believe on a previous call you have said that the ramp-up -- the working capital ramp-up for rolling stock projects should continue in the second half. But I'm wondering if you could give any color as to how the second half would compare to the first one, maybe taking into account recent awards, and also how you see this evolving in the forthcoming fiscal year.

[Laurent Martinez, CFO & Senior VP of Finance]

Okay. Thank you, Benjamin, for your question. So on the free cash flow, to start with a high-level statement, no change, no evolution since the Capital Market Day end of June for this year and no change in terms of what we communicated for H1.So just to give you some more color on this. So we have been -- we are facing as anticipating some headwinds on the working capital in the second half which is fully, I would say, in line with the ballistic evolution of our ramp-up of our main rolling stock project being regional train, PRASA, Amtrak or e-Loco. On this basis and as well on the basis, as you say, of the commercial -- on the order intake and the commercial, I would say, achievement in line with our anticipation, we confirm fully our outlook for this year in perspective of free cash flow generation. And to wrap up, again, absolutely no change in terms of where we stood end of June and where we stood early November after our H1 results. We confirm free cash flow generation for this year.

[Operator]

Our next question comes from Martin Wilkie from Citi.

[Martin Wilkie, Director]

It's Martin from Citi. Just a question on the tender outlook. Just wondering if you had any change in views as to potential orders coming up. We saw news this week about Germany ramping up investment, and really I appreciate that can take some time to come through. But just wondering if you could talk about have you seen any pickup in tendering of late that might lead to some better orders over the coming quarters.

[Laurent Martinez, CFO & Senior VP of Finance]

Thanks, Martin, for your question. So the market I have to say is extremely brilliant overall. And I want to reiterate the 2 main engines of this market growth, which is, number one, on the mainline side and Europe including Germany is, of course, a key part of it but as well on the urban side with, I would say, all the major projects from the megacities, I quoted India, Singapore, Paris, Washington and many others. So these are all the fundamental. Back to your point on the key tenders to come, we have definitively a very active pipeline ahead of us and just to name a few of them, we still have some opportunities of tramway in France. We have opportunities of regional train in Germany, I would say fueled as well by this momentum we are having in Europe and specifically in Germany. And looking ahead, we have definitively opportunities in Spain on the regional trains with as well a very active momentum in this market. In France, with the replacement of the RER, which will be a massive contract for next years. And in APAC, just to complete the round of the world, some interesting opportunities to develop in India and in Taiwan. So altogether, extremely positive market.

[Operator]

Our next question comes from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

Just looking at the major uptick in Signalling that we've seen now both in terms of orders and revenues over the past few quarters, could you perhaps comment a little bit more about that, please, about what's driving the sudden growth there in that business? I mean I was obviously wondering if the group's catch-up in the Signalling market was perhaps coming a little bit at the expense of margins possibly.

[Laurent Martinez, CFO & Senior VP of Finance]

Gael, thanks for your question. So we are extremely pleased by the Signalling development. And as you know, all, this is one of our 2 main axes of development of Alstom in Motion together with Services. So first I would say the key background or the key drivers of this growth in terms of market, number one is mainline digitalization in Europe and the Denmark case I was quoting is the perfect example. We are moving from legacy to digital interlocking and the rollout of ERTMS. So that is one key access drivers. Second one is on the urban side where we are uplifting the urban signalling systems called CBTC to increase capacity of the existing infrastructures. On the back of these 2 axes, which is definitively within the core of our Signalling strategies, we have been, I would say, surfing on very positive wave in terms of market with Marseilles, which is a major contract, but as well with the activities we had in APAC, which is, as well, extremely interesting, but as well in France on the mainline Paris-Lyon to give you a couple of examples. So definitively, we see a positive trend on the Signalling. We are having still ahead of us an acceleration of growth in the last quarters that we are seeing on Signalling. And to your last point, Gael, this is not at all in detrimental to the pricing or the margin and we are extremely pleased as well by the margin on order intake on Signalling.

[Operator]

Our next question comes from William Mackie from Kepler Cheuvreux.

[William Mackie, Head of Capital Goods Research]

Could I just try to understand the developments within Systems? I know that we are working through the end of a number of orders, particularly in the Middle East, and we can observe the fall in volumes in Q3 in the Middle East and in the Systems-related business. Have we now reached a new normal? And how should we begin to think about the development in the Systems business and Middle East over the next 24 months or 12 months even where you have good visibility?

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. Thank you, Will, for your question. So on the Systems side, the dynamic is, of course, fully expected and I would say ballistic. So the dynamic is based on, number one, the completion of our major Systems contracts. So Panama in Latin America, but as well, Dubai, as you know, is expected to be completed around spring/summer 2020 in advance of the exhibition in October 2020 but as well Riyadh, which is as well getting to a completion phase. On this basis, the fourth quarter will show stabilization of the Systems sales activities from the comparison to the third quarter. If I look ahead, of course, we have I would say, opportunities in terms of Systems activities. We have the ramp-up of our Montreal systems metro, which will be ramping up, of course, ahead. And we have, of course, having a tender activities on Systems. And I want to quote the metro of Abidjan, which has been signed on the 23rd of December and which will be hopefully in force within a year from now, which will be, I would say, additional growth drivers moving ahead on Systems.

[Operator]

Our next question comes from Akash Gupta from JPMorgan.

[Akash Gupta, Research Analyst]

I have a longer-term question like, I mean, if you look at the demand driver, we have healthy demand drivers in place and we're getting data point every week or month that growth in trains should be better than what we knew before. So the question I have is that could there be any upside risk to your medium-term 5% organic growth guidance? It may not be in the next couple of years but let's say, we look at growth in, let's say, 3 to 5 years out. And is it fair to say that there could be upside to mid-single-digit growth that you have targeted in the past and what you're targeting in current plan?

[Laurent Martinez, CFO & Senior VP of Finance]

Akash, thanks for your question. So we are focused on our trajectories, and we are extremely confident on our trajectory, Akash, to the 5% up to '22/'23. And I think that our first main driver is obviously our backlog of EUR 43 billion of backlog. It's, of course, an immense asset that we have.Looking ahead, as you say, whether on the mid, long-term post these 3 or 4 years we can be above 5% is a bit early to say. Obviously, the dynamics we are seeing on mainline and on urban is accelerating. This is what I can say at this stage. So we'll see where the development will come. And the fact that we had as a stat, as you know, 6% of passenger increase in mainline in Europe is extremely positive trend. So let's see how things are developing and unfolding in the months or years to come.

[Operator]

Our next question comes from Katie Self from Morgan Stanley.

[Katherine L. Self, Equity Analyst]

I just have 1 question on the Service activity. Could you remind us the current level of Service in the backlog? And then in terms of the large contracts that are coming online over the next year or 2, what are those and kind of what's the time line on when those will be feeding into revenue?

[Laurent Martinez, CFO & Senior VP of Finance]

So the dynamic of the Services is a long-term dynamic strategy. So just to wrap up on this, we usually sign 10-, 15-, 20-years contracts, which means that, of course, the translation from backlog to Services can be, in some cases, a bit long. A contract example is the Services contract we've been signing on the U.K. recently, I was mentioning, and which is a 7-year contract, which is more short term. Overall, in terms of backlog, we are probably in the range of EUR 13 billion to EUR 14 billion of backlog, so it's a bedrock of activities. But as you have seen in these first 9 months, we are building up on this backlog, which is, of course, will be the drivers for the growth moving forward. So we are, I would say, extremely pleased, extremely confident on this line of business and on the development of this line of business. And needless to say that in terms of margin, this is something which is extremely attractive.

[Operator]

Our next question comes from James Moore for Redburn.

[James Moore, Partner of Capital Goods Research]

Laurent, please, can I ask about your 3 large contracts, PRASA, Madhepura and Amtrak. I mean big picture, how's the ramp-up going? Do you feel that you'll hit your previously planned delivery milestones by March?And specifically, if I can, on Madhepura, where I think you had some oscillation issues, it looks to me that the new design of locomotive was cleared by the RDSO in mid-November and cleared for dispatch from the factory. Is that correct? And do you feel that we've gone past the key risk point on India?

[Laurent Martinez, CFO & Senior VP of Finance]

James, so we are -- thanks for your precise questions, and maybe I'll start with the Indian e-Loco. So on e-Loco, we are very pleased indeed by the new design, which is being tested as we speak, tested with extremely positive results. So we are, I would say, in terms of homologation, development, certification, fully on track. And as you say, it has been recognized and publicly announced by our customers. We had a very good relationship with them. So our concentration now is on the preparation, James, on the ramp-up for e-Loco, and we are expecting to deliver the first loco in the weeks and months to come to start the entry in Service in terms of division on this project. So all on track on Madhepura.On PRASA, we have been delivering 29 trains. So we are in a ramp-up mode in Gibela, in -- close to Johannesburg, so everything is on track as well. Customer is happy about the trains. And we are, I would say, putting our effort and energy on the ramp-up, which is, I would say, delivered as expected. Finally, on Amtrak, Amtrak is a flagship project for next year. So we are extremely happy to have seen the first prototype during the first, I would say, the roll-up of the first train and the first ride on the first train. So extremely positive about the start of this first prototype since December. We'll be starting the testing phase around the spring and in parallel, prepare our ramp-up with our factories in Hornell. So as well in Amtrak, the train is very well borne, which is extremely important. The first 2 prototypes are completed, almost completed for the second one. And we are heading to the test and ramp-up preparation.So on all of these 3 contracts, honestly, we are fully in line with our expectation, and we are very pleased by the development.

[Operator]

[Operator Instructions] And I'll take our next question from Alfred Glaser from ODDO.

[Alfred Glaser, Analyst]

I just want to ask about the comment on external growth and M&A. Could you update us on your plans and development in that area, please?

[Laurent Martinez, CFO & Senior VP of Finance]

Alfred, thanks for your question. So on the external growth and M&A, so we are stable in our strategies, which is bolt-on M&A focused on some specific areas like Signalling and Services. So I will not get into the details of it, Alfred, but we are having, I would say, an active pipeline of opportunities which I was reviewing yesterday again. And we are confident that we'll be able to get into some of these few acquisitions in the months to come on the basis of our opportunity pipelines which is well-structured, well-organized and implementation of this M&A are proceeding, I would say, in the right direction. So I would say, all on track on that, and I hope and expect that we'll be able to announce a few of these transactions, which are bolt-on in the months to come.

[Operator]

Our next question comes from Mohit Rathi from AlphaValue.

[Mohit Rathi, Analyst]

So I have a quick question on the sales growth. If I were to roughly calculate the number for Q3, it comes out to be around 2.5%, which marks an acceleration versus 3.2% achieved in H1. So can you please talk a bit about -- talk a bit more about that with respect to your full year target of revenue?

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. Thank you, Mohit. So looking ahead in terms of sales for the full year and in terms of the perspective for Q4, Mohit, we see an acceleration of growth on Rolling Stock and Signalling, which is fueled by our key project on the Rolling Stock ramp-up, which I was mentioning and as well, by our Signalling Alstom in Motion plan development. As I said, we'll see for the fourth quarter a stabilization on the Systems activities. So all in, I would say, we confirm the growth perspectives we have on '19/'20 in terms of sales as we outlined in the CMD, and we are very confident to reach this target.

[Operator]

Our next question is a follow-up from William Mackie from Kepler Cheuvreux.

[William Mackie, Head of Capital Goods Research]

I just wanted to come back and touch on the business development in the Americas and also the relationship to Services. I understand that there were a number of large service contracts, which expired last year and that is part of the reason why we've seen lower growth in Services this year but we should expect an acceleration. However, when I look at Q4 in your Service business, there is a very high comparative base. And also, when I think about Americas in this transition to prepare for the Amtrak business, I know that you're still in the process of ramping up. So just to be very specific, when we think about the fourth quarter of this year or the full year in 2020, how should we think about the development of business in the Americas as you transition to ramp up Amtrak? And will you be able to achieve growth in Services in the fourth quarter of the year?

[Laurent Martinez, CFO & Senior VP of Finance]

So maybe I'll start, Will, to your question on Services. So as a matter of fact, '18/'19 comparison is impacted by some maintenance one-off events, which has been putting some exceptional sales in '18/'19. So this is explaining, in the main, the slight decrease of sales of Services up to the 9 months, and we will have a similar trend for the full year. So this is more due to exceptional sales due to some specific AV renovation, AV maintenance events last year, which is putting us in this situation. So that's on the Services side.On Americas, we definitely see an increase of activities in the quarters to come. We have definitively the Amtrak, as I was explaining, which will be ramping up which we have as well the REM, the Montreal metro, which will be ramping up as well in the fourth quarter. And of course, next year will be a very important increase for the business in the U.S. with both Amtrak, number one; and the metro of Montreal, definitively, number two. Just to -- last word on Americas. The market is still very positive, and we are active on a number of opportunities in Canada, in the U.S. both in terms of Rolling Stock and Signalling. So there is as well, of course, interesting commercial opportunities in North America looking ahead.

[Operator]

We will now take a follow-up from James Moore from Redburn.

[James Moore, Partner of Capital Goods Research]

Yes. It was really just with respect to the margin development for the group in the second half, and I think you're up 60 bps in the first half and I know that you've maintained your target for the year. But are there any different dynamics that you would point out between the levers that drive margin from currency to savings, to mix, to volume that makes the shape of the second half development different to the first half? Is there anything that we should consider in that picture?

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. Thank you, James, for this follow-up. Nothing too specific into this. We are very confident on the margin development. No specific dynamic in the second half compared to the first one. As I say, pricing is good, execution is on track. And in terms of, I would say, the savings and Alstom in Motion, we are as well on track with the dynamics we had in H1. So nothing specific on these subjects.

[Operator]

Our next question is a follow-up from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

This is actually on the cash flow side. In light of the pretty good order intake this quarter, so do you feel now more comfortable about the guidance for positive free cash flow this year? Or does it still really depend on additional down payments that you may receive or not receive by the end of March?

[Laurent Martinez, CFO & Senior VP of Finance]

So indeed, Gael, thanks for the follow-up. We are happy about the order intake and the down payment we received into it. Need to consider, however, that there is some services element in our order intake as well. So overall, no change compared to our perspective or our expectation in terms of this side of the equation on the cash.So the cash, I would say, for the H2, drivers are, of course, remaining order intake and associated down payments. But the other key driver is obviously the progress payments. And as I said, nothing to -- I would say, we are fully confirming the perspective we had on these subjects.So I think we probably can wrap up the call. I would like to thank you for your attention. And just to make a conclusion, I will echo or quote in the press release, "We definitively have a very positive green mobility and market momentum for the rail, which is making us extremely confident on the stability of our growth in our core business. And second pillar, as we reconfirm our Alstom in Motion strategy implementation, we are fully on track to this, and I think that this performance in the third quarter is demonstrating that.So I thank you -- all of you for your attention. Our next financial event is now on the 12th of May for the full year '19/'20. I wish you all a very good day. Thank you very much.

[Operator]

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