Alstom SA

PAR:ALO

Earnings Call Transcript 2021-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]

Thank you. Good morning, ladies and gentlemen. Welcome to our conference call for the first 9 months of our fiscal year 2021. We'd like first to wish you all a very happy and safe new year for you and your relatives. We all faced a number of challenges in 2020, and sure that we all wish that 2021 will be a year of recovery. So starting with the positive spin for Alstom, you may know that 2021 has been declared the Year of Rail by the European Union. Let's move directly to Slide 4. So moving to the order intake, we recorded EUR 4.5 billion order intake for our first 9 months, thanks to solid orders of EUR 1.18 billion in the third quarter. Our outlook for the fourth quarter is positive with several large orders in the pipeline, and you might have seen recently that the Metra Board of Directors in Chicago approved last week the purchase of up to 500 railcars from Alstom, which is clearly a flagship order to come. Additionally, a support to our investments were confirmed with EUR 672 billion recovery and resilience facility earmarked to climate neutrality, which has been finally adopted by the EU on December 11. In parallel, you have seen as well that EU unveiled in early December its smart and sustainable mobility strategy, which is taking quite ambitious targets such as doubling of high-speed rail by 2030 and confirming as well that signalling ERTMS rollout is a priority. If I look towards the U.S., one of the key administration goals is to achieve, as you have seen, a net zero emission by 2050 and spark what Joe Biden calls the second railroad revolution. So in this context, we are expecting a new 5-year transportation funding bill, which would propose $60 billion of funding for rail and up to $105 billion for transit. And this should be on the agenda as soon as 2021. The last example, in Australia, on the other side of the world, where the federal government will invest AUD 5.50 billion investment in the Inland Rail project, which is 1,700 kilometers freight line from Melbourne to Brisbane. So all in all, as you see this confirm our positive market momentum, and we are confirming a book-to-bill above 1 for our fiscal year 2021 on the back of this positive standard pipeline. Moving to Page 5. And turning to some of our strategic win in the third quarter, where we've been -- we are in a number of key projects such as the Metro system standard in Toulouse, around EUR 0.5 billion contract, a flagship win in France; our first rolling stock contract in Romania with 30 Metropolis strengths of Line 5. On the light rail segment as well, some flagship wins with the tramway in Germany in Cologne and tram-train in France. And as well, our first, I would say, mainline signalling contract in India, which is an additional landmark for Alstom development in India, which is, as you know, strategic countries for us, where we have already a well-established position in rolling stock and urban signalling. Moving to the next slide and turning to sales for the first 9 months, we reached EUR 5.6 billion, in line with our targeted trajectory, out of which EUR 2 billion trading in the third quarter, this representing a 2% organic growth year-on-year for this last quarter. And this is driven by the ramp-up of our major Rolling Stock project with a plus 9% growth on a year-to-year basis. Continued very positive dynamic on Signalling with plus 10%, and by the way, we've been achieving this quarter the highest sales ever for our signalling activities, confirming our Alstom in Motion strategy. Services has been impacted down at 7% by the COVID-19. And finally, Systems activities continued its anticipated decline by 23% due to the contract, as you know, which are nearing completion in Middle East. Moving to Page 7. So we move forward as well in our Alstom in Motion strategy implementation with notably the acquisition of a minority stake in Cylus, which is an Israel-based cybersecurity start-up. We'll be developing with them integrated cyber technologies into railway processes, component and solution to serve our customers. We also won a contract for hydrogen train in Italy, which is confirming our leading position on this extremely important new hydrogen market. And finally, turning my eyes to India and this very nice picture on the right, our Alstom flagship e-locomotives were delivered and used to inaugurate a freight section and this attended by Prime Minister Modi. We are extremely pleased by the progress we are doing in India on this flagship contract. Moving to Slide 8 and turning to the ESG front. Our leadership was confirmed and particularly rewarded. First, Alstom was included for the 10th consecutive years in the DJSI, Alstom maintaining its ranking amongst more than 7,300 companies and being part of the top 5% of these companies. And specifically, we have been noticed for action in the areas of code of business conduct and social reporting. Second, we obtained the highest possible score of A in the 2020 annual assessment run by CDP. And this is definitively underlining our commitment, robust policies, demonstrable actions to cut emission and contribute positively to the development of the low-carbon economy. Moving to Slide 9 and turning to Bombardier Transportation acquisition. As you know, we now got full clearance from all the authorities and antitrust authorities in November 2020. On the financing side, we completed very successfully our right issues of EUR 2 billion with 170% oversubscription rate in December and followed, as you have seen early Jan, by 8-year bond issuance with, let's say, very nice 0% fixed coupon with an order, which has been oversubscribed more than 4x. The completion of this acquisition is expected to take place on Jan 29. Moving to Slide 10. Last one will be on our guidance. As you can see, we are well on track to meet our short- and midterm financial targets. We confirm, therefore, our short-term outlook with a targeted book-to-bill ratio above 1, sales between EUR 7.6 billion and EUR 7.9 billion, adjusted EBIT in the range of 7.7% to 8%, breakeven to positive free cash flow generation for the full year. And we confirm equally as well our midterm outlook. So I have finished for this overview of our third quarter. Thanks for your attention, and I suggest that we switch now to the Q&A session. So operator, back to you.

[Operator]

[Operator Instructions] We will take our first question from Martin Wilkie with Citi.

[Martin Wilkie, Managing Director]

It's Martin from Citi. Just on the order intake, you obviously reconfirmed your book-to-bill above 1 and you pointed to several government programs. We have seen some governments talking about scaling back on budgets and obviously traffic is down. Have you seen anything getting deferred from an order perspective, whether it's on the maintenance side or even new projects. Just to understand the spectrum of sort of what's happening in different places if governments are easing back anywhere on investment.

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. Thanks for your question. So in the main, we have seen all the, I would say, government and decision-makers confirming the investment in rail. So I've been addressing the overall pictures of the seamless packages, which are confirming the need and the decision to invest into the green mobility. So if I look at the, I would say, orders pipeline, it remains very positive for us for Alstom. We have a solid pipeline for the Q4 with Metra, as I said, which has already been announced and which will be awarded to Alstom. But as well, we have a number of large orders to come in Europe on suburban regional train in Spain, in Italy and Germany, together with, I would say, a number of several midsized orders, which is as well in the pipeline. So in the main, you are right, Martin, some limited shift here and there, but nothing which is changing the big picture.

[Operator]

Our next question comes from Iris Zheng with Credit Suisse .

[Xiaolu Zheng, Research Analyst]

I actually have 2 questions. So firstly, just a follow-up on the order intake question because the guidance still guides for book-to-bill to be above 1 and then as you've mentioned that the Q4 momentum looking quite good. And if I just take the book-to-bill ratio of above 1x, then that implies more than EUR 3 billion of order intake for the next quarter. So I want to check if you think there is a bit of boost from the delayed orders for the quarter? Or you think that will be a sustainable rate going forward? And I'll ask the next one afterwards.

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. Thanks for your question. So yes, so if I zoom in and double-click on the Q4, just notice that our base orders has been positive in the third quarter. I mean we are expecting as well to be positive for the fourth quarter. There is a number of key tenders, which are up for decision in the Q4, and I mentioned a few of them, Metra already in the box, I would say, in Chicago, but as well, some in Spain and some as well regional trains in Italy, which are -- on which we have been passing a number of key commercial milestones, which are positive for us to get to this number of orders that we are targeting for the Q4. If I look ahead as well to give a bit of a wider perspective, '21, '22 looks equally positive. We have a number of key tenders, which are in the pipeline. We talked about Denmark. We have key tenders as well in the U.S., in Germany. So the pipeline looking ahead in '21, '22 remains equally positive. Your next question, Iris?

[Xiaolu Zheng, Research Analyst]

The next question is on the U.S. market because it has traditionally been a laggard on the passenger rail side. But with all the supportive government policies, as you've mentioned and with the Biden election, so could you maybe give us a bit -- just flavor on your strategy in the U.S. market, maybe against your peers and if how Bombardier acquisition is going to help you in the market?

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. Yes, absolutely. So indeed, North America, if I enlarge a bit, not only on the U.S. because it's U.S. and Canada will become the second key pillars of the new Alstom, and now it represents 25% of the overall market. Europe is 50%. North America is around 25%. So in terms of strategic activities and market momentum, we definitively have, I would say, is a continued commuter's market, and the double deckers, high capacity is a key strategic product. So Metra Chicago will be a first of this kind. So it will be a huge, I would say, framework contract. And there is a similar opportunities in Ontario. There is similar opportunity as well in Québec, which is obviously a key market. And we are now building a specific product with this Metra flagship win. We have the Metro as well. I know that New York City is to decide on the replacement on the New York City Metro car, which will be another key axis. So that's the second, I would say, strategic axis we want to develop. The third one will be Signalling. You know that we are specifically strong in signalling in Alstom. And this will be complemented by Bombardier capabilities, and this is something that we'll be developing as well moving forward. We have as well, as you know, the high-speed segment. Amtrak is performing very well, we are in testing phase. Amtrak will be the first high-speed line in the U.S. market, and we are expecting to have more opportunities on this field as well, and we will have, with Amtrak, the first certified product in North America.

[Operator]

Our next question is coming from Akash Gupta with JPMorgan.

[Akash Gupta, Research Analyst]

It's Akash here from JPMorgan. My question is on Bombardier Transportation and the process. So maybe if I can ask you on the remedies that you have agreed for satisfying European Commission requirements. So can you tell us how much of sales will go away and these divestments that you have proposed? And any proceeds that we should be -- take care while we do our valuation for the combined entity?

[Laurent Martinez, CFO & Senior VP of Finance]

Thank you, Akash. So on the remedies, in terms -- so the process is going on. You have seen the press towards the contender, and we are in deep discussion now with Škoda related to Reichshoffen and Hennigsdorf. In terms of sales, Akash, we are talking about around EUR 450 million of sales. So that's round about the impact we are seeing on these 2 sites. In terms of proceeds, you can imagine that I will not get into the details of this, but the profitability, as I hinted, is quite limited from these activities. So we should not expect major proceeds from this divestment.

[Operator]

The next question is coming from Daniela Costa with Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

I have 1 question and then 1 clarification on some of the prior questions. But the first question I have was regarding the EUR 850 million bond. Can you just elaborate on why that was a bit bigger than what you needed from the BT perspective? So can you give some color on that? And then I'll ask the clarification, which is on the orders.

[Laurent Martinez, CFO & Senior VP of Finance]

Sure. So to the bond, to be honest, indeed, we went to a benchmark size of EUR 750 million bond for this issuance. To be honest, the market condition was so exceptional that we felt it was appropriate to size this benchmark size of EUR 750 million. You have seen that we reached a 0% coupon on this issuance. On top of it, we had a very fruitful dialogue with Moody's, and you have seen that Moody's has been confirming our Baa2 rating with these numbers and with a 24-month horizon. So this is -- this was the second part as well of the equation. So to your next question? Sorry, Daniela I think had a follow-up question.

[Daniela C. R. de Carvalho e Costa]

Am I still on the line.

[Laurent Martinez, CFO & Senior VP of Finance]

Yes, you are.

[Daniela C. R. de Carvalho e Costa]

So my question was a follow-up on some of the other comments you mentioned before. When you mentioned Chicago, with a contract like that which has 2 parts, will you book just the first part, which is the -- I think it's USD 845 million or would you book the whole thing? And the other order I wanted -- I didn't hear you talking about, but it's a lot on the news, is a Belgrade Metro order, which I guess is somewhere between EUR 1 to EUR 3 billion. Is that -- are those rumors wrong or can you comment?

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. So on your first point, you're absolutely right, Daniela. We'll be booking only, which is our policies, the firm part of the orders. So that's clear. So that will be around the belts, the numbers we've been quoting a bit more, that's from the belts the numbers you indicated. However, the framework contract is more than twice these numbers. And that's something very interesting always when we consider our order intake and order book. There is always often a number of interesting options which are, I would say, putting more opportunities moving ahead. On the second one, this is not something which is on the short term, but something which is more for the '21, '22.

[Operator]

The next question Is coming from Alexander Virgo with Bank of America.

[Alexander Stuart Virgo, Director]

Just a quick follow-up, I guess, around the dynamics on your PDPs, the milestone payments and actually maybe broader net working capital terms. Just wondering if you could comment upon those given your prognosis for order intake and the free cash flow guidance. And then as a follow-up, can you make any comments around the prognosis for recovery in our Service business?

[Laurent Martinez, CFO & Senior VP of Finance]

Yes. So to your first point, I mean, in the main, nothing has changed compared to our cash trajectories we have been outlining in May and in November. So our projects are very well executed. We are very satisfied by the technical and the ramp-up on all our main projects across Alstom portfolio. So we are definitively expecting to continue to have the positive, I would say, progress payment and cash-in acceleration due to our progress deliveries. On the other side of the equation, we still are building up inventories to support the ramp-up of our Rolling Stock as we anticipated, and this back in May 2019 in our Capital Markets Day, so we are still on this kind of a ballistic trajectory. So all in, we definitively see a positive working capital contribution in our second half of the year. And together with the down payment, as you mentioned, we are very confident to breakeven to positive free cash flow for the full year 2021.

[Operator]

Our next question is coming from Gael de-Bray with Deutsche Bank.

[Gael de-Bray]

I have probably 3 questions, please. The first one is as we approach the 29th of January, can I ask when you did the latest, the due diligence, and reviewed Bombardier's backlog, and are things progressing as planned on this front? The second question is about how you intend to deal with Bombardier's joint venture in China from an accounting perspective. Will it be treated like CASCO and booked within the adjusted EBIT? Or will it be reclassified with the other associates? And if we assume a margin of, let's say, 4% for Bombardier in the first year, does it include the contribution of the Chinese joint venture or not? And then the third question is about the commercial activity, I think you described a positive picture for Europe. But do you expect to see some delays in the commercial tendering processes outside Europe perhaps? And if you could give us a bit of an update regarding what's going on in Abidjan, Baghdad, Ukraine, India as well, that would be very useful.

[Laurent Martinez, CFO & Senior VP of Finance]

So yes, a number of interesting questions, Gael. So let's go one by one. On your first point, so we are in continuous dialogue with Bombardier. I would say related to their project execution, as you have seen in the third quarter, the project portfolio has been stabilized, which is a positive with some progress on a number of projects. Challenge remains on some projects as expected. There is nothing new into this. And you have seen as well that, for instance, the lockdown in the U.K. we have some consequences or may have some consequences as well on this subject. So we'll see what could be the impact in the Q4. Overall, however, Gael, we do not see a new element nor new risks, which is changing our perspective on the overall BT backlog profitability. So all as anticipated by us on these subjects. To your second point, which is a technical point. So something that needs to be decided, I would say, in the year '21 and '22, but the direction we are leaning at is to treat indeed the joint ventures from BT in China like CASCO. So that will be part of the adjusted EBIT because this is a bit the same logic as we have for CASCO. So to your third point in terms of the commercial activities outside of Europe, and we've been mentioning a number of subjects, which are interesting because Abidjan, Baghdad and Ukraine are kind of government-to-government agreement. So this is something where there is no open tenders. It's a agreed kind of transaction. So things are proceeding well on these 3 subjects. Now like always in this kind of countries, and if I look at Abidjan or Baghdad, of course, countries which are, in some cases, in a difficult state, it's always taking time. But I would say positive momentum on that and we are hopefully expecting some positive momentum. But that would be more midterm topics than short-term topics. If I look at the market beside that, in India, we are definitively building on our success on e-Loco. There is a massive prospect from India to electrify 7,000 kilometers of lines and to upgrade capabilities in terms of rolling stock both in terms of locomotive and the passenger coach and the passenger EMUs. So these are, as well, definitely a very interesting market to look at. I can quote as well Bangkok with a very interesting metro line as well on which we are working. I can quote as well Israel with a number of critical projects in Tel Aviv in Israel on which we are equally well positioned. So market momentum is as well positive in Asia Pacific and in other parts of the world.

[Operator]

Our next question is coming from Jonathan Mounsey with Exane BNP Paribas.

[Jonathan R. Mounsey, Analyst of Capital Goods]

I wonder if I could ask about the Bombardier acquisition completion, particularly in regard to the accounting treatment of what must be some loss-making contracts. I think at the beginning, when the deal was announced, we talked about some sort of bad orders in the backlog that we have to ship out over the first 2 years. And while we've had 1 year already of that, my guess is there is still some Rolling Stock contracts in particular where losses are expected to accrue. And I think under IFRS accounting rules, usually you'd write those to 0 and provide a provision, which would obviously, in terms of headline margins going forward, would sort of deal with the headwind. I mean is that what you're going to do? Are you going to basically look through the backlog and anything that's got a -- is likely to make a loss, you're likely to provide for that at the time when the deal completes?

[Laurent Martinez, CFO & Senior VP of Finance]

So indeed, there is, I would say, a business and an accounting point in your question. So on the accounting point, we know -- so we'll be working on the the price purchase allocation, as you say, it's PPA exercise you take in any acquisition. On -- so that will be something, which will be, I would say, happening in the first half of the calendar year 2021. On the business side, you're absolutely right. There is these contracts, which will be delivered in the main in '21 and '22 calendar years. In 2023, the bulk of this contract will be completed. So this is something where we will be facing headwinds in terms of average profitability due to the execution of this project in the next 24 months or so.

[Operator]

Our next question is coming from Katie Self with Morgan Stanley.

[Katherine L. Self, Equity Analyst]

I just had a question actually coming back to the CASCO JV. I wondered if you could elaborate on how that JV was performing over the quarter or really over the 9 months. And how much was that a key element of the signalling strength you saw in the quarter? Or was that strength more coming from Europe and other regions?

[Laurent Martinez, CFO & Senior VP of Finance]

Thanks for your question. So CASCO joint venture is performing very well, to be honest. So it's one of the leading companies in terms of the urban signalling in China. So A number of key wins in terms of order intake in the first 9 months. A number of, as well, innovation that we are pulling into CASCO, and we will have some specific announcement on that in the future. In terms of, I would say, COVID crisis, absolutely no impact on the CASCO perimeter. So this is something, which has been contributing very positively. To your specific question, Katie, CASCO JV sales are not consolidated into our sales numbers. So as good performance we have in the third quarter is not coming from the CASCO sales performance, it's coming from the positive momentum we have in Europe, to a large extent, and some as well positive development in Asia Pacific, but not in China.

[Operator]

Our next question is coming from William Mackie with Kepler.

[William Mackie, Head of Capital Goods Research]

I wanted a couple of questions. Firstly, on the longer-term perspective in North America, Obviously, the implementation of the Buy America Act (sic) [ Buy American Act ] had a big impact on the competitive landscape of some of the Asian players, particularly in areas like Chicago and Boston. How do you see the competitive landscape now in the U.S.A. developing in the future? When you're bidding on these contracts, has the number of players and the pricing conditions of the contracts been observed to start changing as the landscape has been changing? And the second question comes to the revenue guidance for the year. Specifically, you must have a lot of visibility at this point. So what is it that pushes you to the lower end or the upper end of your guidance range for revenues in 2020, '21? And what are your working assumptions for the pace of recovery into 2021 and into 2022 year against the backdrop of this second wave of COVID lockdowns?

[Laurent Martinez, CFO & Senior VP of Finance]

Thank you, Will, for your question. So on your first question, you are right that there is interesting dynamic in North American market. First, we can say that CRRC is not welcome anymore. And you have seen that there is a specific bill, which is targeting to avoid CRRCs to be in the future in the U.S. So that's the first key element into the market. There is some, as well, new players, if I look back from the last 3 years, Stadler being one of them, which is becoming more present. Now in the main, I don't see, Will, to your point, any evolution in terms of the price behaviors. And the fact that, as you underline rightfully so the Buy American Act command to have 50%, 60% of buy in America is supporting actors or industrial companies like us, where we have, I would say, a significant footprint in the U.S. So this is something, which is a benefit for us. So in the main, competitors, which are getting out, new competitors but nothing fundamentally changing in the competition landscape in North America. To your second point on the revenue guidance, in terms of the equation for the last quarter, mainly for 2021, on the positive, definitively, we have the Rolling Stock where we will have a continued acceleration in the Rolling Stock for the fourth quarter. Services, we see that as kind of stable compared to third quarter because we have the impact of the lockdown and the COVID, which is pushing down some of the main usage of our trains. Signalling will keep as well a positive momentum. And Systems will continue the slight decline in the fourth quarter versus last year. So that's the dynamic of the up and the down. We are well within the EUR 7.6 billion to EUR 7.9 billion of guidance that we have targeted. In terms of our working assumption for the recovery '21, '22. So number one, we are all expecting that there will be no hard lockdown, which will be, I would say, stopping production. And that's the main underlying assumption for sure. We are expecting a progressive recovery in terms of the Services activities, which will be taking some time, but nothing fundamental as well, which is changing our perspective for '21, '22. Our main, I would say, axis will be the delivery of our backlog, the deliveries of the future orders we have in the pipeline and that should be the basis for our '21, '22 perspective.

[Operator]

Our next question is coming from Alfred Glaser with ODDO Securities.

[Alfred Glaser, Analyst]

I wanted to ask you on the EU market environment. The EU has presented its new mobility strategy. What do you expect more specifically for your rail business to come from this strategy?

[Laurent Martinez, CFO & Senior VP of Finance]

So to your very interesting question on the EU strategy, I think that there is definitively a political push underway now in Europe, which is extremely positive. In terms of expectation, a couple of factors. Hydrogen is definitively a key part, which is pushed by EU and the government. So expecting definitively a support in terms of the hydrogen economy to infrastructure and the fact to have a positive mechanism to replace diesel locomotive by hydrogen locomotive. That's one. Second, high speed. As I said, doubling of high-speed rail by 2030 as replacement to flight is a strategic axis. So that's something definitively, which is a key opportunity. And you know that in Europe, there is basically 2 main contenders when it comes to high-speed, Siemens and us. So we are extremely well placed with as well our new product and that we are developing as new TGV and new Amtrak. So we are having the leading edge in terms of technology. The third is Signalling because I would say the capacity in the network in Europe is largely driven by signalling upgrade. And you have seen that in Germany, for instance, but equally the case as well in other countries in the Nordics, in France, there is a wave of signalling opportunities to upgrade the network. So these are 3 axis, which I feel will be extremely important in the futures and pushed and supported by the EU.

[Operator]

Our last question is coming from Simon Toennessen with Jefferies.

[Simon Toennessen, Equity Analyst]

I just have 1 question. Could you comment a bit on the EUR 2.6 billion Paris contract that went to Bombardier and CAF? There seems to be quite a lot of noise in the French press. You appealed against the decision. It was highlighted there have been irregularities and it was also highlighted, I think, that the price difference was about EUR 500 million between your offer and the one from Bombardier. As the buyer of Bombardier, can you clarify this as it sort of raises the questions on contract terms that Bombardier has taken?

[Laurent Martinez, CFO & Senior VP of Finance]

So on MING, indeed, as you know, there were 2 offers on the table, one with Alstom and one with Bombardier at 60% and CAF. So first of all, I want to say that overall, it will be going to the new group one way or the other. So you have seen the latest status in the press. And to be honest, I will not comment further on that, Simon, on the specific tenders, for sure, while the process is ongoing. So I will not comment further on these subjects.

[Operator]

There are no further questions. I would like to turn the conference back to you for any additional or closing remarks.

[Laurent Martinez, CFO & Senior VP of Finance]

So thank you very much. Thank you for your attention this morning. Maybe a couple of words indeed to conclude our session. I would say key takeaway. First one, we confirm our commercial and financial trajectories, which is supported by a very positive market momentum. Second, our financing for Bombardier acquisition is now fully in place. And a third key takeaway, of course, we are now looking forward for the conclusion of the acquisition and the day 1 of the new group with a lot of enthusiasm. So I thank you, all of you, for your attention and look forward to speak with you at our next opportunity. Goodbye.

[Operator]

This conference is now over. Thank you for your participation.