Alstom SA

PAR:ALO

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the Alstom Third Quarter Orders and Sales Conference Call. I now hand over to Laurent Martinez. Sir, please go ahead.

[Laurent Martinez, Chief Financial Officer]

So good morning, everyone. Welcome to our conference call for the first 9 months of our fiscal year '21/'22. Let me first start to wish you all a very happy and a safe year for you and your relatives. So let's get directly to the order intake with, as you see, very positive EUR 14.3 billion order intake for our first 9 months, combined with EUR 9.7 billion pro forma for last year. All of this was a solid EUR 4.6 billion for our third quarter. Europe and Americas are definitively keep fueling the growth and our shares of Signalling, Services and Systems are nearly at half of our total order intake for our first 9 months. These orders has been taken as well with a healthy margin, pleased with that. And our hit rate remains really positive. All in, our book-to-bill is at 1.3 for our first 9 months. And this is definitively consolidating our strong backlog at close to EUR 78 billion. Looking forward, I can tell you that our commercial and bid team are very busy with a solid pipeline and obviously supported by a very, very dynamic market. Moving to some of our flagship orders for our third quarter, and starting with High Speed 2. Extremely proud to have been awarded this flagship contract with Hitachi Rail. In the joint venture 50-50, which will be designing, building and as well, maintaining the next generation of very high speed train with an initial 12 years maintenance contract. Moving to Metrorex in Romania. We've been signing a contract for maintenance for 15 years, EUR 0.5 billion. And we are working with Metrorex since 20 -- 2004 with train availabilities, which has been reaching 99.96% which is exceptional. In Belgium, we have received a new order to supply 98 Double Deck M7 to SNCB as part of the framework contract signed in 2015 with close to 750 traincar orders so far. In Ireland, we've been signing a 10-year workout agreement with Irish Rail up to 750 X'trapolis commuter rails, including 15 years of services, 6 EMUs and 13 battery electric multiple units, all of this replacing diesel powertrains. In France, we have been signing and participating to the implementation of the first concession of a French regional train with Transdev, supplying 16 OMNEO trains. All of this part of a train contract where we've been selling close to 500 OMNEO Premium over 10 French regions. As well on this side Alstom Services will provide maintenance engineering, spare part and overall. As you see on all these examples, we see a clear market trend to bundle rolling stock and Services contract. And you know that Services is definitively one of the key strengths of Alstom. Moving to sales. We reached EUR 11.4 billion in our 9 months definitively in line with our targeted progressive increase with a quarter-on-quarter growth of 5%. If I look at the product line on rolling stock, as expected, continued sales ramp up in third quarter following stabilization effort and overall industrial ramp-up. Very good performance in Services, pleased with that, and progressive increase as well in Signalling. On Systems, as you see, we are resuming growth with the ramp-up of our key contracts in Egypt, Thailand and Canada to name a few. In terms of project stabilization, this remains definitively one of our key focus, our top priorities with this quarter, again, a very intense and positive work. Overall, we do progress according to our plan on all dimensions, technical issues resolution, quality, availability improvement plan and globally deliveries on our key contracts. We made as well positive steps in terms of settlement negotiation with our customers. All in, we traded, as you see, EUR 1.9 billion of sales at 0 margin, representing 17% of our total sales, and this fully in line with our trajectories. Overall, subject by subject, we are stabilizing the situation, and we do confirm our trajectories on the 0 margin backlog trading over the next 2 to 3 years. So moving to supply chain and overall, no breaking news on these subjects and we are actively managing shortage and inflation issues. Starting with the inflation front, we are, as you know, well protected. 2/3 of our backlog is hedged with inflation indexation clauses. And we have, as well, as you know, usually a quite long lead time versus other industries. In addition, as you have seen, we observed a recent stabilization of the raw material price after a period of increase. On component shortage, we have now implemented very comprehensive processes and teams ensuring timely access to our components. This component control tower is deployed within our factories, but as well within our supply chain, and we are assessing needs, priorities and solution on a case-by-case basis. As well we do not have material impact on sales as of December '21. We'll continue, obviously, to closely monitor the situation for this quarter and for the quarters to come. We also, of course, are monitoring the same way the COVID impact on our factories, which is well contained so far on these subjects. So as a last word on my side for this introduction on our third quarter and on our guidance, as you see, we are definitively well on track and confirming our global trajectories to meet our short-term and mid-term financial target. We do confirm our short-term outlook with a book-to-bill above one, as I say, on the back on a very good visibility and very positive market momentum. Sales progression, which is confirmed in H2 versus H1 as a result of our continuous production ramp-up and stabilization progress, progressive recovery of adjusted EBIT and free cash flow generation as of second half of this year. We confirm equally, obviously, our mid-term outlook. So thank you very much for your attention. And I guess we can now switch to the Q&A session.

[Operator]

[Operator Instructions] Our first question today comes from Gael de-Bray of Deutsche Bank. [Operator Instructions].

[Gael de-Bray]

So my only question today is going to be about the supply chain challenges that apparently you've been able to mitigate rather well so far. But can I ask in which parts of your supply chain organization you would see the greatest disruption risks? What keeps you awake at night?

[Laurent Martinez, Chief Financial Officer]

Thank you, Gael, for your question. So in terms of supply chain risk, the key concern of -- not only for Alstom, but for overall the industries is on the electronic components. So this is where we focus the bulk of our priorities. You have to bear in mind that we have a number of components which are specific to our rail industries, which are different from the one of our smartphone or computer power. So that's basically our priorities, and we are working actively with our supply chain and suppliers to mitigate this risk. As I say, we had no description for in terms of sales impact for third quarter, and we continue to mitigate that and monitor that moving forward.

[Operator]

Our next question today comes from Daniela Costa of Goldman Sachs. [Operator Instructions].

[Daniela C. R. de Carvalho e Costa]

I'll ask 1 question only. My question relates to how you're thinking about the pacing going forward of free cash flow, is impacted by sort of how your orders have been nice. So you had extremely strong service orders, which normally I believe they give you long-term visibility that they don't bring advances. So if you compare versus sort of what we talked about during the second half. Can you shed -- I know you can't give numbers and your guidance is reiterated, but can you shed some color on how to think about this pace of free cash recovery over the coming half given what seems to be more a service weighted order intake at the moment compared to rolling stock and Signalling.

[Laurent Martinez, Chief Financial Officer]

Thank you, Daniela, for your questions. So maybe taking a step back here in terms of our free cash flow drivers for the second half of this year. So the underlying trends are basically twofold. The acceleration of the deliveries, which is linked to the industrial ramp-up and the stabilization of the project. So that's the key driver in terms of our cash positive generation for the second half. The second one is indeed the down payment. To be honest, we have a services level, which is in the main within the average of the group, and we are benefiting of close to EUR 11 billion of order intake, which are not services related. So I think that globally, the market is very good. The quality, Daniela, of the down payment, of course, outside of services, is absolutely normal. So we are having something which is a standard in terms of down payment level. And I'm looking with confidence in terms of the down payment as well to come, which will be the second driver to support the free cash flow generation in H2. All in, I do not see any evolution from our H1 perspective in terms of cash for the H2.

[Operator]

Our next question today comes from Guillermo Peigneux of UBS.

[Guillermo Peigneux-Lojo]

I wanted to ask about whether there's been any changes, incremental orders, reorders or any sort of changes with regards to the Bombardier legacy order and Alstom framework agreements. I'm trying to gauge whether there's any potential provision and level changes on the back of it.

[Laurent Martinez, Chief Financial Officer]

Thank you, Guillermo. So no, in the main nothing spectacular on this, no large change in terms of option. I take maybe a step back on this question, Guillermo, to say that? Overall, we have a lot of framework contracts in our activities, which are not considered in our backlog. And if I look ahead, we have option to come in France, in New Orleans, we had option signed in Belgium. So this is part as well of what I will call opportunities that will be materializing and which will be fueling our growth and order intake in the quarters to come.

[Operator]

Our next question today comes from William Mackie of Kepler Cheuvreax.

[William Mackie, Head of Capital Goods Research]

I would like to ask a question about the where we are with respect to the 0 margin backlog and the projects associated with that. Could you please remind us of the level of outstanding 0 margin backlog at the end of the third quarter. How that is expected to trade going forward and which are the key projects which are the focus of your execution teams.

[Laurent Martinez, Chief Financial Officer]

Will, thanks for your question. So in terms of the 0% traded sales, I can confirm what we say in H1, which means that the level of sales to be traded at 0% in H2 will be consistent with the same of H1. And overall, if I look at next year, it will be as well consistent around the same level as the 1 of '21, '22. So this is to give you the trend to come on these sales. And as we say, we are expecting to deliver this backlog in the next 2 or 3 years. In terms of the key projects, and these are the ones, so I will not get into project reviews, but these are the same project that we have been always talking about. So we are talking about projects in the U.K., in Germany, in France, some in the U.S. So these are the same projects. What I can tell you is that there is meaningful progress in terms of deliveries, in terms of customer acceptance, in terms of quality level. I can quote in Switzerland, an increase of reliability by factor 2 since basically we took over. So there is very meaningful progress on the execution of this project. And we are very confident that we are on track to deliver along to our expectation.

[Operator]

Our next question today comes from Martin Wilkie of Citi.

[Martin Wilkie, Managing Director]

It's Martin from Citi. Just 1 question coming back into supply chain and potential impact on cash. It sounds like you're managing to control that quite well. But just to clarify, you mentioned there are some obviously, specific components you have where it's high power semiconductors or elsewhere. Is -- are there any components that could cause late acceptance of trains or in general, are you managing to control this in a way that we shouldn't expect any major sort of phasing differences just particularly thinking about whether final payments and the cash impact could get impacted if there's some relatively small components that delay the final sign-off or acceptance of a train.

[Laurent Martinez, Chief Financial Officer]

Martin, thanks for your good question. I mean a train is a puzzle if we miss 1 piece of the puzzle, you can't deliver it to your customers. So your comment is extremely important. So far, Martin, no impact in terms of final deliveries. We've been able to manage these issues satisfactory and without any impact. I can't guess what would be the impact, of course, in a few months' time. We are actively working on this. But I will not discount that there is a risk that here and there, we may have these kind of issues. So far, in the current knowledge, we do not see any major risk, which will jeopardize our cash trajectories for the full year. But again, something that we are watching and monitoring very carefully.

[Operator]

We will now take a question from Jonathan Mounsey of BNP Paribas Exane.

[Jonathan R. Mounsey, Analyst of Capital Goods]

So back to free cash flow, I'm afraid. Why no explicit guidance this close to the year-end, I think probably both we're hoping for some clarity on that. And around that, have you sort of spoken to Moody's ahead of these results? And how did that conversation go? And do you effectively need to generate cash every half going forward for the next 2 years? Would any half where you didn't do that? Trigger a problem with Moody's? Or is there still actually some room for the natural variation that historically we've seen in this business when it comes to free cash flow on a same old basis.

[Laurent Martinez, Chief Financial Officer]

Jon, thanks for your questions. So in terms of the free cash flow for the second half and you know the nature of our business, we always have the kind of short-term volatilities which can be huge and which is even more important in the companies of size that we are in. So that's why we prefer to stick on a positive free cash flow guidance for H2. And again, I do confirm our expectation we had for H1, no change whatsoever on these subjects. On Moody's, we have a continuous positive dialogue with them. We -- I do not expect any change from our conversation. This is fully in line with the dialogue I have with Moody's. In terms of what you say about the half year cash, it's a bit early days. Jon to provide you some color on that, for sure. And what I can tell you, however, that Moody's is not looking at the quarterly result as a triggering points. They are looking at more the mid-term perspective, both in terms of supporting confirming the cash generation, which we do and as well our long-term target in terms of profitability that we do confirm as well. So this is the way they are looking at Alstom with a mid-term angle.

[Operator]

We will now move to a question from Akash Gupta of JPMorgan.

[Akash Gupta, Research Analyst]

Yes. It's Akash here from JPMorgan. My question is on progress made so far on settlement talks with customers. And I think you said -- mentioned previously that half of the Bombardier projects have been negotiated with customers and you were planning for remaining half before end of the financial year. And can you tell us the progress made in Q3? And how confident you are that you won't need any additional provisions.

[Laurent Martinez, Chief Financial Officer]

Akash, thanks for your question. So indeed, half of this settlement has been, I would say, agreed upon in H1. We continue to make meaningful progress into this. So overall, we do have the same target in the main. So we'll see, of course, like any negotiation, you need to be two to tango. But so far, all the negotiation proceeds according to our target. And I do not see any need to update our provisioning on the basis of what I know as we speak. So we do confirm on track.

[Operator]

Our next question today comes from Alasdair Leslie of Societe Generale.

[Alasdair Leslie, Equity Analyst]

Just wondering if you could talk a little bit more about the -- in detail about the order pipeline Laurent. I suppose your comments around the pipeline, I suppose today have been kind of orientated around this year and H2. I was just wondering what kind of visibility you have already heading into next fiscal year, especially H1. And just wondering whether you see a danger of kind of an air pocket forming, I suppose, next year in terms of soft demand as COVID-related pent-up demand slows down perhaps and before stimulus-driven orders kick in. So just really the outlook heading into H1 next year.

[Laurent Martinez, Chief Financial Officer]

So the pipeline remains very strong, not only for the last quarter of our fiscal, but as well for the next 12 to 24 months. You remind what we've been presenting to you in H1, 400 opportunities above EUR 100 million and take the chance to precise that in average, each of these opportunities it's at EUR 300 million altogether. So this picture remain confirmed. I do not have any sign of delay of this pipeline on the midterm due to COVID whatsoever. To the contraries, we see, in some cases, some opportunities raising coming from the stimulus packages. And you see that the next gen EU plant start to hit the ground and provide upside if I take Italy as a meaningful example. So if I look at second half of this year and the next year, we have been, as you know, selected on Cairo, Ukraine, Norway, all of this is not in our order intake for our third quarter. Santiago, we have opportunities, large opportunities in Germany. As I say, we have a number of options, which will materialize in France, in Netherlands. So the market remains very positive Alasdair, not only for this quarter, but as well for the next quarters to come.

[Operator]

We will now take a question from Katie Self of Morgan Stanley.

[Katherine L. Self, Equity Analyst]

Most of my questions have been asked. So just a quick 1 for me to clarify. On the remedies from the EU commission that have sort of been finalized now with CAF and Hitachi, is there any financial impact that we should be anticipating for Alstom in the next quarter, 2 quarters?

[Laurent Martinez, Chief Financial Officer]

Katie, thanks for your question. So indeed, we have been first pleased to close this deal with CAF, which is kind of the last step of our process with EU. As you know, we are anticipating closing in the first half of our next fiscal. In terms of impact, we will have some, of course, deconsolidation of orders, maybe around EUR 0.5 billion around EUR 250 million of impact in terms of sales. The margin, as I always say, is below Alstom average. So that will not be a major issue. And we may have some working capital impact as well that we need to see at closing. So that's basically where we stand, nothing, I would say, major in terms of financial impact of this. What is important is to close the deal and now to get to the end of this process. And we have been pleased by the progress on this file.

[Operator]

Our next question today comes from Simon Toennessen of Jefferies.

[Simon Toennessen, Equity Analyst]

Yes, Laurent. Can I ask on the phasing of the execution risk related to the backlog? So if you think about the remaining, call it, EUR 5 billion that's left now, is the execution in your view, equally weighted across the next 2 to 3 years from today's standpoint? Or will the backlog be more derisked particularly over the coming quarters? So I'm interested, not from a volume perspective per se, but more from an execution perspective as you judge sort of the individual risk of each project.

[Laurent Martinez, Chief Financial Officer]

Simon, yes an interesting angle to this point. So I answered in terms of the volume of the sales, basically, '21, '22 will be the same as next year. In terms of the profile of the risk, so number one, finalization of the settlement with the customers, that's as we say, which is more short-term issues. Second, there is, I would say, in the next 6, 12 months, finalization of the technical issues, the quality, the design which are remaining. So that will be more 12 months around story. And then we will have more basic execution, so quality, supply chain ramp-up but which is more than on the kind of ballistic trajectories. So that would be the -- and that will be lasting a couple of years, as I say, around 2 to 3 years where we would have basically delivered the bulk of this contract. So these are the 3 kind of steps I see, 3 horizons I see on this project stabilization journey.

[Operator]

[Operator Instructions] We will now take a question from William Mackie of Kepler Cheuvreux.

[William Mackie, Head of Capital Goods Research]

The question relates to the optimization and restructuring of the enlarged production base. You announced a number of measures in Germany to reorientate towards Services and Signalling and change the scope of perhaps rolling stock production. Could you update on your thoughts about plant optimization on a more global basis? And also what level of restructuring provision we should anticipate for the year?

[Laurent Martinez, Chief Financial Officer]

Yes. Thank you, Will, to touch this point. Give me a chance to give you some color of what we have been initiated in Germany. So we are talking about the transformation program in Germany, with a decrease of the manufacturing workforce between 900 to 1,300 positions over a couple of years. And a shift, indeed, as you say, to digital skills to Services to Signalling, which is, as you know, a key market that we want to develop in Germany with around 700 positions in terms of hiring. So this is a reshuffling of the activities. There is no site closure or whatsoever in Germany, it's a reshuffling of the positioning of the companies in Germany. We have been starting the process with our social partners in December and which will be implemented in the next 3 years or so. And to your point, in terms of provisioning, we'll see where we stand end of March in terms of provisioning depending on the progress with our social partners. To your more global question, Will. In terms of restructuring, we do not expect any large restructuring in terms of our plants. We'll continue to have rightsizing, optimization, specialization. But in the main, we have not any plan to have a major restructuring whatsoever in other parts of the world. And we'll continue to optimize and rightsize along the needs we have region by region. So let's move to the probably next question -- last question.

[Operator]

Our last question today comes from Gael de-Bray of Deutsche Bank.

[Gael de-Bray]

You said that you had 2/3 of your backlog hedged within indexation clauses. So could you talk a little bit more about the nature of the other contracts that are not hedged? And what's the typical lead time for these contracts?

[Laurent Martinez, Chief Financial Officer]

Indeed, to precise this subject. So typical 1/3 of the other contracts are more short-term nature. You know that we are -- Signalling job, for instance, can be 1 year, 2 years. So on this one, the risk we are taking is extremely limited. And the other key point, of course, is that if we have something which is a bit more long-term, say, 3 to 4 years, then we are, of course, pushing a back-to-back close to our suppliers, i.e., we are asking and getting firm fixed offers from our suppliers. So we are hedged as well from this perspective. So these are the 2 dimensions of this remaining 1/3 and the way we are dealing with it. And I do not see any risk exposure on these subjects. We are managing that very carefully and very well as we speak. So I want to thank you all for this session. Maybe as a short word of conclusion, as you see 2 key priorities for our Q4. Number one, continues a positive execution on project stabilization and, in turn, of course, delivers on our outlook for sales, EBIT and cash. Second priority is to continue very positive dynamic on our commercial success. I've been saying that our hit rate is extremely positive. So we are gaining this leadership position on the back of a market which remains extremely dynamic. So overall, as you see, we are fully confident to stick on our trajectories going forward. Thank you very much, everyone, and look forward to exchange with you for our full year results in May. Thank you very much.