Alstom SA (ALO) Earnings Call Transcript & Summary

Hello and welcome to the Alstom first quarter Orders and Sales. [Operator Instructions] I will now hand you over to your host, Laurent Martinez, CFO, to begin today's conference. Thank you.

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

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

So thank you, Bernard. And let's turn to the first slide, on the order intake, confirming that our market dynamics is confirmed and our potential is intact with EUR 220 billion of pipeline over the next 3 years. As you know, last year's, in order intake, Q1, we had a very strong order intake, thanks to the Baden-Württemberg orders of EUR 2.5 billion, while this year, as we discussed as well during our full year release, the phasing of our large orders is rather back-end loaded. On the regions, worth noting Americas with Philadelphia orders, which is a proof point of the strong growth and the potential we see in the U.S. market. As a reminder, we are expecting in the years to come an average order intake in this region which is roughly the double compared to the last 3 years. I want also to highlight the success on the large systems in Q1, which has been resuming after modest orders in the fiscal year of '22/'23. Happy also to report a good flow of base orders, illustrating the continuous management focus on this subject which is important for our margins. Two additional points for orders which are positive: number one, percentage of orders with indexation largely exceeds 90% for the quarter as per our target; and second, good quality of order intake in terms of margin, which continues to support our mid-term trajectory. So moving to some of the flagship orders for this quarter, starting with a turnkey project in Philippines for around EUR 1 billion, illustrating about EUR 700 million and a system project in Romania for Cluj. As you have seen in the recent press release, we have as well secured a quite large list of deals which are not yet booked as we speak, including a positive momentum on our flagship locomotive product, Traxx. You have seen some announcement yesterday. And a regional train product, Coradia Stream, in Germany but also Abidjan Metro in Ivory Coast and Quebec tramway in Canada. All of that are expected to be booked within this year. We are therefore confirming our guidance of book-to-bill above 1 for the full year '23/'24. So turning to sales. Overall, we continue our positive track on quality execution with a solid sales ramp-up, as you see, of 7.6% on organic Q1 to Q1, notably with a good momentum on rolling stock. This sales growth definitively support our expectation for the year with a positive momentum, as you see, all across our 4 product lines. We do confirm as well our good progress on our EUR 1.7 billion of sales at 0% gross margin for the full year '23/'24, progressing as planned on the execution and therefore expecting the sales to be front-end loading during this year. Moving to our climate road map achievement on this quarter. First, we have announced on July 6 our CO2 emission target which has been validated by the SBTi, which is a major milestone and this consistent with the level required to meet the goal of the Paris Agreement. In precise terms, this means that we have increased our ambition taking into account the new size of the group including Bombardier and committing now to 40% of reduction on Scope 1 and 2 by '30/'31 and versus 25% in the ex-Alstom perimeter. And on the third scope, we are now committing to 42% on reduction on passengers and 35% on freight. On second element, we have been signing a major solar power purchase agreement in Spain. So this will be a massive project since it will basically start the operation early 2025 for 10 years contract and will cover the equivalent of 80% of Alstom electric consumption in Europe, which is a major step to reach our target, as you know, of 100% of electric consumption from renewables. So as a conclusion, we do confirm our financial trajectories both for the year but also for the mid-term target we were setting out in May '23. Specifically looking at the fiscal year '23/'24, we confirm the adjusted EBIT margin at around 6% and our free cash flow to be significantly positive. With that, I'll happy -- we'll be happy to take your questions. Back to you, operators.

[Operator Instructions] We will take our first questions from Akash Gupta from JPMorgan.

Laurent, first of all, thank you for the cooperation over the year. And wish you all the best for the new role. And welcome, Bernard. Looking forward to working with you. The 1 question that I had was that you said that the 0% gross margin sales would be front-end loaded. Can you provide a set of split between how are you currently anticipating it to fall between first half and second half?

Thanks for your kind words. It's been a pleasure to work with you as well. So on the content of this 0% sales contract, the most important point is that we are delivering and executing as per our target. I'll remind as well that we have been settling all of the commercial issues already back in May. Since we are declining, we are moving from EUR 2.3 billion of 0% sales margin in last year to EUR 1.7 billion in '23/'24. There is, by definition, a phasing. And this sales is indeed a bit front-end loaded in H1 versus H2 but a relative limited front-end-loaded perspective overall.

[Operator Instructions] We will take our next question from Daniela Costa from Goldman Sachs.

Just have 2 questions actually. First, I guess, lots of contracts that you have announced. I sum up, I guess, maybe over EUR 10 billion that aren't yet booked this quarter but will be booked soon. Can you tell -- help us sort of calibrate that with first half to second half cash seasonality and whether this year should be different given the large amount of prepayments potentially in the second quarter? That would be my first question. And then second question, just maybe if you could give us a little bit of an update on what has happened in terms of cost inflation and the curves, whether this year should be front loaded or more back-end loaded. How are you seeing things?

Daniela, thanks for your 2 question. So on your first question, on the phasing of orders, so there is, as you have seen, a relatively soft Q1. However, our pipeline is very strong. And we are very confident to confirm the book-to-bill above 1 for the full year. When it comes to the phasing of H1 or H2, it's still uncertain. From the announcement to the booking, there is a number of steps that we need to complete, so that's something that we will see. And that's back to your point on the cash. That will be one of the drivers, the phasing of the H1 and H2, having in mind that we are starting with a soft Q1 in terms of orders. Second point, as I said, the 0% sales margin will be more front-end loaded, which will have an impact on the global seasonality of our economics. And the third one is indeed we will have the usual seasonality and -- of our activities between H1 and H2. So these are for the drivers on the cash for H1 to H2, bearing in mind, Daniela, that our commitment is on the full year, as you know. And our commitment is confirmed with a significant free cash flow for the full year. Second point, briefly, on the cost inflation. As expected, to make it simple, no surprise on this. We are continuing to mitigate this inflation by signing orders with indexation contract and providing back-to-back close to our suppliers, so I don't expect any kind of issues on this matter, all as per target. Thank you.

We will take our next questions from Gael de-Bray from Deutsche Bank.

I have 2 questions, please. And the first one is for Bernard. I know it's still very early days, but I wanted to know if -- or what you've learned in the past few weeks of being with the business. Is there anything materially different from what you thought it would be? And I'm also curious to know what your priorities could be in the next 6 months. So that's question #1. And question #2 is on the -- maybe for Laurent, if you could provide some update on the potential timing of the booking of the multibillion project in Toronto.

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

On my side, Gael, as it's only my fourth week in this industry, in this company, I wouldn't qualify my comments as plans but rather feelings or observations. So first, I'm quite enthusiastic about what I've seen in terms of teams. Everybody is really dedicated, motivated; and it's great to see that. And by the way, what they have achieved, so far, is quite spectacular in terms of building a global leader. My second comment was -- is to say that it's really a global company. I mean it strikes me versus what I've seen in my previous jobs. We are global, and that's really exciting to have such a global reach. My third comment is that I've been told that Alstom is a project company. And a project company is complex. It's specific in terms of accounting, in terms of management. It's true, but considering also the scale of the company, we are in fact in between a project company and a product company by the scale of what we are doing. And I think it's interesting to see. I'm not talking of the transition but at least something more balanced than what I thought. I think that would be my 3 first comments. It's -- but early days in Alstom. And I'm not really a fan of the 100-day theory. So only being there for 1 month, we're really at the early stage of my digestion of what Alstom is. So happy to discuss that when we will discuss H1 figures.

We will move to the next question, from Jonathan Mounsey from BNP Paribas Exane.

And yes, I would just say goodbye to Laurent. It's been great working with you. I think you've had some very difficult questions to answer over the last couple of years. And you always -- you were able to do that with great grace and calm. And also, welcome to Bernard. I look forward to working with you too. First question, maybe on the Russian asset disposals. It's been going on some time. Just wanted maybe an update as to whether they're making any progress. And also I know you wrote the assets down, but what are we really gunning for here on an exit? Is it basically going to be a nominal $1 sale? Or could we actually see some cash come in on the disposal of that business? And then just a follow-up on the inflation. You mentioned the indexation. Can I just confirm if we put service to one side? I'm talking more about rolling stock specifically. When it comes to wage inflation, that remains not hedged, yes? You have to budget for that when you bid for the orders and, hopefully, get that mostly right. And as an adjunct to that, what do you think wage inflation is likely to be in the following year 2024/2025?

So thanks, Jon, for your kind comment as well. And thank you for the partnership in the last years indeed. So on the Russian assets, we are very opportunistic on this one. As you know, we have been depreciating 100% of this. It's a participation holding position on our side, so if at one point in time we can make a reasonable deal, we'll make it. Otherwise, it's just wait and see. And there is no much progress on this matter as we speak. On inflation, so to be very precise on the wages, the wages are part of the indices which are covering our index contract. It's, as a matter of fact, the largest part in terms of share, so we are fully protected for rolling stock, services and signaling when it is covered on wages inflation as well. And this is why our basic strategy on the midterm is to be immune from inflation. And being immune from inflation being -- is having index contracts and back-to-back close with our suppliers. And as I told, 90% of these Q1 orders are indexed. So when it comes to the wages next fiscal year, so that will be a negotiation which will be starting, as you know, from Jan to March. So it's very early days. I expect a still tense negotiation as inflation, while easing remains high in many of the -- of our regions. So I guess this will be still a tense negotiation.

We will take our next question from Guillermo Peigneux from UBS.

I join everyone else by saying farewell to Laurent and welcome to Bernard. And it will be -- it's been great to work with you, and it will be great to work with you as well. So my question is regarding the organic growth rate, obviously now over 7%. And I wanted to know how sustainable is this growth rate into years to come. I guess at the moment obviously, we're phasing projects and deliveries, but I wondered, that gap between 7-point-something percent and your guidance of around 5%, is there a bottleneck that prevents you from reaching that 7%?

Thank you, Guillermo. Thanks for your kind words as well. Thank you so much. So on our organic growth rate, so we have been starting with a very good fit in Q1 with a bit of acceleration on the rolling stock and which is healthy. Overall, we are in line with our execution trajectory, so no surprise on this. Looking ahead for the full year, Guillermo, we do not see any change in the mix. And we see indeed at least 5% organic for the full year based on our good Q1 dynamic. I will not, of course, bet on a 7%, 8% on the midterm as a continuous basis.

We will take our next questions from James Moore from Redburn.

Laurent, can I too say good luck? Thanks for all the excellent improvements in disclosure. And congratulations on holding the provision red line. And Bernard, nice to have you with us, and I look forward to working together. Can I just talk a little bit about the margin seasonality this year? I know it's early days, but is there anything, compared to the seasonality that you expected or the traditional seasonality in the profitability first half, second half, that you could note at this point? And secondly, can we just talk a little bit about what's going on behind the trains revenue? It looks like it stepped up EUR 170 million, EUR 180 million Q-on-Q in terms of revenue. And is that the expected ramp-up going according to plan? And behind that, when you think about contract to contract and the important contracts, are there any things that are running a bit behind, running a bit ahead that we should watch out for?

Thank you, James, for your kind words as well. And thanks for the dialogue, very positive dialogue, we've had in the last 5 years. I take the compliment of the red line of the provision. We set it back in May '21, and we did confirm that in the last 2.5 years indeed. So talking on your first question, on the margin seasonality, H1 to H2. So we will have sales seasonality related to the sales at 0% margin. As I said, we'll have more sales at 0% margin in H1 than in H2, so that will be mechanically weighting down on the margin on H1. Second, we will have the global seasonality of our sales in H1 versus H2. As you know, we are always accelerating our sales in the second half while we are globally in ramp-up. So that will be, I would say, 2 drivers that I see in terms of the margin dynamics between H1 and H2. So talking about rolling stock evolution, indeed, a strong Q1 with 5% up despite indeed the scope evolution and which was Reichshoffen related which was in the range of EUR 100 million. So we are good on the organic growth in terms of rolling stock on Q1 to Q1. So drivers, James, are very much Americas. We have a large step-up on Americas, both in North Americas and South Americas; and as well continental Europe, where we are still uplifting our ramp-up on the regional trains globally. So these are the 2 quick key drivers of our organic growth for the rolling stock that we are still expecting to continue to unfold during the rest of the year.

We will take our next questions from Delphine Brault from ODDO.

I have 2. First, can you comment on the gross margin of the orders booked in Q1? And second, can you update us on the tensions you may still see in your supply chain?

Yes. So thanks for your 2 question. So on the gross margin on order intake, I'm very pleased by the quality of the order intake. I told you back in May we are not about quantity of order intake. We are about quality of order intake, and the quality of order intake is threefold: number one is a profitability target. And on this, I can confirm that the profitability that we have been booking in our Q1 orders is consistent with the 8% to 10% profitability target we have on the midterm. The second parameter is the cash parameters. And we are not looking only at the down payment but at the overall cash profile. And equally, I'm pleased by the quality of the cash profile of this order intake, which will be supporting our 80% cash conversion. And the third parameter is around risks, which are products and T&Cs. And this is where our selectivity and leadership position is, of course, playing a role to be productive on this part. On your second question, on the tension on the supply chain, we know that we've been passing the peak of the electronic component crisis from last year. It's still a tense and complex situation but which is very well monitored, under control. And I do not see that as a major risk, as we speak, but still something that we will need to watch out not only on the electrical component but globally on our supply chain. But I would say nothing specific on this matter as we speak, Delphine.

We will take our next questions from Martin Wilkie from Citi.

Also, Laurent, if I can say, good luck to your future role. The question I had was you've obviously pointed to ongoing success in passing through inflation. And you also talk about the health of the pipeline. And it does feel that, surely at the margin, something has got to give in terms of either end consumers paying higher real ticket prices or governments having to borrow more to pay for trains. Has there been any tension in the pipelines and not in terms of your firm orders but of any pipeline projects being delayed because of inflation pass-through and that governments are sort of backing away from certain contracts if they're going to be higher cost than they might have been a couple of years ago?

Thank you, Martin. Thanks for your word as well. Thank you so much. So on the pipeline, we do confirm the quality and the momentum of our pipeline. You know that we are updating our commercial pipeline on a quarterly basis. And you have seen that we confirm EUR 220 billion with the same phasing as the last 3 months. On a very concrete basis, we have not seen at all any evolution in terms of the dynamic due to the interest rate or the budgetary situation. I just remind that 70% of our pipeline is based on replacement. I've been in New York City with [ Martin ] a few months ago now. And if you look in Paris, if you look in Germany, there is so many replacement which is needed. And this is something which is, of course, a must do for the stakeholders and a very strong backbone of our pipeline ahead of us. So to make a long story short, no impact whatsoever on this matter as we speak.

We will take our next questions from William Mackie from Kepler.

Laurent, Bernard, yes, echoing everyone else's comments, but thank you for the journey and the improved disclosure. And welcome, Bernard. My 2 questions go to, 1 question about orders in Americas. You've said that we should expect order intake in the Americas to be double the base of the last 3 years or average. Could you maybe scope what you mean as a base of the average for the last 3 years? And what provides you the confidence to make such an upbeat statement about the Americas? And then secondly, when looking to growth for the rest of the year, could you provide a little more color on your expected growth rates across the business lines and what we should be penciling in with respect to the uplift in rolling stock services or signaling and systems?

Thank you, Will. And thanks for the comment on the improved disclosures. We've been working hard with [ Martin ] and the team to get there, so thanks for all of them. So on the order intake momentum in Americas, the background of it is definitively the push from the Biden infrastructure plan which is starting to unfold in terms of concrete projects. There is a number of, as well, private operators which are starting to explore the high-speed territories. And there is a very famous line from Los Angeles to Las Vegas, for instance, which is at play. So overall, we see a potential of moving from around EUR 3 billion per year of order intakes to around EUR 6 billion. So that's basically the numbers we are talking about. Of course, this is something which will be unfolding in the years to come. And we'll see how all of this is developing, but the back of it is this rail momentum that we see in the U.S. On the second point, which is the growth rate by product line for full year basis, so just to have for you a sense, as I say, the mix should be largely unchanged compared to last year, which means as well that, in terms of the growth rate, we see all of the product line being around the average of the group. So the system which has been done in Q1 will be basically catching up in the rest of the year. Rolling stock service will be -- and signaling will get closer to the average of the group. So that will be something which will be a very nice wide spread of positive momentum across the product lines.

[Operator Instructions] We will take our next question from Arnaud Palliez from CIC Market Solutions.

All the best to Laurent and Bernard in their new roles. My question is about the negative currency impact we had in Q1 on sales. I would like to know if it could have also some negative impact on the operating margin or if it's rather neutral.

Arnaud, thanks for your words. And thanks for your question. So as you know, we are fully hedged in terms of currency risk. So there is no impact on our profitability, thanks to our hedging mechanism that are in place on all our projects.

We will take our next questions from Jonathan Day from HSBC.

Just going to echo the sentiments again. And Laurent, thank you very much and all the best the new role. And welcome to Bernard. I just wanted to ask a little bit about the footprint and capacity and wondered if you could just talk a little bit about how you're managing capacity as you ramp up production on the rolling stock side; and whether, given the sort of contract opportunities like the one you mentioned in the U.S., you need to expand capacity [ and the top-rating ] footprint adjustments as well.

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

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

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

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