Alstom SA (ALO) Earnings Call Transcript & Summary

Hello, and welcome to Alstom Fiscal Year 2024-2025 First Quarter Order and Sales. My name is George, I'll be the coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host today, Mr. Bernard Delpit, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you very much. Good evening or good morning, everyone, and welcome to this conference call, to discuss orders and sales for the first quarter. Starting with order intake, Slide 3. We recorded EUR 3.6 billion of orders in the first quarter and the backlog is broadly stable at EUR 92 billion at the end of June. From a regional perspective, Europe is leading with large orders in Germany, the U.K. and Italy. With regards to product lines, we continue to see good momentum in Signalling and Services with book-to-bill above 1. Our continuous focus on base orders is paying off with a good flow in the first quarter, which is supportive for margins. A few additional remarks. First, market dynamics remains solid. The pipeline potential is around EUR 200 billion of opportunities for the next 3 years. Second, and as announced in our full year results, we expect order intake to gain momentum as we progress through the year. Quality of order intake, in terms of margin is in line with midterm trajectory. Margin in order intake continues to exceed margin in backlog, which, in turn, largely exceed margins in the P&L. Margin in order intake in Q1 were particularly good. On Slide 4, some key orders in this quarter. It includes another success for 70 Traxx Locos in Italy, a landmark contract from Hamburg Metro with a total value up to EUR 2.8 billion, with a first call-off under this agreement of EUR 670 million, including both rolling stock and signaling. And then additional 10 trains for the Elizabeth line in the U.K. associated with maintenance services, obviously, with margins for those trains that have been updated and with different margins from the one we booked in the last year. Terms and conditions of all those orders have been carefully reviewed and negotiated considering the size of certain of these orders, and they are in line with our objectives. I would like to add that since June 30, you've also seen strong news flow on Signalling with OBB in Austria for around EUR 100 million and Perth in Western Australia for approximately EUR 650 million. This is encouraging for our Signalling business and was a second quarter order intake. Last but not least, the major order will be disclosed tomorrow morning. I cannot anticipate on the client disclosure but stay tuned. Turning to Sales. They reached EUR 4.4 billion in Q1, including EUR 2.3 billion for Rolling Stock, EUR 1.1 billion for Services, EUR 637 million for Signalling, and EUR 341 million for System. Alstom delivered organic sales growth of 5.3% in Q1, which is in line with full year guidance. Rolling Stock activity was quite high, notably in Europe, with deliveries relating to the Olympics in France. Of note, the good start of Services ramping up in all regions and delivering a 13%, 1-3 percent organic growth year-on-year. On Slide 6. Regarding rolling stock production. 965 cars were produced in Q1. It came lower than the 1,122 production achieved over the same period last fiscal year. However, the contract mix is very different and simply said, better than last year. I'm talking here of the contract mix that is a combination of type of cars and type of contracts. With the end of the production of the Aventra program in the U.K. and of the ICX in Germany, with higher deliveries in France on programs like -- such as RER, new generation and Metros for Paris region. We will refine full year outlook in terms of car production at the time of H1. But the message is the same as in May, we'll now stabilize production in a range between 4,500 and 5,000 cars per year with less swings in the mix going forward. We are talking here about cars production. Based on last year's experience, we are carefully monitoring to deliver more than what we produce with a bit more than 1,000 cars delivered during Q1. On Slide 7, just to emphasize the strong team's mobilization around the Olympics games in Paris with 3 metro lines, 1 commute line and 2 tramways lines opened or extended. Slide 8. It looks now like an old story, but it happened only a few weeks ago. So deleveraging plan is now executed. For those of you who are off in May, it's now down. During the first quarter, we announced and executed the successful completion of a EUR 1 billion rights issue as well as the issuance of a EUR 750 million hybrid bond. This was achieved thanks to the strong support of our reference shareholders as well as a supportive market environment. We are also in the final stage of the sales process regarding our U.S. conventional Signalling business. We are expecting the last closing conditions to be waived shortly. And as previously announced, the plan is to close the deal during the second quarter. Net proceeds from these transactions will amount to EUR 2.4 billion, EUR 1.7 billion already cashed in and EUR 0.7 billion in September. The impact on deleveraging amounts to EUR 2 billion due to the treatment of hybrid bonds as 50% equity and 50% debt by the rating agency. Proceeds are progressively used to repay short-term debt, including commercial papers and RCF, and will also fund short-term working capital requirements and free cash flow seasonality. Regarding the impact on credit rating, Moody's upgraded the outlook to stable on June 30. This was the aim of the plan, and Alstom fully implemented it in a timely manner. Turning now to guidance. Let me remind you of the key assumptions that underpin our fiscal year '24, '25 outlook. On the external factors, supportive market demand and level of down payments broadly in line with last year. As of today, these conditions are met and confirmed. The deleveraging plan being fully executed, key remaining action our side is the end of the integration program with Bombardier. I can confirm that this condition will be met during the year as per plan. We, therefore, confirm the fiscal year '24, '25 outlook that we provided at full year results in May, i.e., book-to-bill above 1; sales organic growth around 5%; adjusted EBIT, around 6.5%, with a margin improvement to be more pronounced in the second half of the year due to structural seasonality but also to the timing of the various self-help initiatives regarding cost savings; and free cash flow generation to be within a range to EUR 300 to EUR 500 million for the full year. Regarding the first half, we confirm the seasonality, which we explained last May, we expect free cash flow for the first half to be negative with a range of EUR 300 million to EUR 500 million. Regarding midterm ambitions, there is no change to the framework that we provided back in May. Before we open for Q&A, let me share a few words of conclusion. Commercial momentum is sound with order intakes to accelerate within the year starting in Q2. Mobilization around the rolling stock delivery is strong, as seen in France for the Olympics, and deleveraging plan has been executed and put Alstom on solid foundation. So in a nutshell, we are in line with the plan unveiled in May. Thanks a lot for listening. I will now take your questions.

[Operator Instructions] Our first question today is coming from Delphine Brault of ODDO BHF.

I have 2. First, can you provide a bit more color on your pipeline for Q2 and H2, so for the remainder of the year, maybe by region or by segment? And second, can you comment on any tension that you may still see in your supply chain, if any?

Thank you, Delphine. What I can do is, first, to remind you that tomorrow morning, we'll make a significant enhancement and a new order to be booked in Q2. And that's going to be in Europe, that's going to be for Rolling Stock and Service, and that will be, again, a significant order. What I can also do is to remind you that we have announced large orders that you already know. They have been announced and waiting proper conditions for booking, for example, in Portugal, for EUR 700 million; Haifa-Nazareth for EUR 700 million; Perth Signalling, EUR 650 million; and Proxima for EUR 700 million. On top of that, around EUR 15 billion of options on frame agreements to be called off progressively of next quarters and years. And that bring us to confirm our book-to-bill above 1 for the full year, and a strong order intake in Q2 as well. On the supply chain, what I can tell you that it's still something we are monitoring very carefully because it could explain some of the production bottlenecks that we have in certain sites. Nevertheless, nothing major to flag here. So still on top of our priority in terms of execution, but nothing specific, I would say, to flag.

We'll now move to Daniela Costa of Goldman Sachs.

I have 2 questions. One is a follow-up, I guess, now that the deleveraging part of your first priorities were done, can you talk a little bit through those working capital actions that you were implementing, what has been done, how it is progressing, a bit of an update on that. And then the quick second question is regarding like whole U.S. tariffs and the risks around the elections. I know U.S. is not very big for you, but are you fully -- all the costs for everything that is done in the U.S. are U.S.-based? Or could we see some impact from tariffs?

Okay. On the first one, on the deleveraging. Yes, we have some, what I could say, organic actions undertaken since now a few quarters to improve the situation. Still, we have some seasonality. Just to illustrate, the actions on inventories continue to, I think, to progress. What we have done to synchronize production and deliveries is also part of the plan. That's what I explained when I described the situation in terms of production, we have delivered more cars than what we produced in Q1. That's an illustration. And we are also working to continue to put the adequate pressure on our supply chain. And again, we manage it carefully because on the one hand, we could have some issues. And on the other hand, we need to get the right tune in terms of inventories and most of the inventories are coming with the supply chain and the supplies. So yes, we are moving on 2 legs, and our organic measures are well paying off. But I think we need to wait for the end of the semester to describe what kind of impact it has on the balance sheet. Now to your point on the U.S. elections. Frankly, nothing to flag here. As you said, it's an important region for us, the Americas, but nothing really to flag here. The Buy American Act is still -- I mean, that 95% of what we are doing is sourced in the U.S., and I don't think we might expect something different in the coming years. And we don't see a major impact as of today on the Amtrak project that is progressing well. And now, frankly, I could say the same thing for the French elections, which has created some impact. And I mean on the political side of it but nothing material on our industry and our business.

We'll now move to Martin Wilkie of Citi.

It's Martin from Citi. The first question I had was just going back to the pipeline. I think at the start of the call, you mentioned it's now around EUR 200 billion. If I recall correctly, it was around EUR 190 billion last time around. Just if you could, give us a bit more color on what's driving that either by region or product seeing that nudge higher in the pipeline?

Frankly, Martin, considering the total amount, EUR 190 million to EUR 200 million(sic)[ EUR 190 billion to EUR 200 billion ] doesn't make a big difference, nothing really to flag here. It's in the same, I would say, ballpark on what we discussed in May. Nothing significant to report here.

Okay. And if I could ask a follow-up thing. Obviously, you talked about a mix shift over time with Services and Signalling becoming a more important part of the mix relative to Rolling Stock. But it still seems that they're very healthy backlog and conversion of Rolling Stock, given what you're talking about for Q2 as well. Has there been any change on that front? Or should we still expect that mix shift of the revenue mix away from Rolling Stock to continue as you talked about previously?

Nothing new. We are very much in the same direction of what we explained in May. We've seen a good momentum in terms of Signalling and Services. I mean, I'm sure you noticed that the book to bill for Service is double-digit one. So very much in line with what we said. And again, tomorrow, you will see a big bundle, I would say, order, so with a lot of services. And we are happy with the development in the Signalling business as well. So no it's -- I would say that it confirmed what we said in May with the mix converging in terms of Rolling Stock and Services in 2026, '27 towards 40% of our backlog for each and signaling on top being around 20%. That's very much our road map. And I think that what we're going to see in terms of order intake in this year will confirm it.

Our next question will come from Akash Gupta of JPMorgan.

I have 2 as well. The first one is on your debt reduction plans. You have largely executed the plan, and I'm wondering if you can talk about what kind of feedback you're receiving from customers and with a better balance sheet, do you see room for positive surprise on orders should the customer get more confidence in your ability to execute large long-term contracts after the debt reduction plan? And the second one is on Signalling. So orders were up almost 100% year-on-year and we saw you booked a large order in Hamburg. I'm wondering if you strip out this large Hamburg order, then can you talk about the base order development in Signalling that you are seeing?

On the first question, Akash, the same way we said in the winter that we had no negative feedback from the customer on our hedging situation and balance sheet issues. I can tell you that we had no positive feedback from the customer on the execution of the deleveraging plan. Frankly, for them, we are the same company. We are having a huge backlog to execute, and they are very confident that we'll be there. And they need Alstom be there in order to deliver on the backlog. So no real feedback, I must say. We had very positive feedback from our shareholders, from the market, from the financial community, I would say, but not really for the customers. I'm not sure I get your question. Was it on base orders? Or is it -- could you please rephrase it?

So I mean if you look at Signalling orders for Q1, they're up almost 100% year-on-year. And we know that you booked a large order in Hamburg, which also had some Signalling. And I was wondering if you can provide some color on underlying orders in Signalling, what sort of development you are seeing there, excluding this large order.

Well, a way to say, almost EUR 900 million of order in Signalling, Hamburg, I would say, represents, I'd say, EUR 150 million. That means that the base orders represent EUR 750 million or so. So this is very much in line with what we have always said that base orders with good margins are fueling the pipeline for our Signalling business. And it's going in the same direction of what we said in May, both for Signalling and for base orders.

We'll now move to Gael de-Bray of Deutsche Bank.

I have 2 questions, please. So firstly, I wanted to understand if the 14% decrease in the car production level was in line with your internal assumptions. And if not, why that had been the case? Do you also still expect the production of cars to grow more or less around 5% this year? And in which segments and geographies do you expect to see an acceleration in the remainder of the year? And then I'll probably get back for the second question.

Yes. Okay. So I will not comment on our internal objectives because I mean it's -- there are many factors here. What I can tell you that we are trying to get both, I mean, cautious assumptions when it comes to size, the cost of our activities and ambitious target when it comes to daring on our commercial targets. So the fact that it is where it is today in terms of number of production doesn't tell you much about the financial impact of this production. But I would say that it's in line with the plan. Maybe it could have been more and we had, here and there, some bottlenecks that have created some minor deviation to the plan but it does not change our total view on the year to be broadly in line, maybe a little bit above what we produced last year and above all, what we delivered last year. So I would say no major deviation here and no impact on our financial guidance.

Okay. And the second one is about the recent dissociation of the CEO and Chairman roles. I know it's been only about a month, but I was curious to hear your thoughts on the process and on what this could potentially change for the company going forward.

The CFO has no personal view on the governance of the company. It's a recent change, and they are working together, I would say, on a very frequent basis. So there is nothing much to report here, Gael. I don't know if -- what you were exactly expecting. I mean, these are -- I mean, those Chairman and CEO are strong personalities and, I guess, that would be very good for Alstom. Nothing specific to report here.

We'll now move to Andre Kukhnin of UBS.

I've got 2 on margins. I'll just go one at a time. Firstly, I wanted to pick up on your comment about the margin progression in the year, being second half weighted due to seasonality and timing of the measure. I just wonder if you could help us calibrate that a little bit. Obviously, we're looking for about 80-basis points margin expansion for the year. And you already had more of a second half kind of progression in the margin last year. So could you maybe talk about those measures and the size of them that create this H and H deviation?

Thank you, Andre, for your question. It's not the time, really, to discuss margins and profitability. What I can say that what we have seen in Q1 as margins on the order intake was very robust and above what we saw last year in terms of backlog improvement. But we stick to what we've said, approximately 50 bps improvement in the backlog year-on-year, that's the target. And I would say that Q1, it might be a little bit above the target. But considering the size of the order intake, you shouldn't take it as an indication that we will be above the yearly guidance in terms of improvement on the backlog -- the margin on the overall backlog.

Okay. So just to make sure I'm not confused. So if we're looking for largest to go from 5.7% last year to 6.5% with the 80 basis points progression, I thought you guided for a bit less than that in H1 and a bit more in H2. And the 50-50 that you mentioned before you mentioned the backlog progression, is that kind of the guiding light for H1 and then you expect to accelerate that in the second half with the self-help measures? Is that the right read?

No, I'm just telling you that the margin in the backlog is good. When it -- and it has improved significantly in -- for the order intake of the first quarter. On the adjusted EBIT progression. What we have confirmed in the guidance that it will be more pronounced in the second half of this year for the very reason of the seasonality. So I expect that H1 adjusted EBIT will be very consistent with full year adjusted EBIT last year. And the significant progression will come in the second half because of activity and because of the cost-saving initiatives that we have taken and that will have a full year impact on the second half of this year. So the seasonality that we flagged in May will be not only on the cash but also on adjusted EBIT. And again, something close to last year profitability, you're going to see that in the first half of this year. By the way -- it already happened last year, by the way, where the profitability of H1 was close to last year full year profitability. I'm not suggesting it's a pattern but we're going to replicate the same kind of profile for adjusted profitability, adjusted EBIT this year.

That's very helpful. I -- my second question was about the backlog margin but you answered it at the beginning of your answer. If I may just cheekily squeeze in one. On the cash flow profile, your guidance is very clear. I wondered if I could ask at all whether the kind of cadence of the order intake and that also difference or in the deliveries in Q1, does that place you anywhere kind of off the middle of the minus EUR 300 million to EUR 500 million range for the first half? Or are we still certainly kind of in the middle of it for the first half?

I will not comment on that, Andre. I mean, based on Q1 orders, I think it's too early to give you more color on how we see our down payments over the year and how it can be articulated with our free cash flow. Just keep in mind that you will see an acceleration of order intake in Q2. And we have the same view as the one that we explained in May for the full year and H1 in terms of free cash flow. No change here.

Next question will be coming from Jonathan Mounsey of BNP Paribas.

Maybe the first question. I think you touched on the order pipeline being strong. I know that last year, I think you walked away from that large contract in India, I think after you've been even selective as the preferred bidder. I just wonder, is there any sign that, that contract can come back, I know it was extremely large, perhaps on better terms?

No news from India.

Okay. Maybe as a follow-up. Obviously, during the period high inflation, you and, I guess, the rest of the industry sort of relied more heavily on escalation clauses and had been the case in the past. And just wondering whether those types of contract details are still in place on fresh contracts. Also now that the inflation is easing, and I'm just wondering whether the competition starts to rise, and it's harder to get that sort of protection on the contracts that you're winning going forward in order to be competitive against everybody else in the market?

We still have the same kind of clauses in the new contracts. I mean, that's the way -- the point is that indexes will be different. But from a contractual point of view, we need the same protection, and we have it.

Maybe just one final one, given how shortly the answer to the first one was. Obviously, good to know that the disposal to North is almost complete. Is there anything else in the pipeline around disposals, anything active or being considered that we could see in the next sort of 24 months or so? Or does that really bring the disposal process to them for the foreseeable future?

I think that -- we said with Henri when releasing our full year results that we are continuing to look at what needs to be done in order to have a dynamic management of our portfolio of activities. So I would say nothing on the back burner but still a lot of activity of thinking about our strategy and the impact on our portfolio of activities. But nothing really to flag here for the coming quarters in terms of disposals or acquisitions.

The next question will be coming from Vlad Sergievskiy of Barclays.

Thank you very much for taking my 2 questions. I'll ask them one by one. Just one on the cash flow, please. In the second half of last year, you reported a very sizable increase in prepayments. Our contract liabilities were up by over EUR 1 billion, which is twice bigger than any semi-annual increase previously. At the same time, your order intake over the same period, excluding Service orders, was relatively modest and book-to-bill was below 1x. Could you help us understand the reason for such a big increase in prepayments during the last period in the period when orders were relatively modest? And how this increase impacts your view on contract working capital development going forward, maybe for this year and beyond?

Okay. I'm not sure where you want to go. Yes, we've seen a strong increase in contract liabilities because of prepayments last year because we had good commercial momentum and the acquisition in the contract. So if the question is, does it have any impact on this year? The answer is no. We continue to see a good momentum. It's -- I think it's too early to talk about contract working cap, but there is some seasonality as we explained because we continue to execute on the contract. But in terms of activities of some of our Western factories, second half is more loaded than the first one. So it's why we have some seasonality, and it will have an impact on working cap in the first half. We are monitoring the situation and we'll discuss that with H1 results.

And a follow-up on the cash flow, please. If we look at your guidance for the year, EUR 300 million to EUR 500 million. Can I clarify, does this guidance include lease payments and interest costs related to the hybrid bond? And how would free cash flow calculation change if those elements are included? It will be perhaps helpful if you can quantify those elements to us, how you see them for this year. That would be the second question.

No change since we discussed it at full year. So we have the same definition of free cash flow as previously. So it excludes leases and any coupons that are treated as dividends. So -- and for the leases, I mean, no big change. We are still thinking about EUR 160 million to EUR 170 million per year. And for the hybrid coupon, it's going to be in the range of EUR 35 million net of tax for the full year base.

We'll now move to James Moore of Redburn.

I don't have too much to ask because you've been very clear tonight, so thanks. Maybe I could go back to your margin comment being particularly good in the new order intake in the quarter. Is that because of a higher mix of Signalling and Service, which helps on a mix basis? I'd be keen to get away from that and just understand on a pure trailings basis, whether you're seeing the order intake margin progressing. That's the first question. And then the second question surrounds down payments. I think one of your ambitions was to improve the down payment percentages to drive the quality of free cash flow. And without being too precise on the numbers, given the orders you've seen in the first quarter and what you signaled being attractive orders in the second quarter, are you seeing signs of that improve down payment terms coming through as you hoped?

James, on your first, I think, yes, the good performance in terms of margin on order intake in Q1 has to do with the mix with a good level of both signaling and base orders. That's really what has driven margin in order intake in Q1. I wouldn't draw too much conclusion of that but it means it's moving in the right direction. But it has to do with the mix, including mix in geographies, by the way. In terms of down payments. Frankly, no change to what we said in May. We said that we see the overall amount of down payments for this year consistent with what we experienced last year. So no major change. Nothing really I could discuss here. I think it will be better in H1 to discuss it. But as we see some good momentum for Q2, I expect also some good level of down payments in H1 even if it could be a little bit unbalanced between H1 and H2. Nothing really to flag here.

Ladies and gentlemen, as we are short a bit in time, we have time for only one more question. And the last question today is coming from [ Thompson Day ] of HSBC.

I just wanted to come back to the pipeline and just ask, around your previous comments on the pipeline, have you seen any sort of changes in market activity, any customer activity? I know previously, you talked about customers becoming a bit more hesitant. And I know you've also said, obviously, you're looking at quite an order intake for the second half, but just wondering more generally whether that hesitancy has continued or whether it's something that's now sort of faded again into the background?

Okay. As I said, nothing really changed in this quarter versus what we explained in May. So we -- but looking at the number of bids that we are on and that we are working on and submissions that we are working on, I can tell you that I haven't seen any softness in the pipeline. A lot of activity in Europe, in the -- specifically in Germany, maybe. Maybe some delay for some expected offers in the Americas. But nothing really material to flag here. We are working on the same assumptions in terms of order intake as we -- as now versus where we were in May. The same assumptions in terms of total amount of down payments. So really, nothing to mention here as a change in our landscape for this industry.

Thank you very much for your presentation, Mr. Delpit. Ladies and gentlemen, that will conclude today's conference. We thank you very much for your attendance. You may now disconnect. Have a good day, and goodbye.