Alstom Unsp/Adr

gentlemen, welcome to the Alstom half-year results conference call. Note that this call is being recorded. At any time during the presentation, you can press star 1 to enter the queue for the question and answer session. I now hand over to Henri Poupar-Lafarge. Sir, please go ahead.

Good morning, everyone. Welcome to Alstom first half 22-23 results. I will start by giving you some highlights. Then I will leave the floor to Laurent, which will give you some details on the financial results, as well as some data on our trajectory and outlook. And then I will come back for the conclusion. And of course, I will take the questions that you may have. But let's start by giving you the main messages of this first half. The first one is about the demand. The demand is being confirmed. We told you in May that we had a large pipeline, and I can confirm that this large pipeline is still there. It has even increased. And this is on the back of the long-term trends, which are the economic growth, the urbanization, but also, as you know, by the huge investments launched by a number of regions in the world in favor of health mobility on the back of the need of a transition of mobility towards sustainable mobility. The first half's results are definitively solid and we have achieved all our targets. We are totally in line with our trajectory, but I will leave it to Laurent to give you more details on this one. These good financial results, the sound financial results, are backed by sound operational results. And I can tell you that the operational turnaround is totally in line with our plan, both as far as ASTOM is concerned, but also as far as the integration of Bombardier is concerned. We are putting in place all the actions which have been announced to you over the last period and which are bearing their fruits. This, in turn, allows me to give you a more detailed outlook for the financial year 2022-2023, both in terms of adjusted debit, which we now estimate at between 5.1% to 5.3%, as well as for the free cash flow, which we expect to be between 100 million to 300 million positive cash. Here are, as you can see on the slide, our main key performance indicators for the year. And I have to say, as you can see on the slide, that I have decided not only to give you the financial ones on this slide, but as well as the ESG indicators, which, as you know, are extremely important for us as well. So the first one, the classical one, orders, 10.1 billion, book-to-bill of 1.25. We are continuously recording... a good level of order fueling our future growth. And I want to insist on the fact that the quality of this order intake is extremely good and is totally in line with our current plan and our future targets. Sales have grown by 8.1% here as well, in line with our trajectory. And on the back of the last years and last period order intake, sales amount to 8 billion. EBIT margin, I just said EBIT margin at 4.9%, an increase of 40 bps as compared to the same period of last year. So we are progressively, as we have said, enhancing our profitability, recovering our profitability. Free cash flow, minus 45 million, so a small usage of cash, of course, as compared to last year, which, as you may recall, was recording a very large cash outflow. So this is in line, again, with our anticipation, with a good level of cash down payments, particularly a good level of cash flow in India. One or two words on our ESG indicators. We make progress on all fronts, whether we talk about scope one and scope two emission, minus 6.5% as compared to the baseline. Energy consumption, minus 5% as compared to our baseline. We are increasing the electricity from renewable sources. And last but not least, we are improving our ratio of women in management. So we are going to continue to report to you on these indicators very regularly from now on. So turning now to demand, very strong market potential. We are portraying to you a kind of three-year rolling pipeline. We have above 190 billion euros, including a large portion of it in the next 18 months. So it's not only back-ended, but it's also front-loaded. And we can see on the slide that we have very large standards on all continents. I think I said it in last May, all continents are positively oriented, whether we talk about the Americas, North America, Latin America, whether we talk about Europe on the back, not only of the replacement of the existing fleet, but new lines, increased capacity. AMECA with a number of large turnkey projects coming back. APAC, of course, Southeast Asia, Australia, very buoyant market in Australia as well. So very sustained level, and we are aware of some of the macroeconomics challenges, but we don't see any slowdown of the demand despite of this global environment. As far as ASTORM is concerned, so looking backwards on our first half results, so it's a good level of order intake, an increase as compared to last year, a record level backlog of 85.9 billion, close to 86 billion. On the back of book-to-bill, which is above 1, which has increased mechanically our backlog, but also the weakening of the euro has increased mechanically as well this backlog. As you can see on the right-hand side of the chart, We have a good level of order intake in all regions, Europe being our primary region, large markets, but as well as Americas, APAC, and AMECA. Of course, when you talk about AMECA or Americas, it can be influenced by one or two big tickets, but we have a sustained level of order in all these different regions. Similarly, in terms of activities, we have a large order in rolling stock, and particularly for Germany, for Egypt as well. But we have a huge order in tech in services, system, and signaling as well. A few examples of these contracts. So you've seen on the rolling stock contract, so the largest one for Baden-Württemberg, which is one of the largest regional trains ever ordered in Germany, double-deck trains together with their service maintenance activities. We have within this all this family of Coradia regional trains, which is a very successful family, new orders in Romania, in Spain as well, continuously recording some successes in high speed, very high speed, in Sweden, in France, and as I was mentioning, a very sound level of order intake in services. with the 30 years maintenance on Baden-Württemberg, maintenance as well in Romania, and maintenance in Spain as well. So a lot of our orders are coming now bundled with rolling stock and services together. Sales, I will not go into all the details, but we have a sound level of sales on all our segments. Rolling stock, plus 2% may seem relatively low, but we have a number of rolling stock which are included in our system business, which has increased a lot. So we have a ramp-up of our rolling stock activities. Service is a significant step-up, particularly in Europe and in the Americas, on the back of a number of large contracts which are being executed. Signaling growing smoothly. Here as well, this is only the external part of signaling, but we are larger growth if we take into account the signaling which is included in our systems, because as you can see, there is a huge jump in our systems activity. There was a slowdown in the previous years because of the end of some contracts in the Middle East, Dubai, Riyadh, for example. Now we have the wrap-up of the new contracts, whether it's in Cairo, in Montreal, in Thailand, sorry, and still in Montreal with the REM, quite significant trade this half year. So really a nice wrap-up of our systems activities. Execution of our projects. I would say it's exactly in line with our trajectory. First, because we mentioned that in the past, we have a level of what we call non-performing sales, so all the orders in tech mainly inherited from Bombardier, which had zero gross margin. 1.3 billion euros of sales generated by this backlog. We said that it would be 2.6, 2.7 for the year, so we are in line with this trajectory. It represents today 16% of our sales, and this will go down progressively to a much lower level as we are executing this backlog. This is translating into some decrease in our provisions, of course, as we are consuming the provisions because of this contract. And again, this is in line with our trajectory. We have not changed our level of provisions since day one, and we are keeping this level. And things are in line with our plan, not only in terms of global security, amount of provision but as well in terms of timing and I'm pleased to tell you for example that the last two settlement negotiations are now being finalized and there is no more uncertainty on this backlog of negotiations which we had to manage after the integration of Montmarlin. Talking about Bombardier integration, just a few points. So it's now one year and a half. We have converged our processes, all our processes, and we are now, of course, focusing on deploying common and standard processes throughout the group. Our digital suite that we have within Alstom, that we have developed within Alstom, is being now deployed throughout the group. It took us some time because first, of course, you need to change the processors, and when the processors have been adopted, then you can deploy the full suite of tools. We have deployed seven countries, and we intend to deploy all countries by December 2024. We can only confirm the synergies. And as compared to last year, which was around 100 million, we want to double this number for this year. So overall, I've always said that it will take three to four years to fully integrate Bombardier, and the date of December 2024 is definitely in line with this plan to three to four years. So we are very satisfied by the way this is being managed. Operationally, I think during the Capital Market Day we had this opportunity to tell you a little bit more operationally what it means and how we need to turn around some of our operational indicators. So we wanted to tell you, to show you today where we stand at the end of September as compared to the graphs that you have seen again last May. We are pleased to tell you that on all fronts we have made some further improvements. whether it's the GetReview, which is an engineering indicator, which is stabilizing at a decent level, where we've done a lot of progress, defect per unit, so all the quality indicators have improved tremendously. And I can say as well that we have now excellent customer relationship. We are back to a normal customer relationship because the quality of what we deliver is in line with customer expectations. We still need to work on delivery on time, and we still have some targets to improve the delivery on time. We have improved, but we need to continue to improve this one. As you can see, open quality issues have decreased tremendously. Manufacturing support has to improve. Engineering on time is improving. So globally, without going into the details of each and every operational indicator, we are in line with our trajectory to put back the operational performance of the group at the level where it was before the integration. This has been done, I would say, despite a challenging environment, but despite the electronic component and all kinds of supply chain crises. And I have to say that the group has very well managed these crises because we have not been impacted on any of our projects by these electronic component shortages, which I think, if you compare with other industries, it's quite an achievement. Coming back to innovation and coming back to one of our key highlights, as you know, Alstom is pioneering the hydrogen technology. We made a lot of progress in the last semester with the first fleet in commercial services in Germany with the three chords of autonomy on fuel cells. But one thing which has not been announced is that we have received around 350 million euros of subsidies from different countries in Europe to support our R&D development in hydrogen. This is a significant amount of money, which is really not only... I would say showing the importance of the hydrogen economy for Europe, but also showing the importance of Alstom as being the leader in this technology for rail transportation, and Europe counts on Alstom to develop future trains, future hydrogen trains. Second part of our innovation, all what is autonomous mobility, we are continuing to develop both for passenger trains and for freight trains a number of projects with ATO, so with automatic train operations. which is something which is quite usual and conventional for METRO, but which is not yet developed for MENLINE. And we are also pioneering this technology for MENLINE, both in France and in Germany, as well as in other countries. We have some different types of pilots, and we are, period after period, achieving milestones to secure these technologies. So these were a little bit the highlights of the first half, and now I'm pleased to hand over to Laurent, which will comment on our financial results and financial trajectory. Thank you. Up to you, Laurent.

Thank you, Henri. Good morning, everyone. So let's start with the P&L. So with basically 8.1% sales growth in H1, of which 5% organic, on the back of a positive project execution and in line with our trajectories. In terms of gross margin, we have uplifted by 40 basis points to 13.2%. Similar to last year, we have some phasing on R&D expense, and you should expect some increase during our second half of our fiscal year. S&A represents 6.3% in H1, stable versus last year. Finally, sound contribution of our GVs in China at 75 million euros to be compared with 77 million euros last year, thanks specifically to a positive contribution of Casco, our signaling, and as well our rolling stock GV in China as an export base to Asia and Europe. Altogether, as you see, EBIT at 4.9%, improved by 40 basis points compared to last year. Moving to the main drivers behind the change in adjusted EBIT for the first half, number one on the synergies with a ramp-up developing as planned, representing 60 basis points of margin improvement. Second, lower contribution from non-performing sales with a positive impact of around 10 basis points in H1. And third, higher volume and favorable project mix helped by margin, driving a 50 basis point uplift in H1. Last but not least, effect on the macro headwinds, mainly inflation, accounted for negative 80 basis point impact on our margin and reflecting lower margin at completion from the part of the backlog that is not covered by indexation clause. Let's look at the dynamic of these subjects on the next slide. So for Alstom, as we indicated, the current macro challenges are essentially about inflation, since we have been able, as Henri explained, to mitigate fully the challenges caused by supply chain, including electronic components in H1. A number of actions have allowed us to mitigate this inflation headwind. Number one, we took strong cost-out measures on a project-by-project basis. Second, 35% of our cost base is labor, and these costs are fixed for this fiscal year. Third, energy costs, even if they represent less than 1% of our cost base, are subject to high increase. Still, they are edged at 90% for this fiscal year, 50% for next fiscal year, and around 20% for our fiscal year, 24-25%. Fourth, on the commercial side, 90% plus of our order pipeline is covered by indexation, this reflecting our selectivity. Looking at the backlog in more details. First, contract with indexation formula account for two-thirds of our backlog and 50% of our sales in H1. Indexation formula, as you know, covers all our cost natures, raw material, energy, labor and supplies. In addition, 60% of our suppliers are with fixed price or limited indexation. As a result, margin completion for this contract has slightly gone up, leading to a marginal positive impact on H1. Second category is contract without indexation for one-third of the backlog and representing 50% of our H1 sales. Out of this 50%, 10% are short-term, therefore no impact by inflation as price are revised on a regular basis. For the remaining 40% of sales, higher share of our suppliers, actually 80%, have price fixed or indexation with a cap, mitigating hence inflation impact. So we have reflected all of these cost factors in our cost to complete based on our central inflation scenario, resulting in, as I explained, lower margin at completion for this non-index contract, leading overall to a net impact of 80 basis points as we anticipated in our fiscal year 22. Turning to net profit, briefly, restructuring charge low in H1 with phase 2 of our general restructuring, which probably will be implemented in second half. In terms of integration cost, I remind that we have announced 400 million euros for integration cost over the next three or four years. We are now ramping up this integration cost with an investment of 64 million euros in H1. an effort which will be, of course, continuing in both H2 and the next two fiscal years. In addition, we booked €50 million of one-off costs related to final non-cash remedies accounting impact and legal fees. Below adjusted EBIT, financial results stable with some increase expected in H2, ETR stable at 27%, leading to an adjusted net profit of 179 million euros, broadly stable versus last year. So let's move to the free cash flow. Clearly on our trajectory is to reach a positive cash generation for our full year 2022-2023 with a few drivers, limiting our net impact to minus 45 million euro in H1. Number one, discipline on CapEx and R&D spent. Second, working capital very much in line with our expectation. I will come back on that in a minute. And third, good performance of our Chinese joint ventures with 97 million euro dividend received during our first half. So moving into some details on the working capital, a number of moving parts. Number one, we analyze inventories together with contract assets and liabilities as it represents our supply chain and production cycle. This net increase is very much in line with the translation of the ramp-up during H2 and next year, and as well some stop anticipation to manage current supply chain challenges. Related to contract liabilities, continuous healthy down payment that we are expecting to follow up for the second half. I just want to flag as well that our specific down payment scheme related to German customers has decreased from 471 million euros to less than 300 million euros in H1. Secondly, increase in trade payable, essentially related to the increase of inventories, and as well some currency impact. In turn, trade payable are now pretty much aligned with the level we've seen in Alstom pre-acquisition. Third, please to report a decrease in trade receivables, in particular to an effective cash collection in H1 and a reduction in overdues. Finally, stability in terms of other current assets and liabilities. Just to be very precise on a few specific points, on the other liabilities, other payables are stable as announced in fiscal year 2022 at 1534 million euros versus around 1.5 in March 2022, good stability of suppliers with extended terms at 348 versus 324 million, and tax and VAT receivables reducing from €167 million in March 2022 to today €128 million. All things considered, working capital before provision is therefore standing at 9% from 10% last year, absolutely in line with the expected trajectories we announced in May. Related to provision, here again, 144 million euros of provision consumption, very much in line with our consumption trajectory. A few words on net debt with the usual evolution driven by free cash flow dividend and lease contribution together with some one-off on remedies and forex impact. This is developing as planned with a low point for this half year, which will be uplifted in the second half with the expected cash generation in H2. Looking at liquidity, very strong liquidity at 4.6 billion euro as of end of September. Our 4.25 billion euro RCF being the backbone of this liquidity and which has not been known as of end of September 22. Short-term commercial papers and bank facility are used to cover our working capital seasonality. I want to stress that we monitor our gross cash proactively, and considering that we manage all our liquidity centrally at group level, 800 million euros of gross cash is more than enough to drive our treasury operations. Few words on our long-term debt. As you know, no change compared to the last half year for sure with a very favorable maturity profile under current market condition with no refinancing before October 26th and an average fixed rate at 0.22%. On the right-hand side, you see a positive evolution driven by interest rate on our pension, with a decrease of the underfunded plan by 200 million euros and an increase on the surplus overfunded plan by 50 million euros. So altogether, net liability reducing by 250 million euros. Overall, we are delivering in accordance with our plan. We are confident in our delivering trajectories driven by cash and profit generation and therefore expect no rating action from Moody's following this H1 result. Let's turn now briefly to the trajectories for the second half with the key drivers first in terms of adjusted EBIT. Synergies, as I explained, is developing as planned with an expectation of 60 basis point contribution for the full year in line with H1. Non-performing sales consistent with H1 with an accretive impact of 10 basis points. Third, I would like to note that by March 23, more than 50% of our backlog will have been renewed. Margin on order intake is in line with our profit trajectories, and margin backlog is improving since the acquisition. On this basis, we expect higher volumes, favorable business mix, to help margin by 30 basis points for this full year. Finally, we expect inflation to still wait on the margin generated by our non-indexed contract during H2 with a net impact consistent with H1, i.e. 70 to 90 basis points. To end on the trajectories and on the cash generation, we expect to generate positive free cash flow between plus 100 to plus 300 million euros for the full year, driven by positive momentum on EBIT, strict management on R&D and CAPEX, and as expected, offset by working capital change, driven by provision consumption and normalization on working capital before provision. Thank you. I will now hand over to Henri for the conclusion.