Alstom Unsp/Adr

Hello and welcome to the Elstom half-year results for fiscal year 2023-2024. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question at any time. If at any point you require assistance, please press star zero. You will be connected to an operator. I will now hand you over to your host, Henry Pupula-Forge, Chairman and Chief Executive Officer, and Bernard Delphi, Chief Financial Officer, to begin today's call. Thank you.

Hello, good morning everyone. Welcome to Alstom first half results for the financial year 23-24. As we have announced already the results on October 4th and that as you have seen this morning these financial results are confirming what we have announced on October 4th. We have changed slightly the order of the presentation and I will start with a high level view on our situation. So just to start with, considering what has happened during the first half and also considering where we are in our journey in the integration of Bombardier and our efficiency plans and action plans. We have decided to launch a global and comprehensive plan in three parts in order to consolidate our investment-grade profile, but also, and more importantly, or as importantly, I would say, to deliver profitability and cash. So the three parts of this plan is, one, And the first part, which is the most important one, is the commercial and the operational plan, coupled with the cost-efficiency plan. The second part of it is how to strengthen our balance sheet in order to, again, sustain this Evensman-grade rating. And the third part is about the organisation and the governance as we are entering into a new phase of our development. So I will just go through these three pillars. And then we'll hand over to Bernard for the financial results and then we'll come back at the end to detail the plan. So the first element, the first pillar again is about operational and commercial plan. This is the most important one as we need to definitely improve the efficiency of our activities. If we look back a little bit what has happened in the last six months, we had the impact of our hop-up. We had, as you said, a double digit hop-up of our activities, notably of car production. If I just take, for example, the months of October alone, we have produced in October 30% more cars than what we produced one year ago. And this, of course, has created some working capital requirements. At the same time, we had a relatively soft commercial performance, a soft commercial performance in a volatile market. And I will come back. The pipeline is still very interesting. However, short-term headwinds exist in terms of development of our activities. Last but not least, we had some delays in some acceptance of Aventra, which is one particular project. You know it's not only a project, it's a program which has suffered a number of roadblocks and that we are delivering in the UK. So basically, what we're going to do, first and foremost, we are going to accelerate the third phase of our integration plan. You may recall that I told you in 2021 that it will take three to four years to fully integrate Bombardier in the sense of fully build an efficient organization. We are today two years and a half after. It's a new phase. We have done all, as I said in last May, we have done all the basic integration, and now we need to accelerate accelerate the efficiency and the optimization roadmap. In addition, considering what has happened and which is a clear call for change, we are going to improve the working capital discipline because it's good to grow, but this growth should not be combined with such a level of working capital requirements. We are going to also implement a cost-saving plan. We have estimated that at 1,500 jobs. This cost-saving plan is not only, I would say, needed to improve our profitability, but it's also enabled by the situation in which we are, which, again, where we have done a significant... investment in the integration of Bombardier by the SNA, so by the support function, but which is now behind us. So these actions are essential in order to secure our EBIT and cash trajectory. The second pillar is to recognize that despite all these organic measures, we have now a balance sheet which has been weakened with 3.4 net financial debts in a global macro environment, which is, I would say, less forgiving for this kind of situations with higher high interest rates and Moody's, which has put us on a negative outlook. We have therefore decided to launch a package of inorganic measures and Berna will come back on that. These inorganic measures intend to deliver up to 2 billion euros of net debt reduction by March 2025 and it's a combination of asset disposals, and we expect €500 to €1 billion from this disposal. Equity-like issuances, so some structured finance schemes. And last, if needed, if and when needed, capital increase. I've always said that the strength of our balance sheet is of utmost importance, and we need to do whatever it takes to sustain this strong balance sheet, and if needed, we'll do a capital increase. Last third pillar of our plan, the governance organization. I think we have a complex organization. I mean, there are a number of companies which are saying that they have complex organization. I think it's something that we needed to have during this period of intense work. of standardization of our processes, deployment of our tools, and so forth. Now that this is behind us, I think we can simplify the organization to make sure that we have better accountability at all our level of the organization. This, by the way, starts with the board itself. I think it was, during this period, extremely useful to have a very... tight chain of command, and we discussed that with some of you, by the way, during the AGM of last year, that this was on the table to split the role between CEO and chairman, and we have decided to move in that direction since a while, and this will be done at the next AGM. There is no emergency, but it will be done next July with the arrival of Philippe Petit-Colin, who is ex-CEO of Safran. So these are the three pillars of our plan. Again, the first pillar, and I have to say the most important pillar, which is the organic cash generation. We have also inorganic measures, recognizing that our balance sheet is weak at that point in time. And we take advantage of this new phase of our development plan to change our organization, simplify the organization, as well as enter into a more longer-term situation in terms of board governance. So now I will hand over to Bernard, which will come back on the few financial numbers.

Thank you, Henri. Good morning, everybody. I will be quick on slide 10 as H1 key figures are in line with the preliminary ones released on October 4th, so 8.4 billion orders and sales and 5.2% adjusted EBIT margin. Organic sales growth is slightly above preliminary figures, up 8.8% in this first half. I also wanted to briefly touch on our ESG results. We are ahead on the roadmap of scope one and scope two, and we continue our progress on women in management indicator. We will update you on taxonomy at your end. Turning to orders, page 11. Book 2 bills stood at 1 for the first half, as anticipated since May, due to the phasing of some sizable orders in H2. Last year's performance was strong, notably due to the 2.5 billion order in Germany for Baden-Württemberg, and it explains the 16.1% decrease in H1. During this first half, Europe remained strong with orders in Germany and in Italy. We also saw some good progress in APAC with 1 billion euro of orders in the Philippines, as well as orders in the U.S., most notably in Philadelphia and Connecticut. I'd like to highlight the good mix between product lines with rolling stock representing 45% of the total order intake and signaling system and services totaling altogether 55%. We also had a good performance across smaller orders, those under 200 million, totaling 3.2 billion in the first half. The quality of the 8.4 billion orders is good. Margins on new orders are exceeding the margin in backlog, which in turn exceeds the margin traded in the P&L, and this supports our mid-term trajectory. Henri will provide you with new information on margin in the backlog that supports this trajectory going forward. Turning to sales on page 12, at $8,443,000,000, let me highlight a couple of points here. First, and as you can see from the bridge, sales growth was impacted by negative forex effect for around 3%, mainly due to the U.S. dollar-pegged currencies. Strong ramp up of rolling stock, sales at 4 billion 463 million grew at 6% on an organic basis. It's also worth noting the strong double-digit organic performance of signaling and services franchises, respectively €1,243,000,000 up 12% and €1,986,000,000 up 14%. We are guiding for above 5% organic growth for the full year, which I admit might look cautious. Not on this slide, but anticipating your question, sales at zero gross margin were €1 billion during H1. We confirmed that we should land around €1.7 billion for the full year. We also maintain our expectation of €1 billion of those sales for next fiscal year. Following up with a review of the P&L, page 13, Adjusted gross margin stood at $1,165,000,000, that is 13.8% of sales, up 60 bps. R&D expenses stood at $254,000,000, that is 3% of sales, up 10%. S&A expenses stood at 538 million, that is 6.4% of sales, up 6.1%. Net interest in equity investors' pick-up was 65 million, down 13.3%. That leads to adjusted EBIT of 438 million, up 10.3%, and an adjusted EBIT margin of 5.2%, up 30 bimps, against last year, 4.9%. Some qualitative comments on my side here. Gross margin continues to progress, even if impacted by the negative effect of the Aventra program, as you will see on the next slide, and only partially offset by some release of provision for a risk inherited from the Bombardier acquisition that has been settled on a positive note. R&D is increasing as planned with, as usual, some seasonality effect, and you should expect a higher percentage of R&D over sales in H2. SG&A have increased due notably to inflation. To curb this, we are now putting in place a dedicated plan to reduce those costs as much as 1% of sales when fully implemented. Finally, some contribution from Chinese GVs at 65 million. This is quite stable compared to the same period of last year after considering the depreciation of the Chinese yuan against euro. Moving to slide 14 and the main drivers of adjusted EBIT margin growth. Synergies are continuing to deliver with a contribution positive for 30 bps. Non-performing sales, improved coverage of inflation and backlog, and R&D acceleration are altogether in line with our expectations. Volume and mix are contributing positively, slightly above expectations. And the eventual impact was negative for 80 bps in the first half. As this is a loss-making program, we book full impact of the additional cost immediately in our P&L. Turning to net profit, slide 15, few figures worth mentioning. Integration costs stand at 91 million euros, down from 116 last year, still high in my view as we continue to deploy the integration program with, as an illustration, now 80% of employees using the same digital suite. Plan is to complete this program by the end of next fiscal year and then close it. Financial results were negative and increased significantly in the period, firstly due to rising short-term interest rates and to the higher drawdown linked to the working capital swings, the rest coming from fees. Finally, the effective tax rate has slightly improved from 27% last year to 25%. All this is leading to an adjusted net profit of $174 million for the first half. On slide 16, we provide a new framework for the analysis of free cash flow. First, as all corporates, a basic KPI is EBITDA, here enhanced by the important dividends from the GVs. So that's 592 million in H1, or 7% of sales. Plan is to steadily increase it thanks to gross margin improvement and to secure it with new cost-out initiative. Second KPI is what we call FFO here, funds from operations, defined here as EBITDA and JVS dividends, less investment, financial and tax expenses. CAPEX and CAPDEV, very stable, less than 2% of sales. Financial were high in the first half due to rates and drawdowns. And finally, FFO reached €255 million in H1 positive. The miss of H1 came from working capital that we need here to refine as actions to regain control are different. When it comes to trade working capital, defined as inventories and receivables, less payables and other current assets and liabilities, the normal course of business is to keep it stable. That was not achieved this semester with a $730 million negative, half coming from VAT and the rest from inventories and other dues, partly offset by payables. On the other hand, contracts or projects working cap is more volatile. It includes provisions on top of contract assets and contract liabilities. The evolution was negative for 645 million over which Aventra. Double whammy here penalized us with delays in execution on the asset side and less down payments as planned on the liability side. I take the opportunity of this slide to give some color on H2 based on this new framework. FFO should be lower in H2 due to seasonality of investments and dividends. Trade working cap should reverse partly, and contract working cap continues to be volatile. At worst, we see some further small deterioration, but overall, it will depend on the phasing of down payments. Slide 17 provides details of working cap and variations as reflected in free cash flow. So you can see a 763 million negative variation of trade working cap, of which 730 are cash. and a $688 million variation of contract working cap, of which $645 are cash. Payables have increased as a function of sales and inventories, where overdue and the VAT included in the other asset liabilities explain the negative evolution of trade working cap. As explained earlier, low level of down payments explain why funding of contracts have only increased by $177 million, where execution issues, notably for Aventra, have increased contracts assets by $836 million. We are now putting in place a control chain for free cash flow with two major cockpits. One is operational to... pace actions at country and project level for every link of the chain from tenders to acceptance, and a financial reporting cockpit to switch from a backward analysis of actuals to a rolling forecast approach on cash in and cash out. On page 18, you see net debt evolution with free cash flow, dividends, and leases contribution. And finally, on slide 19, is the roadmap to deleverage Alstom from now on. Deliveraging will be supported by cash generation and inorganic measures, both contributing in a balanced way. Inorganic measures were not in the trajectory of May. The total now decided by the board is a $2 billion contribution to deleverage with a swift implementation target of March 2025 ahead of FFO generation showed here that goes until March 26th. Considerations on rating metrics are the drivers of this differentiated timeframe. The press release gives some indication of how we will orchestrate this delveraging. First come the disposals for a range up to 1 billion. The potential is already identified and we are starting execution that will take several transactions. Then is CASI equity a subsidiary level? Some precedents give sense of what we could achieve here. Structuration and costs are the key drivers on this part of the plan to have the required impact on leverage. It could be significant as we have identified scope for ring-fenceable activities providing stable revenues that can be structured as dividends for preference shares type schemes. I can only paraphrase here the press release that clearly underlines that Alstom is flexible on sizing and sequencing of those instruments. Last, the Board will propose to the General Assembly in July that no dividend will be paid with regard to the fiscal year 2023-2024. Henry, back to you.