Alstom Unsp/Adr

Hello and welcome to the Alstom fiscal year 2024-25 half-year results conference call. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand over to your host, Mr. Henri Poupard Lafarge, CEO, and Mr. Bernard Delpy, EVP and CFO, to begin today's conference. Thank you.

Good evening, everyone. Thank you for joining this conference call to review ASTOM's first half fiscal year 2025 results. I'm Henri Poupard Lafarge, Chief Executive Officer, and with me, is Bernard Delpit, Executive Vice President and CFO. And before Bernard goes into the financial details, let me give you some of the headlines. First of all, we had a good H1 performance, a sound H1 performance. That in a difficult environment, in particular regarding the supply chain, and I will come back to it later on. We continue to work decisively on our trajectory and our roadmap to implement our operational roadmap. And this allows us to confirm our guidance for the full year. So what about our priorities going forward? The first one, as always, is to continuously improve the quality of our backlog through first selectivity and an improved mix towards service and signalling. We are also focusing on the geographies where we have a strong presence and a strong competitive advantage. Second priority is to improve our project execution. Again, in a difficult environment during this first half, where supply chain is now impacting our product lines. This requires to be more agile than ever, and we manage to manage our operations, so that we can minimize any disruptions related to these supply chain issues. The third priority is about our industrial efficiency. As you know, we have a large manufacturing setup. There are around 80 assembly lines and across more than 50 factories. So we have started to optimize this setup. You recall that this is the phase in which we are now after having deployed our processors. We are now in a phase of industrial restructuring. And we have started notably in Germany with a plan which has been announced beginning of October. So moving on. To the main numbers and our recent results in this context, first of all, we are pleased with the commercial momentum. With 10.9 billion euros of order intake in the first half, which is consistent, by the way, with our priority towards high quality, margin accretive orders, otherwise has increased focus on signaling and service projects. Book-to-bill stands at 1.25, which is supporting our growth strategy. As far as sales are concerned, we have a 5.6% increase in organic sales, which reflects the continuous backlog execution, of course, and which is consistent with our guidance of around 5% for the full year. Adjusted EBIT is at €515 million, up 18% compared to the same period of last year, and the margin came at 5.9%, thanks basically to the growth and the cost savings and the improvement in growth margins. This puts us on track to deliver around 6.5% adjusted EBIT margin for the full year, according to our guidance. The free cash flow was negative 138 million euros, came above our guidance, which was, I call you, negative 300 to 500 million euros. This year, I mean, the typical working capital seasonality between the two halves of the year has been mitigated by the solid book to build and the strong down payments during the first half. Compared to our communication in May, we now expect down payments to be more first-half weighted this year, and therefore we leave the trickle-flow guidance unchanged for the full year. Let's look at the demand environment. In 2023, as you may recall, we saw a peak in industry orders driven by recovery plans post-COVID, adding to the solid secular growth. While the market is stabilizing now, it remains at a higher level than in 2019 and the previous picture. And according to the recent UNICEF study, which has just been released, our addressable market is expected now to grow at nearly 3% annually during 2027-2029. And historically, if you look in the past, we have always exceeded, or the market has always exceeded this forecast. And it was to emphasize that the real industry is influenced by long-term trends, very regular and solid and resilient long-term trends. The first of it is the passenger ridership, which has been restored after COVID. And in most countries now, the passenger ridership is at the same level or even exceeds the last peak of 2019. We see continuous investment in rail infrastructure across the globe. In India, for example, India has finalized the electrification of its network. The Dutch ban in Germany is at a record level of capex spending in 2024. The roll-out of the ERTMS signaling system in Europe is now being launched and continued in Italy. The liberalization, the regulation of the market in Europe and in particular in France is attracting new operators and which is also encouraging product standardization. Finally, the fleet replacement is at high speed and high space. Globally, two-thirds of our orders are concerning a fleet replacement. In this environment, which is a very positive environment, we can maintain and we will maintain our policy of selectivity and of high-quality order intake. If you look numerically at the order pipeline, we see a €200 billion of pipeline in the next three years, stable more or less in Europe, increasing in Middle East and Asia-Pacific, and notably with a number of very large projects to come. The market in the Americas has been a little bit slower than what we expected, with a number of projects right-shifting. We have also seen some slowdown in the green mobility and the green traction, as the supply chain for batteries and fuel cells are yet to be matured. So overall, again, very nice pipeline, encouraging and supporting our strategy of high-quality organic tech and selectivity. If you look at Q2, and the order intake during this first half was definitely more skewed towards the second quarter, and we had a solid 7 billion euro order during the Q2. And in particular, let me outline three landmark projects. The first one is a major order in Germany for S-Bahn Köln for 3.6 billion. In line with our strategy, it's a bundle project including 34 years of maintenance. In line as well with our strategy of signaling, we have a very large signaling project in Western Australia, one of the largest ever, for 650 million euros. Finally, in France, the first order won by a private operator for various pit trains in France for 850 million euros, including 15 years of maintenance. Here as well, we are increasing and we are investing in our high-speed production capacity to cope with this increasing demand as you have seen as well with the announcement on the order of very high speed in Morocco. During Q2, it's worth mentioning as well that we have recorded around 2 billion euros of base order, which is a very solid level, a good level, and as you know, these base orders are usually margin-attractive. Talking about margin, let's look at the gross margin in backlog, which you know is a very important indicator not only a reflection of our past commercial successes, but also a good indicator for the future profitability of Assetom. So the average gross margin in the backlog now stands at 17.8% at the end of the first half year, which is now more or less back to pre-major levels, and the gross margin in the other backlog is expected to continue to grow around 50 bps per year since the merger and it's continuing to be in that direction basically because we are executing some of the lower margin contracts which we have inherited from the BT legacy backlog and with this lower margin contract comes as well from time to time some options which were also lower margins and we are replacing these lower margin contracts by as I said high quality order intake both on rolling stock, but also on the mix on service and signaling. Let me, by the way, highlight the fact that for rolling stock, we have gradually, year after year, improved the gross margin in order intake of our rolling stock activities by one percentage point each year since the merger. So we are also improving the quality of our order intake in rolling stock. Our priority, as being said, is the execution of our project. It remains our priority in this environment. We of course focus on all that we can control, but it's fair to say that recently we have faced some new external challenges. Over the past years we have navigated across a number of challenges, including the electronic component shortages, the inflation spikes, And we have been, I think, quite agile and quite successful in mitigating these challenges. However, this first half, we had to face new challenges coming from our supply chains. Basically, 60% to 70% of our delays in rolling stock are today due to supply chain challenges. So we have increased our monitoring on all our suppliers, and in particular on 69 suppliers, which could potentially impact our production lines. The reason behind these new challenges is partially due to the high demand across the industry which has put pressure on a number of small suppliers. We are also facing some challenges in some suppliers for which the technology is not fully matured and here I mention batteries or fuel cells. We are taking a number of decisive steps in order to manage these issues and reduce all the delays in our deliveries. We have not been where we wanted to be, but we continue to improve the situation. We continue to improve our day-to-day operations. And we are confident that we'll go over this challenge as we have gone over these challenges of electronic components or inflation. Giving some examples of our projects, we are currently managing a very diversified portfolio of 2,500 projects. And 100 to 150 are considered as critical due to their size or their technological challenges. Of course, our portfolio management is to manage seamless execution of the vast majority of this project to mitigate the ones which are challenging. So just to give you a few recent achievements, for the greater Paris, we have delivered on time for six lines to prepare the Olympic Games. And these have been widely recognized as a great success. We have also turned around several legacy projects, and I just mentioned a few of them. Some locomotives in South Africa for Transnet, and I've been in South Africa quite recently, and I can tell you that the turnaround is extremely impressive. We have also turned around the project of M7 for commuter trains in Belgium, both in the production in Valenciennes, Crepan, and in Bruges. And finally, as you probably have seen, We have managed to turn around the issue of the Talent3 project, which was originally for ÖBB in Austria and which has been recently sold to the leasing company Rockhell. It's quite a nice achievement. On two projects we are continuing our efforts. The first one on Amtrak where we are continuing to progress with FRA. We have moved to stage 2 and stage 3 of the testing and we hope that we can move on to the certification and homologation in the coming future. Half of the cars have already been produced and delivered. Finally, Avantra which continues to We are on our P&L, and in the first half, we have delivered 130 cars, which have been delivered unaccepted. We are now entering into the final negotiation to finalize the acceptance of the full cars, the remaining cars, and to close out all various supply contracts associated with the project. But again, it has impacted again our P&L for the first half. Regarding the rolling stock production, which is on slide 11, in the first half of the year, we have produced 2,000 cars, which is an 11% decrease as compared to the same period of last year. But just to highlight a few points, first, we are at the end of the production in Derby, and last year we produced around 300 cars in Derby during the same period. And this year, we have not produced any cars, because here we are talking about the car being produced, not the car being delivered. Second, we have a number of projects in startup phase, in particular in Germany, and this project has delivered sales from design and certification activities, but not yet in the production phase of the cars. So we expect the production to increase again during the second half, as we are ramping up, and to reach around 404,000 to 406,000 at year-end, with, again, the project in startup phase maturing. These were a few introductory comments, and now I will hand over the floor to Bernard for a more detailed financial review. Thanks, Bernard. The floor is yours. Thank you, Henri.

I'll start with page 13. So we recorded €10.9 billion of new orders in the first half of the year. From a regional perspective, Europe remains the most dynamic region, accounting for most orders. From a product line perspective, Book2Build was around one for running stock, 1.8 for services, and 1.7 for signaling. It was a very small semester for system orders, traditionally lumpy. At group level, the Book2Build stands at 125, with a mix in line with the objective to progressively rebalance the backlog between rolling stock and services. As already mentioned, we are pleased with the quality of the order intake for the first half, in line with what we already mentioned for Q1, well above backlog, boosting gross margin. You can see at the bottom The illustration of the mixed evolution on Alstom's order intake with services and signaling exceeding now 50% of the order intake for the first time since the merger. Turning to sales on slide 14, the group recorded sales of 8,775,000,000 of euros in the first half. Organic growth for the period stood at 5.6%. Currency had a negative effect of 90 bps mainly due to US dollar pegged currencies. Scope had a negative 70 bps impact notably from Spain joint ventures not consolidated anymore and to a lower extent from the recent disposal of our US conventional signaling business. Rolling stock organic growth stands at 2% in line with Q1 release with an important shift in the contract mix when compared to last fiscal year, namely the ramp down of Aventras and the ramp up in sales in France, Italy or South Africa. It's also worth mentioning double-digit organic growth of services at 2.2 billion euros and of systems at 800 million euros. They are driving the group 5.6% organic growth in H1. Last, signaling product line is reported stable in this first half, but system cells are including signaling activities. So all in, organic growth of all signaling activities is closer to 5% in H1. Turning to the P&L review on slide 15, gross margin continues to progress to 14% of sales. R&D is stable in euros with, as usual, some seasonality here. We expect a slightly higher R&D on sales in the second half. Selling and administrative costs are reducing from 6.4% to 6% of sales, thanks mainly to the cost-saving initiatives launched in H2 last fiscal year. JV's contribution was 71 million during the half year, an improvement of 6 million compared to the same period last year. In China, urban market is challenging, but high-speed has a strong momentum, and the AST joint venture is benefiting from this new phase of investment. It should be noted that this is the only JV with a non-Chinese partner benefiting from the rise in high-speed orders in China. and the signaling success story, CASCO, continues to deliver on this profitable growth trajectory. All in all, adjusted debit came at $515 million for the first half, representing a 5.9% margin and the 70 basis point increase against last year. Turning to the profitability bridge, The main drivers behind adjusted debit margin for the half-year are consistent with the trajectory we explained at full-year results in May. Volume and mix contributed for 25 basis points, mainly from volume effect at 20 bps. Aventra program has weighted again on the P&L for an amount equivalent to last fiscal year and we entered into the phase of modifications and final negotiations of this project. Higher industrial efficiency, also, through reduction of under-absorption of fixed costs versus last year, and cost-saving plans launched last year are progressing well, with the overhead reduction plan ongoing. Finally, scope had a small negative impact it should be slightly higher for the full year as the sale of North American conventional signalling business happened early September. Let's now take a look at the items below adjusted debits. A capital gain of 21 million euros mainly comes from the disposal of US conventional signalling business. Nothing to report on restructuring. As a reminder, we have 230 million euros Euro provisions to handle current plans on overheads and industrial footprints. Integration costs reached 51 million, in line with the guidance of a range between 90 to 100 million euros for the full year. I confirm that we are close to completing this effort, with the last countries switching to Alstom IT systems in January 2025. Net financial expenses are slightly above last year. Net interest charges were reduced by 24 million as a result of the deleveraging plan, with impacts starting in Q2. However, this was more than compensated by hedging costs, where we had a positive one-off last year, and the 12 million euro increase in bank fees, notably due to terms of last year's RCF now terminated. Finally, the effective tax rate increased to 37% due to a non-cash depreciation of some deferred tax assets in some countries. Consistently with the mid-term plan, the structural effective tax rate remains around 27%. All this is leading to an adjusted net profit of $224 million for the first half. On slide 18, we use the same framework for the analysis of the free cash flow as last year. So EBITDA, including JV dividends, increased to $708 million in the first half from $592 million in the same period last year. This represents slightly above 8% of sales against 7% in the same period last year. CapEx and CapDev reached 2.5% of sales in the first half against 1.8% in the same period last year. Consistent with last year, we expect this to land around 3% of sales for the full year. After deducting cash out related to financial and tax charges, funds from operations reached 282 million euros in the first half. Working cap change represented 420 million cash outflow in the first half. Structural seasonality on trade working cap was partly compensated this year by a more favorable phasing of down payments that allowed to keep contract working cap stable. Bottom line, the free cash flow stood at negative 138 million. Looking at the second half, We expect positive FFO in H2, but lower than H1. Working cap reversal during the second half of this year with increased production and deliveries and reduction in inventories. So we are confident about delivering the 300 to 500 million euro cash flow for the full year. And the position within this range will partly depend on the level of down payments during the second half of the year. Some details on trade working cap. So trade working cap stood at 2,193,000,000 positive, so 45 days of sales at the end of September, an increase of 527,000,000 or 11 days since March, largely reflecting seasonality. Looking at the details, inventory stood at 85 days, up from 79 at the end of March. We expect inventories to trend towards around 75 days in normative approach. Payables, receivables, and other current assets and liabilities remain stable in terms of date of sales compared to March. Notably, client revenues are kept at a low level, indicating resolution of some longstanding issues with specific customers looking at contract working cap on site 20 it was a negative 4 billion 645 million and a 15 million improvement it stood at negative 94 days at the end of the first half this is consistent with the level at the end of March and favorable compared to the negative 72 days reached at the same time last year Positive drivers include a lower level of contract assets versus September 2023, in part thanks to the progress on Aventra deliveries, favorable progress payments profiles in both rolling stock and systems, but also stronger door intake leading to higher down payments. On the other hand, while growth in service and signaling is beneficial for margins, It does consume cash as both activities require a positive net contract working cap. For the full year, we confirm our last mega-idens of a level of down payments consistent with a full year of 23-24, which means that down payments are more first-half weighted this year. Finally, provisions on risk and contracts have been reducing as planned. Turning to slide 21, Net financial debt decreased to 927 million euros at the end of September from 3 billion at the end of March 24. Three main moving parts here. First, of course, the deleveraging plan brought more than 2.3 billion cash inflow over the semester. As a reminder, the sale of TMH was completed last fiscal year for 75 million and bridges the gap with the 2.4 billion of the total plan. Second, free cash flow was negative for 138. Last, the first coupon on the hybrid bond, which is treated as dividends under IFRS, together combined with leases amounted to a nearly 100 million cash outflow in the first half. You will find an appendix of this presentation, the updated bridge computation from enterprise value to equity value, reflecting the recent change in capital structure. Finally, turning to cash and debt profile at the end of September. On the right-hand side, you can see there is no change to the senior debt profile. The group benefits from a favorable maturity profile under current market condition with no redemption before October 2026 and an average interest rate of 22 bps. On the left-hand side, you can see the 2 billion euro improvement in the cash, cash equivalent and shortened debt profile. As we announced at the time of the rights issue, shortened debt has been fully repaid for a total amount of 1.2 billion. Cash and cash equivalent amount to 1.8 billion euros, with 949 million invested in bank-term deposits and in money market funds at the end of September. As a side note, ASTEM will continue to use commercial paper and revolving credit facility for liquidity needs going forward to manage short-term working capital funding requirements as it is flexible and efficient. Henri, over to you for the conclusion.