Alstom SA (ALO) Earnings Call Transcript

Hello, and welcome to the Alstom Third Quarter Orders and Sales for Fiscal Year 2025 and 2026. My name is George, and I will be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I'd like to turn the call over to your host today, Mr. Bernard Delpit, Executive Vice President and CFO. Please go ahead, sir.

Good evening, everyone. Thanks for joining the group's orders and sales update for the third quarter of this fiscal year '25, '26. Let's start with orders on Slide 3. Alstom recorded EUR 20 billion of orders in the first 9 months. The book-to-bill ratio was 1.4, accelerating to 2 in the third quarter. As a result, the backlog reached EUR 100.3 billion, up from EUR 96 billion at the end of September. Some color by region and product lines. The Americas are on track for the best year ever in terms of commercial momentum, with orders in Mexico and Canada this quarter adding to the large orders in New York and New Jersey booked in the first half. Europe remains the largest contributor, supported by numerous rolling stock options being exercised in France as well as first-time orders in Central and Southern Europe. The order intake for services accelerated in the third quarter with several large rolling stock contract being bundled with maintenance like, for instance, PKP in Poland, Baden-Württemberg in Germany, in Mexico and in Greece. Systems also got its fair share of order intake, thanks to the turnkey contract in Melbourne. Signaling order intake was softer in Q3, but the product line had a solid first half with contract wins in Italy, Taiwan, Brazil and Singapore. Turning to Slide 4 and details on the third quarter where we booked EUR 9.6 billion of orders. This record quarter reflects not only strong global demand for rail solutions but also robust tendering activity and contract awards in geographies that we consider as our home markets. It also demonstrates our ability to provide integrated solutions to clients not only when we sell rolling stock together with maintenance, but also when we deliver turnkey projects. It also shows the growing success of the rolling stock platforms with some of them already being in service and some others being in the final stages of approval. Looking at examples of large orders booked in the third quarter. The Avelia Horizon platform continues to gain momentum as the only very high-speed double-deck solution on the market with nearly 200 trainsets now on order across multiple clients, both private and public. In the quarter, as part of the framework agreement with SNCF, we secured 2 additional tranches for a total of EUR 2 billion. One tranche covers 30 trainsets for Eurostar, which will be the first double-deck train Channel. The other tranche is for 15 trainsets for SNCF for international operations, notably between France and Belgium. The Coradia Max double-deck regional solution is currently under development and testing for German clients. We booked 2 major contracts for a total of EUR 2.1 billion, one in Poland for the supply of 42 Coradia Max trainsets for PKP Intercity, together with long-term maintenance. Another in Baden-Württemberg where the region exercised an option for 26 additional trainsets also with maintenance. Looking at Mexico, we signed a contract worth EUR 920 million for the supply of 47 trainsets and the maintenance for new rail corridors in the country. This project builds on also Alstom's strong industrial footprint in Mexico, and leverages the development and expertise gained through the Tren Maya project that was recently completed. In Greece, we signed a contract of nearly EUR 400 million with Hellenic Train for 23 Coradia Stream regional trainsets and 10 years of maintenance. These trains will be produced at the Savigliano site in Italy using the proven Coradia Stream platform already deployed for several customers across Europe. In Australia, we secured a EUR 1 billion share of the Suburban Rail Loop East Line contract in Melbourne. And as this System contract, we will deliver 13 automated metro trains, signaling maintenance and a range of subsystems. And in Canada, we booked a EUR 1.4 billion contract for metro cars for Toronto. I want to emphasize that this record level of order intake does not go against our selective approach when responding to tenders. In the last few months, a number of large contracts in Switzerland or Denmark, for instance, went to competitors because we choose not to participate when our solution was too far from the customers' requirements or because the contractual conditions were considered by us as too stringent. All this considered, the average margin on new orders continues to exceed the average backlog margin. Moving to operational highlights on Slide 5, starting with some delivery milestones. In the third quarter, the first MF19 metro train entered service in Paris. The deployment of this new generation of rail metro trains will continue across 8 metro lines through 2033. This year also includes homologation procedures underway for several major projects. This, of course, includes the Avelia Horizon for the large customer SNCF under the TGV name as well as locomotives and the Coradia Max double-deck regional train solution. Now looking at the industrial footprint, we are continuously adapting the footprint to align with backlog and demand as well as strengthen Alstom's competitive advantage. For example, construction of the new assembly line in France for Avelia Horizon is progressing as planned. The site in Fez, Morocco has completed the first production line for drivers' cabs and expanding its capacity in components, including converters. At the same time, we continue to execute the transformation plan in Germany. We are also considering various options to adapt the Bruges site in Belgium in light of current backlog. As a result of this rightsizing initiative, we now expect nonoperating expenses to land above the EUR 100 million mark. Turning to Slide 6 on production. Volumes remained broadly stable over the first 9 months, in line with full year plan. In the third quarter, sequential improvement in India for metros and in Germany for EMUs helped offset the seasonal slowdown in South Africa. Compared to last year, the production mix has shifted with now a higher share of projects currently in ramp-up phases. This evolution in the portfolio mix supports operational momentum and prepares the ground for a volume increase in Q4. We now foresee car production this year to land within a range of 4,300 to 4,400. Turning to sales on Slide 7. Sales reached EUR 13.9 billion in the first 9 months, up 7.2% on an organic basis and down from 7.9% in H1. Q3 organic growth was 5.9%, largely due to a tough comparison base. The same effect should lead to Q4 organic growth moderating. All product lines with the exception of systems contributed to the sales growth. In particular, rolling stock sales totaled EUR 7.2 billion, reflecting 6% organic growth. This was driven by strong ramp-up in Germany with double-digit growth across multiple regional train projects, continued momentum in France notably supported by the RER NG program. And in Asia Pacific, the locomotive business in India remains an important growth driver. Services sales reached EUR 3.4 billion with 9% organic growth, supported by strong performance in Italy, the U.K., Australia and people movers in the U.S. Sales in signaling came in at EUR 2 billion with 13% organic growth, driven by robust execution in France and Italy. Finally, system sales totaled EUR 1.3 billion, flattish on an organic basis. It was impacted by the ramp down of the Mexico Tren Maya contract, which was not fully offset by ramp-ups in the Philippines and Taiwan. We expect this trend to continue through the rest of the year. Looking at inorganic items. Foreign exchange was a 3.3% headwind driven by the euro appreciation against most currencies. To be noted, the same euro appreciation is also expected to have a mildly negative impact on margin and cash for the full year. Scope had a negative 80 bps impact. Due to the deconsolidation of the North American signaling business in the first semester last year, scope was neutral in Q3. On a reported basis, sales, therefore, increased by 3% during the first 9 months of the fiscal year. Including with Slide 8 on the outlook, the set of assumptions behind the outlook here has not changed compared to mid-November when we reported first half results. We assume R&D at around 3% of sales, which is slightly higher than the last fiscal year, and the first half year of this year. Regarding tariffs, there is no change either. We remain well protected, largely thanks to the group's multi-local footprint with several manufacturing sites in the United States. Now turning to the outlook. Based on the commercial momentum to date, we will deliver a book-to-bill above 1 at group level as well as for rolling stock for the full year. We confirm the organic sales are expected to grow by more than 5% for the full year. We reiterate guidance of an adjusted EBIT margin around 7% for the fiscal year, with currency expected to be a bigger headwind than we anticipated back in May last year. Finally, we confirm the free cash flow outlook of EUR 200 million to EUR 400 million. We are not narrowing the guidance range. The exact timing of some commercial opportunities and operational milestones will determine where we land and whether certain cash-ins fall into Q4 or next fiscal year. With this, I will now take your questions.

[Operator Instructions] Our first question today will be coming from Mr. Gael de-Bray of Deutsche Bank.

I have 2 questions, please. Good evening, maybe to start with. The first question is related to these 2 additional orders you got from SNCF for Avelia trains this quarter. I was wondering if we can infer from these announcements that the TGV M is now fully back on track in terms of quality and in terms of ramp-up. So that's question number one.

Okay. Gael, thank you for your question. Yes, there is absolutely no change as of today to what was previously said in terms of time line for the homologation. And I will let SNCF make any announcement on the revenue service start, no change from our point of view.

Okay, understood. And the second question is on the order dynamics. I mean obviously, they've been super strong this quarter, but I'd say more generally, that's been the case over the past couple of quarters. Is there any risk that you had so many orders falling this quarter that, that eventually will get a bit of an air pocket for orders in the next few quarters?

Okay. Fair question. And frankly, no air pocket ahead. We have good visibility on orders for the next quarters, I would say, with, of course, some uncertainty on the timing of the booking and then the timing of some down payment collection. But for instance, we have the regional trains for CP in Portugal that now has been on the back-burner for quite a while. We have several opportunities for which customers have already made some announcements. Just to illustrate that, the turnkey project in Belgrade, the Virgin project for very high speed for the Channel with -- we see some commercial news flow possibly in the America region. So we have good visibility. I do not expect an air pocket even if, for sure, not every year will be as strong as this fiscal year.

Our next question will be coming from Akash Gupta from JPMorgan.

I have 2 questions as well. My first question is on working capital. So you gave this EUR 200 million to EUR 400 million free cash flow guidance months ago when visibility on several working capital line items was low. Maybe if you can talk about how in the course of years -- course of the year, these assumptions have changed. And based on 9 months progress and the outlook for the remaining couple of months, what do you expect in your latest plan versus original plans? Or in other words, what I want to know is that, which line items could be better than expected and which line item there may be some uncertainty versus original plans. So that's number one. And number two is on -- a question on nonoperating expense. So you are guiding for above EUR 100 million because of the options for Belgium site. And when we look at your backlog at various sites, is this one is kind of a one-off or there any future need for adaptation in other sites that can lead to these nonoperating expense can be above EUR 100 million in coming years?

Thank you, Akash. Let me rephrase your question to be sure to check that I get them right. So first, on working capital. Yes. In fact, it goes as we thought in the beginning of the year. So the -- on the one hand, the outstanding commercial momentum was anticipated. Hence, we felt that the down payments could be back-end loaded. We have visibility on that. So down payments in H2 should be higher than in H1. It goes as planned, nothing has changed, but it's still back-end loaded as we anticipated since the beginning of the year. On the other hand, it's true that we have a higher share of options in the order intake. So when you are considering the record level of order intake, you need to keep that in mind when making your inception in terms of cash-in. We have several orders that are booked in H2, but with no down payments, but rather what I would call installments of a few quarters, okay? So that also has to be considered in the working capital dynamics. And we have also some projects that are still awaiting homologation milestones. I will not discuss again the TGV. So you know this one will come next fiscal year, but we have also projects that are still in the homologation phase. So it could fall either in Q4 or next year. So therefore, the guidance is unchanged. We keep the range as it is. You know that I consider it's already a very narrow range in terms of lending for cash. We are managing billions of cash in and cash out every month. So I'm not narrowing the guidance, as I said, I think because it goes as planned since the very beginning of the year. Does it answer your question, Akash on working capital?

I mean it does. But maybe some color on like when we look at the level of contract assets, what's your thinking now versus start of the year? Do you think you are still on track? Or will there be more? I mean overall working capital is fine with your plan, but I was asking more on the different line items. Has there been any change versus your original anticipation at the start of the year?

Frankly, it's difficult for me to go into the detail of the balance sheet at the end of Q3. So I will not elaborate on that. We see very much this year as a kind of -- with working capital as a headwind to cash generation. But contract working capital could be a tailwind in H2 versus what you have seen in H1? So that's all I can say at that stage of the year. Now your second question was on nonoperational expenses. Was it, Akash?

Yes. So you guided for more than EUR 100 million this year because you are considering option for Belgium site. I wanted to ask when we look at the other sites, is this one-off? Or could this nonoperating expense may be above EUR 100 million in the coming years as well?

Yes. By definition, all nonoperational expenses are one-offs. And for the moment, we were just considering some rightsizing of the Bruges site. We are contemplating different scenarios for the future of the site. So let's say, it's our view as we speak today. By the way, we have some other sites in terms of engineering that -- and I will not detail the geographies where we are also thinking of some restructuring. So I was just mentioning that because as previously I guided for a EUR 100 million NOE. It could be north of NOE, you could maybe take EUR 150 million in your model, if it helps you.

We will now go to Vlad Sergievskii of Barclays.

I'll try to ask on free cash flow guidance as well. So to deliver the second half cash flow that you're aiming for, you would require significant positive working capital contribution. Can I ask outside of the arguably higher prepayments or contract liabilities, are there any other working capital lines that could contribute meaningful positive number? Or we will be talking predominantly about contract liabilities here? And my second question related to cash flow is on the dividend from Chinese JVs. Do you expect any cash flow contribution from this dividend in second half of this year? I can see previously sometimes you've got these dividends in the second half and sometimes you didn't. Any plans for this year would be very helpful.

So I will start with the second one. So it's some balance between H1 and H2 in terms of dividends. This year would be strong in terms of contribution of the JVs. But in terms of dividends, yes, indeed, it's pretty balanced between H1 and H2. So I expect H2 to be below H1 this year. Now in terms of free -- on contract working cap, I see down payment as a driver for contract liabilities. But also, we'll see that it will depend again on homologation timing, some contract assets moved as well. But beyond those 2 points, nothing really to mention here.

Next question this evening will be coming from demoiselle or I should say, Ms. Delphine Brault of ODDO BHF.

Yes. I have 2. First, as regards to Germany, can you update us a little bit on your strategy there? Where are you in terms of efficiency improvement because, well, you mentioned production ramp-up and you continue to sign orders. So any inflection as compared to what you told us a few months ago? And second question, it seems that CAF, your Spanish competitor may consider or be advised to consider your participation to the contract you lost recently against them. What is your view on this potential offer?

So on Germany, no change. No change in our strategy. We continue to adapt our footprint to the demand and to what we consider will be a normal and average level of business in Germany. So no change here. The total PC -- I mean the production of cars this year will increase a lot. So that will help to reduce the under-absorption of fixed costs in Germany. So that goes in the right direction. But it's only one step. There are continuous steps in order to turn around the business here in Germany, but it goes in the right direction. And it's not because we have been awarded new contracts that we will change our strategy because we need, again, to reshuffle our capacity there and to turn the business with more services as the installed fleet will continue to grow. But in terms of, I would say, car production assembly line, we stick to the plan. We are happy because the Görlitz plan now is ready to be handed over to KNDS. That's done. That's well executed. And we continue to discuss with unions on the future of different sites. So no change in the policy. We are very happy with the new awarded contracts, but it doesn't change our view of the need to restructure our business in Germany. Now for CAF, I haven't received any call from our partner. We know them well. If they are interested in Bruges, happy to discuss.

Next question is coming from Daniela Costa of Goldman Sachs.

I have 2. So on the first one, I just wanted to check. This year, I think you said the share of ramp-ups that were in terms of what you were executing was higher than last year given we see this big order intake in this quarter and recently. Do you expect the profile to continue to be sort of more skewed to ramp-ups also looking into the next year? That's the first question. I'll ask the second after this.