Levallois-Perret Nov 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Alstom SA earnings conference call or presentation Thursday, November 5, 2015 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Patrick Kron Alstom S.A. - Chairman and CEO ================================================================================ Conference Call Participants ================================================================================ * Fredric Stahl UBS - Analyst * Andreas Willi JPMorgan - Analyst * James Moore Redburn Partners - Analyst * Andrew Carter RBC Capital Markets - Analyst * William Mackie Kepler Cheuvreux - Analyst * James Stettler Barclays - Analyst * Martin Wilkie Citi - Analyst * Alfred Glaser Oddo Securities - Analyst * Jaisika Kaur Goldman Sachs - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, welcome to the Alstom conference call. I now hand over to Mr. Patrick Kron. Sir, please go ahead. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [2] -------------------------------------------------------------------------------- Thank you very much. And good morning, ladies and gentlemen. I am talking from Saint-Ouen, which used to be Alstom transport premises, and is, from now on, the Company's headquarter. Are present with me Marie-Jose Donsion, who is the CFO of the Company, Selma Bekhechi, who runs the IR-wide team of Alstom; as well as Emmanuelle Chatelain, that a few of you know, she is VP Communications (inaudible). I will give you a few information. For those of you who don't know, Marie-Jose has been in Alstom for a number of years. I will not give numbers, but she joined in 1997, and had a number of responsibilities, starting with corporate; then in the power businesses; led the grid finance team; and is Finance Director of Alstom Transport, since the beginning of this year. And Selma joined us as VP -- as IR Director two to three years ago. Emmanuelle, no need to present, most of you know. I also want to tell that in addition to the classical analysis participation to this call, we also welcome a few journalists. So let's go now, please, on the issue. We are going to talk about the presentation of the first-half results for the current fiscal year, accounts from April 1, 2015, 'til the end of September of the same year; as well as matters related to the transaction with General Electric, which closed on November 2, this Monday. We published, yesterday evening, a press release on share buyback program that I'm going to talk about in more detail later in the presentation. And we published, this morning, a press release relating to the H1 numbers, as well as government matter. I remind you, as classically, that all published element, presentation, financial reports, including MG&A and accounts, as well as the press releases, are available on our website, www.alstom.com. If we go on slide 2, what are the main takeaways of this presentation, this publication, on H1, Alstom achieved a sound operational performance in transport with order levels at EUR3.9 billion, and book-to-bill above 1 at 1.2. The sales are up 8% at EUR3.3 billion. The IFO after corporate costs reached EUR167 million; 10% above the EUR152 million that was recorded over the same period of last year. I remind you, as we did in the previous publications of our accounts, that, in compliance with IFRS 5, Alstom energy businesses were classified as discontinued operations. Therefore, they are not included in the lines on the order of sales IFOs, and are only reported under the line net income discontinued operations, obviously, as in the free cash flow data. I think it has not been unnoticed, but we definitely closed the transaction with General Electric this Monday, on November 2. The Board of Directors, as published yesterday evening, subsequently decided, in its meeting that was held yesterday, to launch a public offer to buy back 91.5 million of its share at a unit price of EUR35 per share, which amounts to EUR3.2 billion. And in order for this to happen, we will call for a shareholder meeting of Alstom shareholders, where we are going to submit the share buyback, the OPRA, with a French acronym, nothing to do with music, but with share buyback, to the vote of the shareholders, scheduled on the -- which will happen on December 18, 2015. And you'll see the further presentation, in the presentation, that we confirm our -- the mid-term guidance. I suggest that we go now, please, on slide 4, which summarizes our main KPIs for the first half of the current FY15, 2016. As I just indicated, the orders were strong, were healthy, at close to EUR3.9 billion. They were fueled by small- and mid-size contracts across all regions. And you see, compared to the sales just below, that it gives a book-to-bill ratio of 1.2. I remind that the comparison with last H1 needs to take into account the fact that we had around EUR4 billion of contract with PRASA in South Africa, which obviously boosted last year's number. Sales were up 8% at EUR3.3 billion. I think it's a record level for sales over a half year. Income from operation, which includes the corporate costs linked to Alstom transport activity, as we have done in the previous publication, increased by 10%, with an operating margin of 5.1% after corporate costs. The net income from continued operation stands at EUR18 million. It's clear that this number includes a number of specific elements: separation cost, high transitory financial expenses, as well as specific impairment charges. So it's obviously much more difficult to comment on these lines rather than the previous ones, because, again, they include a number of specific and transitory elements. The free cash flow from continued operation, before tax and financial outlook, was close to zero; slightly negative, minus EUR5 million. It was a negative by EUR85 million last H1. Let's go in some of the elements I just described, starting with the orders. As I just communicated, the Alstom book, EUR3.9 billion of orders in the first half, compared to the EUR6.4 billion, which, again, included the EUR4 billion; book-to-bill, 1.2. I globally consider this is a very healthy -- another half year of healthy commercial performance with a number of successes in all geographies you have here; and, interestingly, with no big elephant just boosting the numbers. So it means that we had quite a sustained level of successes over the geographies in most of our product lines, as indicated in this slide. And, obviously the backlog, at close to EUR28 billion, gives us a visibility on future revenues, as it represents between four and five years of sales. On slide -- on the following slide, slide 6, you see some example of our commercial successes that were, where, in most of the cases, published when the customers allowed us to give this information. And you see here that, again, both in geography and in type of businesses, I think we had quite a nice flow of good news. And this allows us to confirm that we are well positioned to capture opportunities in all continents; and, as we had the opportunity to discuss earlier, both in developed economies and in emerging markets. Moving to the slide 7, which goes now to the P&L, sales and operating income, they both increased. As I mentioned, sales increased by 8%, 4% organically, at EUR3.3 billion, so here with solid performance in Europe, and continued growth in emerging countries. Without going into details, I would say that the deliveries in Europe include a number of ongoing [existing] programs in France, in regional, suburban, and very high-speed trains in France; suburban trains in Italy; maintenance contract in the UK and in Sweden. In emerging markets, we executed metro and tramway contracts in Latin America; and we are starting to ramp up the PRASA contract in South Africa. Income from operation is at EUR167 million; that's up 10% volume impact, as well as ongoing action for project execution and cost control. And it includes a share of the corporate costs, which represents negative amount of EUR17 million for the half year. This is not surprising. We have guided towards around 30% on a -- EUR30 million, sorry, on a yearly basis. And this is more or less the 30% of the EUR100 million that we used to report for the global corporate numbers. If I go on the next slide, this I won't detail much, just to say that we continue, obviously, our R&D programs to continue to fuel innovation, which is in Alstom DNA. We spent EUR58 million in R&D on H1, which is in line with the level of last year. You have a few examples indicated here. We have, basically, the same focus on developing new product and technology, and upgrading the range of existing ones. We also continue to invest in our -- in CapEx for both the modernization of the existing footprint, as well as its expansion, with a number that is in the ballpark of EUR100 million. So, with two half-years on average, the EUR50 million on H1 is not a big surprise. Turning to the P&L, on page 9, and moving to the items below the IFO line, you see that we have restructuring expenses this semester around -- at EUR14 million. Last year, it was substantially higher due to some restructuring ongoing in Alstom transport headquarters, as well as some European facilities. And we said, at that time, that it should not be considered as [nominative]. This being said, when there is a need to restructure somewhere we definitely do. But we gave you an indication of EUR30 million [that's] per year; doesn't mean that it will go higher at one point in time, if necessary. But this EUR14 million is not totally unexpected. The non-operating expenses, at EUR52 million, include some impairment losses on assets: notably, on some R&D capitalized one that we considered as wise to readjust. All in all, the EBIT is at slightly above EUR100 million, up 60%. The net charges, representing the cost of EUR86 million. And, obviously, this has -- this is, by all means, not representative of what will be Alstom's future balance sheet, and, therefore, expenses, due to the stronger financial structure, that we expect to beat. The share in net income and equity investees, also a line which has include some substantial numbers, most of this line is based on the contribution of TMH. You know that the first half of last year of TMH was strong. We had, more or less, EUR30 million out of the EUR39 million which were related to TMH. H2, as we guided, and as we indicated, was very low, was actually close to zero. And after the trough of Q4, we had from a kind of stabilization at the operation level, and the TMH contribution of the EUR13 million, is at the level of EUR11 million, represents EUR11 million out of EUR13 million. Basically, the minus EUR20 million-plus is related to the difference between H1 last year and H1 this year contribution from our Russian participation in TMH. As a result, net income from continued operations amounted to EUR18 million. Again, this includes a variety of non-recurrent elements. If we move now to the free cash flow, on slide 10, the free cash flow from continued operations was close to zero. Had, still, over the period, some negative impact of the ramp up of some projects. This is -- again, and I said repeatedly, there is some volatility in the cash flow. You know that we had a substantially negative cash flow on the first half of last year, which was more than offset by the performance of the second one. In this case, we are close to zero on H1, and will continue to strongly focus on cash management, all actions necessary being in place, and continue to have a focus. I'm not going to comment the cash flow from discontinued operations because, as you know, through the locked-box mechanism that was agreed with GE as part of our general transaction, the cash flow from discontinued operations from April 1, 2014, is covered by GE. Moving on slide 11, I'd like to spend a few minutes on our financial structure, and give you a balance sheet as of September 30, knowing that September 30, is just before the closing of the GE transaction. Obviously, our liquidity situation has substantially changed over the weekend, from Friday 'til Monday. You had the situation, end of September, where the liquidity position was sound with EUR1.85 billion of gross cash, and EUR1.35 billion of undrawn credit line. [We have now] used the EUR1.6 billion facility, which was mobilized in order to allow the transition 'til the completion of the GE transaction. This was fully drawn at that time. I also told you that we obtained waivers on our financial covenants for all facilities, because, obviously, the covenants were no more reflecting the reality of the situation with the multi-billion closing expected in the near future. Again, as I said, we are renegotiating new bonding and revolving credit facilities to replace the existing one, after the completion of the GE transaction. We go on the next slide, which talks about debt and equity. You, obviously, on slide 12, see the net debt standing at EUR4.8 billion, and EUR3.1 billion over the previous closing period, March 31, 2015. Obviously, this increase being related to the free cash flow generated over the period: notably, by the energy activities, as well as the finance and tax spendings. On the right part of the slide, you see that the equity decreased slightly at EUR3.7 billion, for the reasons which are mentioned in the bridge, that you can see in the slide. Let's go now, after H1, if you don't mind, and, obviously, we'll be happy to answer questions, on the situation related to the General Electric transaction; and I try to explain a little what happens in terms of [proceeds]. I just go to slide 14, if I may. You see that the first thing is that we have -- and, sorry, because a number of these lines include rounded numbers. So I'm sorry not to be able to detail the EUR50 million within the EUR12.4 billion transaction. We had the transaction, the sale of GE, as you know, a EUR12.35 billion initial price; and this included EUR1.9 billion of cash transferred to GE as of, again, March 31, 2014. Again, the evolution of the cash in the transferred entity is, obviously, taken into account by GE in its final price, but has no consequences for us as the locked-box mechanism offsets any variation in this perimeter. So this is what is proceeds for us. We had some ups and downs in the discussions with some commercial deals that we generated a positive EUR400 million. We had also to get a price reduction, as you remember, last summer of negative EUR300 million. All in all, it makes a more slightly positive delta, EUR0.1 billion. We include transaction costs of EUR0.3 billion. I indicated that these transaction costs include, among others, the direct costs of the transaction. We have to pay lawyers. We have to bankers. We have to pay a number of elements directly related to the execution. We have also a tax [friction]. I indicated, when I started my communication on this deal, that this was around EUR0.5 per share, is EUR150 million; at the end of the day, slightly below that level. So, all in all. And then, we had a number of separation costs, which include, among others, IT and others. So, again, the ballpark is EUR0.3 billion, as we assess it today, part of it being immediate down payments. And part of it, notably, what relates to separation, being split over the period as we have to rebuild some IT systems coming from the transitory period to the final one. But because of this, will be generated, not over a couple of weeks, but over a longer period. That's the money which comes in. We have the two reinvestments: one in the joint ventures with GE. The final amount is EUR2.4 billion. Three JVs, you remember, grid, renewables, and nuclear. We have also the acquisition of GE signaling, around slightly above EUR700million. And if you make the [algebra] sum of all what is there, we get net proceeds of EUR7.1 billion. If you go to the next one, we indicated that we will return part of the cash to the shareholders. The Board will propose to the shareholders' meeting of December a share buyback of EUR3.2 billion, which is the low end of the EUR3.2 billion to EUR3.7 billion bracket that I gave you as an indicative element. Subject to shareholders' approval, obviously, this will be done through the repurchase and cancellation of 91.5 million of shares, which is slightly below 30% of the capital, at the unit price of EUR35. This represents a premium of 17.6% over the closing price of November 3, which was the date preceding the decision of the Board to move in this direction and propose to the shareholders; and 21% -- 22% of last month's volume-weighted average price. This will be filed to the AMF with a notice in the coming future. I'll come back in indicative timetable and some meetings, as I said, to the shareholders' approval through an AGM. Bouygues has the intention to tender a number of shares, which will allow him to remain at its current level, post OPRA. So Bouygues intends, through this operation, to keep the same level as the one he holds today. What is the impact of all this on the balance sheet? Again, if you look at the pluses and minuses, so we start with this net proceeds of EUR7.1 billion. We had the net debt position, before this locked-box came into place, of around EUR3 billion. What are the other elements which will impact the picture as we look at it on September 30, 2015, on a kind of pro forma, if I may, having all these elements coming into place? So we have the debt, EUR3 billion; we have the proceeds, EUR7.1 billion; we have the share buyback, assumed to be achieved immediately. As you know, we have accepted to bear the consequences and the fine we got from the DoJ, which represents EUR0.9 billion. And the last one is the free cash flow of the continued operations, which is the only element which impacts, basically, the balance sheet from April 1, 2014, of transport, more specifically, on the continued operations, which is rounded at EUR0.2 billion. And this, at the end of the day, confirms my original statement that we will look for a company which will be fully deleveraged, again, on this September 30, basis. Obviously, this deleveraging is, notably, after investment in the JVs, in which, as you know, Alstom has a put option with a guaranteed minimum price, which is our entry price, plus an escalation formula. We are talking about a deleveraged company with potentially a reserve of cash should Alstom decide, in due time, that it makes sense for the Company to exercise the put, the liquidity, and the minimum price being guaranteed by our agreements with GE. The indicative OPRA timetable this year, we will file, early next week, the note d'operation to the AMF, the Financial Market Authority of France. We expect to will call for a shareholders' meeting, to be conveyed on December 18. The offer will be opened from December 23, 'til January 20, with a settlement and delivery scheduled for January 28, 2016. And I indicated, just a personal note, that after this completion of the transaction, i.e., at the end of January, I will resign. And the Board will give the responsibility of running this Company to Henri Poupart-Lafarge. So, if we go on the current situation of Alstom refocused on rail, the Company is deleveraged, relies on a strong balance sheet. I just mentioned a few elements. We have seen, and I think that the H1 number is another illustration, that we have in Alstom the necessary ingredients to be successful because of our international position, because of our range of technologies, products, services, and systems. I also would like to say that the acquisition of GE Signalling will allow to grow our signaling activities, something that, as you know, we were looking for for a period of time; open the freight market to Alstom; strengthen our presence in North America. And I mentioned the order backlog. We had, indeed, a very nice set of successes, and I'm expecting. We hope that more are going to come. There are a number of substantial projects in which we are in the final conversations, if I may, with the customers. So I hope this will unlock and give also some substantial good news in the different geographies. Again, I mentioned that the Company, and this is not here and should, is benefiting from a skilled management team, led by Henri Poupart-Lafarge. I think that the transition will be done absolutely smoothly, seamlessly. And I think it's another good news for the Company and its shareholders. And the last slide being on the outlook, where, on slide 20, I confirm here the guidance. This concludes the presentation. And we are now, obviously, ready to answer any questions. Sorry, if I've been a little bit long, but I wanted to go through these elements in a little bit -- with some details. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Fredric Stahl, UBS. -------------------------------------------------------------------------------- Fredric Stahl, UBS - Analyst [2] -------------------------------------------------------------------------------- I was wondering if we could start maybe with GE Signalling. If you could help us with the -- give us some pointers as to what we should put into our models for next year in terms of both sales and profitability, that would be good. And then, secondly, I was wondering if you had anything in the first half in terms of Alstom transport, anything in the margin that we should consider: if you had mix changes during the period, or if you had any ramp-up costs in the first half that we should think about when forecasting margins, going forward. Thank you. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [3] -------------------------------------------------------------------------------- On the first one, I've no intention to go into specific details on GE Signalling. The company has been integrated. We welcomed, on Monday, 1,200 new colleagues in Alstom. We are working with them on the next steps, on the way to successfully integrate and use all the complementary things that exist. At the end of the day, Henri will, undoubtedly, organize with you a session in order to explain the situation of the Company, give some views, etc. And it will be a good opportunity to detail the situation. But at the current stage, there is nothing new that I would add. So we will keep some elements for later, in 2016. On the IFO, I think the IFO is going up. So we had also the margin going to 5% to 5.1%. It's an increase. It's a slight one. You know you have also, and you have seen that in the past, to accept some volatility, which is related to the mix. On a specific quarter, depending on how much rolling stock we have, depending on what type of rolling stock we are trading, you know when you start a program, for instance, in the Regiolis contract in France in which we are moving from the development stage to what's the execution stage. So I would not overreact when, at one point in time, for a specific quarter, or half year in this case, there is a [0.1] delta happened now, because this is the type of things that we are not surprised to happen. So, there is no specific element. The backlog is big. We have had a very, very, long period of book-to-bill above 1 where we have been building backlog. That has been the case for the many previous years. It's also the case for H1. So the good news is that, at one point in time, this big backlog is not a platonic backlog; it's a backlog which turns into sales. And this is happening. And we see that growing. The sales, definitely, has a positive impact on the IFO, because of the volume impact. But then, you have to take into account, in addition, how the mix goes, etc., etc. So there is no specific warning, no specific element that I need to add to make the numbers explainable, I think they are. -------------------------------------------------------------------------------- Fredric Stahl, UBS - Analyst [4] -------------------------------------------------------------------------------- Very good. Thank you. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- Andreas Willi, JPMorgan. -------------------------------------------------------------------------------- Andreas Willi, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- My first question is on the cash return. You opted to go for the lower end. Maybe you could give us some explanation for that, also in terms of what your M&A ambitions are within transport, and whether the joint venture investments are also by the rating agencies seen as an asset you can borrow against it. So how they see, and how you see, the scope for M&A. And the second question for you, Patrick, you signed a new four-year contract as Chairman and CEO in Q2 this year, even though you indicated before you are leaving. Maybe you could give us a bit more background around that contract, and what that means now when you're going to resign next year. On free cash flow expectations in the continued operations, we have seen the outflow in the first half of the year. Should we see a normal seasonal improvement in the second half of the year? And maybe you could give us some indication where you see the free cash flow, including interest and tax, for the continued operations to end up for the year. Thank you. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [7] -------------------------------------------------------------------------------- On the first question, the cash return, and the low end of the bracket, it's not a surprise. I guess, Andreas, you know us very well. In my former communication, I indicated that we bid the low part of the bracket. So I think, again, we could very well have been slightly above this level. But this gives the Company a deleveraged situation. And again, keeping too much money piling on the balance sheet doesn't give the proper -- is not the proper financial hygiene leverage in the Company is probably not good. So, the Board considered that it was wise to be in the low end. Doesn't mean that we have a pile of M&A activities in the back door; this is not true. You know that our focus is for organic growth. We think that we have in hand whatever is necessary. We don't exclude to seize market M&A opportunities, if it allows us to boost our profitable growth strategy. But it's absolutely not mandatory. And we are not in a must do, or whatever. And again, this is -- it's the low end. If I were you, I would not speculate on some big M&A coming. This is the other way round, actually. It doesn't mean that we will not consider some small targets here and there. And we have done it, and will continue to do it, if it's possible, and if it makes sense, if it's good for our health. On my contract -- and I saw in your note this morning that you were worried about that point, and I want to give you all comfort that you should not be worried. Basically, if the deal had been completed before the last AGM, in June, I would have resigned, and I would have left, because I said I'll go to the end of this project with GE and then give the helm to Henri. The problem is that we were far from being at the end of the process in last June. I thought it was my duty not to leave the Board in the middle of a very active and complex position, but to keep it to the end. So it has not been a secret to any of the 99% of the shareholders which voted for my re-election that I will not use the four years; the other way round. And 99%, again, decided that it was making sense for me to be renewed. They probably also knew, because I was clear there, that although you must, by law, be re-elected for a term, which in our Company, by law, is four years, they knew, and they were very happy for probably to know that, that I gave up any termination package. Therefore, the Company will not be liable versus me of anything when I will decide when I will resign, i.e., at the end of January 2016, if things move as expected. This is not a four-years contract. I have no contract with the Company, no [labor] contract with the Company. And the day I resign, I leave smilingly and hoping that I've done a decent job over this 13 years in the Company. So, no worries. It's not a big question mark. It's no question mark at all; so, it's neither big nor bigger question market. If I go on the last point, which is your question on the free cash flow of continued operation, I'm not going to change the guidance that we gave. We expect this Company to generate cash. We think that, on average, it should generate cash in line with the net income. There is volatility over the period, and there is nothing special, I would say, for H2 of this year. I burnt my fingers enough in the free cash flow forecast for a short period of time that I don't try again. But again, you have seen last year. Last year, we had a substantially -- we had a negative free cash flow before financial and tax over H1, and we had more than offset this with the double number positive on H2. So we'll see what happens this year [material]. It's more difficult to predict than the past. -------------------------------------------------------------------------------- Andreas Willi, JPMorgan - Analyst [8] -------------------------------------------------------------------------------- Thank you very much, Patrick. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- James Moore, Redburn. -------------------------------------------------------------------------------- James Moore, Redburn Partners - Analyst [10] -------------------------------------------------------------------------------- I also have a few questions, if I could. Maybe one on the free cash flow, if I may. I think your 18-month conversion in transport before interest and tax is 14%, 15%. And I understand the volatility point and that the first half tends to be light. But do you have any concerns that the 100% conversion is going to prove a challenge? Do you see any change in the terms of trade within that, or is it just timing and volatility? Secondly, now that the deal is finalized, could you, perhaps, give us some idea of the GE joint venture net income, because, obviously, disclosure on that has thinned a lot over the last year; and what we could expect in, say, the first 12 months, or the first full year to 2017, or some period? Some have talked about EUR120 million, some have talked about EUR180 million; just trying to get a sense for what magnitude that's running at. And then finally, could you help us a little bit understand, of the outstanding bonds in the Company, what you might retire early? I guess you will asset and liability match later-dated bonds of the joint ventures, but if you were to retire some earlier bonds it might bring a cost of EUR100 million, or something, and I'm just wondering if you could help us with your plans on that. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [11] -------------------------------------------------------------------------------- Thank you very much. On the free cash flow conversion, your 16%, 17%, this is fine, James. But, again, you know well us; you know that there is some volatility. Is the 100% conversion a challenge? Yes. When we gave the mid-term guidance I said that the free cash flow conversion is not the easiest part of the global picture. We have been -- we are working for that. The only thing I can add, without being more specific on that point, James, is that we have not seen recently any element which is changing our ability to do, or not to do. So there is no deterioration, nothing that I have to report to you because I'm not aware of any such. The second one is on the JVs. I'm not going to give a guidance on the net income of the JVs. We are working on the accounting of these JVs in Alstom's accounts. We indicated that's likely that will be an equity-based accounting. At the same time, as you know, we have something which is extremely valuable: is both the liquidity and a minimum price. This will have to be included in the way we will report on these JVs because the reality, the economic reality of these JVs is we are protected from any type of -- if any -- again, I've no reason to believe there will be underperformance, whatever. But for us, it's clear that the floor of what the JVs will do has to take into account the fact that we have this minimum price given in the put option. So, we have a put. We have a minimum price. This minimum price is escalated at close to 3% if we take the average of the different numbers, which escalates this minimum price. It's 2.4% plus the escalation I just mentioned. So, frankly, we'll have to check the way we give the most fair representation of all this. But again, you know that these JVs are under GE's operational management. We have, obviously, the rights associated to be participant in these JVs. But, at the end of the day, GE runs the show. And it's logical, and it was structured like that, that GE runs the show. We had no competitive. We were not the critical size in the energy business, that's why we moved in this deal. Obviously, don't imagine that we have the critical size by cutting something which had not the critical size into pieces. So it's important that these energy activities rely, are backed, by a strong group with all the necessary means to be successful. That's the way it is. Again, the put is a formula, future EBITDA-based classical formula, but with a floor. The EBITDA, I cannot give a guidance on something which basically is going to be run operationally by GE. But I know that I have this floor, which is, in my view, something which is important in the balance sheet of Alstom as well, because this is something which is pledge-able, should we need to pledge, which obviously is not the case today. The questions on the bonds is the last one. At the end of the day, indeed, post-OPRA, we will be with debt on our hand, debt that we got from the financial markets, on one hand, with not reasonable coupons. So that's something which has been negotiated under the circumstances of the time. So, we have these bonds, and, at the other hand, we'll have cash. So we will have, or my successors will have, to take a view on what is the best option and what is the consequences of buying on the [buy-in]. And my intuition, and that this will not be based on theoretical concepts but on the economics, under which some bonds can be repurchased, or not, if we get swept because of the terms that are suggested in order to be able to repurchase, and keep the bonds, if it makes sense, then maybe the situation will be looked at. That's, more or less, what I can say on that. The way the agency, the rating agencies considered the JVs, they have different views on that. For me, it's absolutely clear. We have put on these JVs. We have the full ability to exercise the put, should we decide to exercise it. So I don't imagine that this will not be taken into account by rating agencies. At the same time, should we, at one point in time, decide not to exercise then maybe the situation will change and the agencies will review. But currently, what we have is EUR2.4 million invested in JVs, with liquidity rights and minimum price guarantee. Now, I'm not a rating agency, I don't understand necessarily all what they write, but you get a view, and I will try to explain. -------------------------------------------------------------------------------- James Moore, Redburn Partners - Analyst [12] -------------------------------------------------------------------------------- Thank you very much, Patrick. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Andrew Carter, RBC. -------------------------------------------------------------------------------- Andrew Carter, RBC Capital Markets - Analyst [14] -------------------------------------------------------------------------------- I had three questions. One a sort of a big picture one, and then just two financial ones, for which I apologize. Just, big picture, I wondered if you could just talk about how you see the rail industry at the moment. And I wondered, I guess, just, big picture, do you think that some consolidation is required in the industry? And, I guess, if you think it is, do you think it is actually likely with how the players are positioned at the moment? The second was just in terms of pensions, which wasn't mentioned, I don't think, in the presentation. Are there any cash contributions required to any of the Group's pension funds, following the transaction? And then just finally, I apologize for this one, but obviously not so aware of taxation in France. But is there any consideration when you're receiving back the cash proceeds from the OPRA, is there any tax required to be paid by a French shareholder, following that? Thank you. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [15] -------------------------------------------------------------------------------- Thank you very much. I will -- thank you, Andrew. On the first questions, which is the general picture of the rail industry, I said that we have a company, as Alstom, which is among the top players in this industry. We have the most international base; we have the broadest range of technology; we have the broadest range of product, services and systems; we have the experience of a partnership in these range geographies; we have the ability to accompany the customers with the services, etc. To cut a long story, Andrew, whether you trust that or not, we believe that we have a nice path ahead of us as we are. One. Two: there is no industry in the world, there is no company in the world, who can say that they will never look around. There will be, at one point in time, some consolidation, consolidations, possibly. Is it coming tomorrow? Not necessary. Are we going to be part of? I hope. If there are opportunities of consolidation which makes sense for us, why not consider it? But I will not speculate that this is going to come as a massive wave tomorrow. And again, it's not necessary detrimental for us the other way round. There were [debate] said, look, the consolidation is ongoing, because the Chinese are combining. Yes, two Chinese companies are combining. Is it a threat? I never underrated the threat of Chinese competitors. CSR was a threat, CNR was a threat; the combination of them is a strong competitor. But they were already strong competitor in other terms. I don't see why the combination of the two creates something which is a game changer compared to the situation before. Yes, they benefit from a very strong local market. Yes, they try to go aboard, yes, they do; they have been doing that for a long time. And the EUR28 billion of backlog that we got, we got it around all the competition of the planet, including the Chinese. That's one. Yes, okay, yes, Hitachi has bought Ansaldo, but, at the end of the day, they are half of our size. So it's not an earthquake at all. As you know, we know about Ansaldo. We looked at it, and considered that we not in a position to give a future to these activities. If others do, great for them. Look, so that's my point. I mean, yes, there are some small players. You know that this industry is composed of more or less pure players, very different to the situation of the energy. If there are opportunities, we look. But we are absolutely not on a kind of must-do mode. There were speculations about Bombardier, and, obviously, not going to comment about the strategy of a specific competitor, but we have no plan, no ongoing discussion with them. So if, one point in time, they want to explore their strategy and their options in rail then we'll see; and if it makes sense, we'll talk. But again, don't -- we are focused on developing organically. And we'll only look at acquisitions and M&A if it's a way to boost our strategy, and to boost our development; not at all in a do-or-die or a must-do mode. Second, on the pensions, Andrew, there is no specific -- and from a -- I'm looking at Marie-Jose, who knows, and I don't, but she confirms that there is no upcoming funding requirements that are in the horizon. And the third one, concerning the shareholders, I don't think it's the appropriate time to detail. We are going to publish the detailed note for -- make public the detailed note on the operation next week. And this note include the 10s of pages which will relate to the tax situation of the various shareholders depending on their geography, their status, etc. So you will get the full understanding of that, rather than me giving you the partial view, and probably a not totally sound one. So, I ask a little bit of your patience on the third point. -------------------------------------------------------------------------------- Andrew Carter, RBC Capital Markets - Analyst [16] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- William Mackie, Kepler Cheuvreux -------------------------------------------------------------------------------- William Mackie, Kepler Cheuvreux - Analyst [18] -------------------------------------------------------------------------------- Thank you for the questions. A couple, please. Firstly, can you share with us your view on I come back to the market conditions. We've seen shifts in a number of emerging markets in terms of their behavior and propensity to spend on infrastructure projects, so how is the tender backlog evolving? And then, rolling on to the backlog, what soft discussion can you offer us, or color, with regard to the quality of that backlog; and how, as you execute the revenues and the volume, you mentioned the benefits of operational leverage, that may play out in terms of the margin rate? Because, specifically, I guess, what I'd like to understand is what are the necessary conditions that would drive the transport business margin in to the middle or towards the upper end of your 5% to 7% mid-term target band? And lastly, on a detailed question, you mentioned some volatility on the corporate expense. But can you give us a range of where we think, now you've got a visibility on the decoupled transport business, what the ongoing level of corporate expense should be? Thank you. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [19] -------------------------------------------------------------------------------- First question, on the activity, on the tender activity, I think that, yes, in some geographies there may be a shift of some projects because of some budgeting constraints. But don't you think that it has happened over the last year in [Europe], for instance, very substantially? Yes, overall, I think that we have had an incredible positive sequence in commercial activity. I think that the backlog -- the pipeline remains active. We have a few elephants in the pipeline, which I hope will move from the backlog to -- from the pipeline to the backlog. You heard some very high-speed stories in North America; you heard some [new urban] transportation stories in the Middle East; you may have heard also some substantial opportunities in Asia. Again, we are moving ahead, not only with the ongoing flow which remains active, but also with some big elephants that we hope we are going to capture and move from pipeline to backlog. So there are all the good reasons for bad news, but what we have been able to do is turn these good reasons for bad news into good news. Yes, there are budget constraints in a number of geographies, but this has not changed. And we have, again, been able to keep the book-to-bill above 1 for more than five years, if I'm not totally wrong. So in my view, and in summary, it's very difficult to give, because if I shift, but shift compared to what? It's very difficult to give specific timing for prospects to turn into contracts, but we see the pipeline active as a greatest understatement. The backlog, yes, the backlog is healthy. Why wouldn't we have an unhealthy backlog? Or what is the -- assuming that we act logically, why would we take bad contracts, not to say (inaudible) contracts, on board? Is it because we need to fill our backlog? It's a record level of backlog. If we don't apply hygiene in our backlog today, in the order intake today, we never do. Assuming we have a minimal rationality, which I hope we are beyond the threshold, you should assume that we apply hygiene, and we have been applying hygiene for a long time, and that, therefore, the quality of the backlog is improving, and has gradually improved. So the answer is, yes, the backlog is a good backlog. The backlog is going -- is gradually improving as we take orders and we execute, and the backlog is consistent with our forecast statements in order, so that's. And then, the improvement of margins, the improvement of margin -- by the way, okay, the margin moved from 5% to 5.1%. You say limited, I'm disappointed, Patrick, that's not good. But at the same time, the IFO is moving by 10% up. So that's not totally negligible, as well. But again, looking at the income from operations and the way it would move forward, it would be a combination of volume, quality of the -- backlog is backlog. So volume -- I mean what we'll be able to continue to take to the backlog [because we can't stop]; and volume; then quality of execution; then continued accents on costs. And then, it includes some volatility. You know that if we increase the signaling, and if we increase the service part the mix between the various categories of activities go up then it goes up. And within a given category, take rolling stock, the mix is not absolutely uniform. So on the period we can some products executed in rolling stock. We are not exactly at the same level of life and, therefore, not necessarily the same level of performance. So, yes, it's volume, mix, and performance; performance being execution and cost. Corporate expenses, I'm sorry if I said that there is volatility. In fact, there is no yearly volatility. We are -- I told you that we were expecting corporate expenses. We guided around EUR30 million per year. We are at EUR17 million. So, okay, you may have a debate for EUR2 million, last year it was EUR15 million, but I wouldn't consider that as volatility, otherwise everything is volatile, including my humor. -------------------------------------------------------------------------------- William Mackie, Kepler Cheuvreux - Analyst [20] -------------------------------------------------------------------------------- Thank you very much. If I can just go back to the operations for one follow up. You initiated a number of footprint-related measures, a number of almost two years ago, some of which was related to transport in terms of direct cost reduction. How much of that is left to achieve? And when you look at the footprint of transport, supply versus demand across the various countries, is there additional need to make adjustments to the underlying production base? -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [21] -------------------------------------------------------------------------------- Well, this is moving. It has been moving in transport, as well as elsewhere. We didn't give a quantitative number this time. I think that this is an ongoing process, which is going to continue. There will be new action taken everywhere in order -- both at the level of the operation. You know in all the categories that I mentioned, which are the manufacturing performance; the optimization of the footprint; the overheads in general, notably, in the operations; the corporate costs; and the overheads at the simple level, etc., which we have been able to improve through the operation, what we call the d2e program, it's on track, it's moving ahead, and will continue. But again, we don't need -- our guidance doesn't assume that the world starts spinning the other way around. We are on a continuous process rather than a revolutionary one: evolution, rather than revolution. -------------------------------------------------------------------------------- William Mackie, Kepler Cheuvreux - Analyst [22] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- James Stettler, Barclays. -------------------------------------------------------------------------------- James Stettler, Barclays - Analyst [24] -------------------------------------------------------------------------------- Just following on, looking at the backlog, if we look at the mix development, what can you say over the next three years in terms of the percentage of service, and indeed signaling, with what you've got in the backlog? And just, any more color on what the key execution challenges are. And maybe talking about, for example, PRASA a very large deal, how risky is that going to be to execute? Thank you. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [25] -------------------------------------------------------------------------------- Well, I think, obviously, when, James, first one, is when you look at the backlog, basically, you have a content of service, for instance, which is larger than what you may have on rolling stock, because, typically, the length of the service contract may be longer than the length of the rolling stock one. So this is not, per se, a pertinence to assume the mix of the sales, because they tend to be executed over a longer period, by nature. That's what I said. What we think, what we want to do is basically grow the non-rolling stock area faster than the rolling stock one. That has been the stated strategy, and we keep there. And Henri, when he details what he intends to do, will probably come back more on that. GE Signalling will obviously give a boost of the signaling sales, and increase the mix in signaling. So this will -- this move. We have not given a detailed guidance, and I'm not prepared to give one today, but that's what we want to do. In terms of execution, what needs to be done in terms of execution is the -- is nothing real. I think we are getting better in the execution compared to where we were a number of years, and expect to continue to improve. You know that in contracting business, and we have a contracting business, it's important: execution is the key driver, given backlog can turn into very substantially different P&L, depending on the way it's executed. So, it's remained a key focus of the Company, and its management. You talked about PRASA. PRASA is the starting point. We already delivered some trains from Brazil as part of the contract, and now the work is to gradually transfer and ramp up in South Africa. It's a large contract. It's a contract which is a difficult contract in terms of execution because we, basically, have to build a factory, to train more than 1,000 workers to be able to ramp up this factory. We have to stabilize the supply chain. We have started already, because some of the trains we are delivering already include some local supply, because we need to go there. So this is -- but you know this is the type of thing that it's our job to do. Our job is to be able to do that. And if we have been able to successfully tender on this contract, which is a good contract for us, subject that it is properly executed, and your point is well taken, it's because of our history in the country, our ability to meet all the black empowerment criteria's, etc. So, in other terms, the experience we have. We have not been, at that time, when we took the contract, very exposed to rolling stock experience. But we have very broad energy one, which has been useful at that time, to help us ramp up in rail. So, look, this is something which will be scrutinized in the management of the coming period as a large contract, not necessarily a risky one. All large contracts, by nature, are risky because if they turn bad they turn bad in bigger numbers, even though the program is to be executed over a long period. But, that's a point I can make, if we are unable to take large contract, to have -- we have a fundamental problem. Again, our ability is to be able to take a combination of contracts in all geographies, to be able to rely on local partners, to put an installed base, and that gives us a clear competitive advantage against a number of competitors, notably Chinese, who are unable to do so, so far. So again, and so, therefore, it should -- we should turn that into opportunities. It's -- all large contracts are scrutinized. We have in place all the, I would say, reporting and sensors that are needed to check, because, indeed, they never go linear. So whenever there is a variation, we have to step in and correct. So, look, we'll -- we are moving in this contract. We are at the very initial stage. I think we are just at -- it's a long contract, as I said. And it will ramp up, so we will have the opportunity to talk about this contract regularly. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Martin Wilkie, Citi. -------------------------------------------------------------------------------- Martin Wilkie, Citi - Analyst [27] -------------------------------------------------------------------------------- Do you think I could come back to the free cash flow? I understand you don't want to give guidance, but in your balance sheet impact you do talk about a negative transport free cash flow when you calculate the estimated net debt position, post transaction. I understand there's probably a slightly definitional difference here because, obviously, the transport free cash you talk about is before interest and tax. I suspect this one is after interest and tax. But I just want to check that, that slide on slide (multiple speakers) -- -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [28] -------------------------------------------------------------------------------- Definitely. Definitely, it is. -------------------------------------------------------------------------------- Martin Wilkie, Citi - Analyst [29] -------------------------------------------------------------------------------- So the difference in that slide is not implied guidance for the second half, is more interest and tax is bringing that down? -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [30] -------------------------------------------------------------------------------- No, thank you for -- I'm probably -- as I said in explaining this slide, we should have talked about continued operation rather than transport, because this definitely includes all what is not related to GE and not taken in the locked-box. Obviously, we are not talking about the future, but we are talking about the past, because we are giving a kind of pro forma picture on September 30, 2015. Last, but not least, this is rounding numbers, so don't try to extrapolate. We have been trying to give the big picture, rather than the detailed number, to explain why the EUR3.2 billion was making sense. So, sorry for this lack of clarity. -------------------------------------------------------------------------------- Martin Wilkie, Citi - Analyst [31] -------------------------------------------------------------------------------- Good to clarify. So, thank you for that. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Alfred Glaser, Oddo. -------------------------------------------------------------------------------- Alfred Glaser, Oddo Securities - Analyst [33] -------------------------------------------------------------------------------- I just wanted to follow on GE disposal. Could you give us a more precise idea of the capital gain that you might book in the P&L this year at Alstom? And then, on the revenues reporting, you have now a clearly positive foreign exchange impact. What would be your guidance for the full year in terms of foreign exchange impact on revenues in transport? -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [34] -------------------------------------------------------------------------------- I would be rich if I were able to answer you on the second part of your question, Alfred. No, I cannot disclose an accurate estimate of the ForEx as we move forward. So, that's the second one. On the first one, yes, there will be a capital gain. We will communicate on the capital gain after all the accounting job has been done. And this will be done with the full-year numbers, so I don't want to give presently a figure. Hope it's going to be substantial, but I don't want to give a figure. There are a number of things that we have look. I give you an example. Among others, we have tax assets. We need to make sure that these tax assets are fully valid and that the new perimeter will give us a fairer -- because this is at the corporate level, this is a [tax on the same] level. So we need to make sure that tax assets here and there, for instance, are giving -- we have enough comfort that these are going to be used, otherwise, we may have an impairment issue. That's the type of things we want to look at. Therefore, there is some work which is going to be done by the finance team, Marie-Jose and her team, and then we'll come back with the numbers. You know the closing is done so close to the half-year numbers we need some time to review, and we will comment with the full year. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Jaisika Kaur, Goldman Sachs. -------------------------------------------------------------------------------- Jaisika Kaur, Goldman Sachs - Analyst [36] -------------------------------------------------------------------------------- I only have a couple of questions left. The first one is about your net debt. What do you consider as the ideal or the comfortable net debt level for your business over the medium term? My second question relates to your M&A strategy, and apologies for coming back to this one. I guess, I understand that you're not in a must-do-more when it comes to M&A, but I wanted to clarify that you said you will still be looking at opportunities. So, by that, do you mean you will be looking for opportunities that will be of the bolt-on nature? Secondly, is there any gap in your portfolio where you think those opportunities can arise? Thank you. -------------------------------------------------------------------------------- Patrick Kron, Alstom S.A. - Chairman and CEO [37] -------------------------------------------------------------------------------- No. Thank you. The idea that this is an issue that we have been addressing and lately, and there is no idea on that. You know that, basically, we are somehow financed by our customers in the system business and we don't want to have customers having headache on our balance sheet. This being said, with post-OPRA, we'll still have one of the best balance sheets of the industry, so I don't imagine anyone has a worry. So, look, a Company such as Alstom can be leveraged. It cannot be aggressively leveraged, in my view. So I am not in a -- I don't think it's appropriate to give that target. But again, by taking the conservative part of the OPRA in the Board's recommendation to the AGM, we get the signal that we don't want to be crazy in terms of balance sheet of the Company. On the M&A, you are fairly representing my point when you say that we are not in a must-do mode. That's exactly my view. We are not in the must-do mode means that we believe that we have a sound portfolio. It doesn't mean that there are not opportunity to boost the portfolio on bolt-on acquisitions. Typically, GE Signalling is a nice bolt-on acquisition because it covers some holes that we had. We are very much focused on passengers signaling, while GE allows us to be globally on freight signaling. If you look at our signaling business, we are quite broadly present. But I wouldn't say that US -- North America is a stronghold of our signaling activities. It boosts, therefore, our signaling activities in this geography. So, that's typically the type of acquisition we like. And we look for some? Well, we have been. There is [nowhere] we have been. We've a lot of money to do. So a little bit more [contemporary] than active. But we'll continue. We'll continue with the idea that we'll apply the toughest hygiene and make sure that we don't do mistakes. But definitely, in my view, we are talking of bolt-on. And bolt-on means giving something in terms of cost base, giving something in terms of commercial presence, giving something in terms of technology additions, etc. That's where we are. But again, there is nothing cooking. So we'll have plenty of time to [get that stock in]. Good. From the screen, I see that there are not so many additional questions. I've been with you a long time, so thank you for your interest. Selma is obviously at your disposal to give you additional elements, and cover your curiosity. And you know the next steps. As far as I'm concerned, in addition to the shareholders' meeting, I look forward talking to you on January 14, on the Q3 orders and sales. So, thank you very much, and have a good day. Thanks. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's call. Thank you, all, for attending. You may now disconnect.
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