Henri Poupart-Lafarge - Chairman and CEO Marie-Jose Donsion - CFO

Akash Gupta - JPMorgan Daniela Costa - Goldman Sachs Guillermo Peigneux Lojo - UBS James Stettler - Barclays Martin Wilkie - Citi Gael De Bray - Deutsche Bank Andrew Carter - RBC William Mackie - Kepler Cheuvreux

Ladies and gentlemen, welcome to the Alstom Conference Call. I'll now hand over to Mr. Henri Poupart-Lafarge. Sir, please go ahead. Henri Poupart-Lafarge: Thank you. Good morning, ladies and gentlemen. Welcome to this conference call on our first quarter results, order and sales. As you know, our first quarter comes from April 1 to June 30, 2016. You have all had the press release, which has been published this morning, and which gives you figures by geography and by product. I'll be very short. In this quarter, Alstom booked only small contracts, with no order above EUR100 million. This led obviously to an exceptionally low level of orders of EUR900 million, which of course does not reflect the commercial activity, and which indeed had been quite strong during this first quarter, and we expect this commercial activity to translate into orders in the coming quarters. And for example, as you may have noticed, that we have communicated on regional trains in Italy or on the extension of the metro for Dubai in 2020. As far as sales are concerned, we are continuing to show a good organic growth, the sales have reached EUR1.7 billion, up 7% organically or 9% in actual numbers, compared to the first quarter of 2015-2016. Sales deliveries were mainly driven by regional, high-speed, and suburban trains in France, regional trains in Italy, Germany, and Sweden, and of course -- and the progressive ramp-up of the PRASA project in South Africa, as well as the maintenance of high-speed in the U.K. as well as signaling projects in Canada. All in all, I would say that these good sales momentum as well as the commercial activity gives us full confidence to confirm all our guidance for the coming years, and particularly our 2020 objectives. I think this is what we could say on this first quarter activity. And now I will switch to the Q&A session. I am together with Marie-Jose Donsion, our CFO, at your disposal if you have some questions. Thank you for your attention.

[Operator Instructions] The first question is coming from Akash Gupta, JPMorgan. Please go ahead with your question.

Yes, hi, good morning everybody. I have three questions please. My first question is on service sales. And I can see in your release that service sales has gone down from 393 in Q1 last year to 361 this year. I'm wondering if you can help me understand what are the moving parts here and what should we expect for first half given services profitability is higher than the group average. So that's the question number one. Question number two is on -- in the press release you talked about acquisition and partnership in the month of April, and I'm wondering if you can give us some number in cash flow impact in those partnership and acquisitions? And then the final question is on Brexit. And just say some thoughts on how that will impact financing condition for your customers, particularly in Europe? Henri Poupart-Lafarge: Thank you, Akash. I will take your last question first, on the Brexit. Of course, it's very early days. I mean, it's early days for everybody on this topic. So we have not seen of any signs of impact of the Brexit on our market. We could say that the first consequence of the Brexit is a movement in currency. All our sales are local in the U.K., and all our sales are actually in service, in infrastructure, and in signaling. So we are not exposed from any kind of either competitiveness issue or hedging issues to U.K. Of course there will be a translation impact but which is relatively minimal. As far as the big projects are concerned, like HS2 or these ones which will require some heavy financing, again, it's too early to say. We are monitoring the situation quite closely. One could say from a kind of general perspective that uncertainty will probably lead to kind of slowdown of these big projects. But to be fair, I've not seen any sign of that. So this is at that stage pure speculation. On your first question of service, yes, and indeed if you look at last year there was a huge growth in service business. And we said that this was partially explained by large renovation contracts in the U.S., and so this is now being reversed. And we have now a slowdown of these renovation contracts which have been delivered last year. I will not comment on the profitability side, just to tell you that these renovation contracts are not necessarily the ones which are the most profitable of our service portfolio as it's closer to a new build type of activity rather than a kind of long-term maintenance type of activity. On the partnership, I'll hand over the floor to Marie-Jose on the partnership and acquisitions. Marie-Jose Donsion: Okay, so Akash, I confirm we've communicated on, in fact, two main acquisitions for a value which is roughly EUR10 million. So the first one is the purchase of the 50% share of Nexans, we had a JV with Nexans in Morocco called Cabliance for some components which we acquired back. It's a small size activity mainly to directly diversify our sourcing and have a second source of supply on this component. And the second acquisition, which is more significant, is a company called CTLE in South Africa, which was acquired in April, in fact to support the execution model and the localization that we have in South Africa to execute our PRASA project. So this is in fact a company that today retrofits and maintains the fleet in South Africa, it's roughly 400 blue collars that are in manufacturing site roughly 10 kilometers away from the site where we will erect our Greenfield factory to manufacture the PRASA project. Henri Poupart-Lafarge: Thank you. Next question?

The next question is coming from Daniela Costa, Goldman Sachs. Please go ahead.

Hi, good morning. Two things from my side, could you maybe remind us regarding sort of free cash flow for transport, how should we think about the volatility of that throughout quarters? And then the second thing, can you give us some more details about Dubai and Italy in terms of the share of Alstom, and also what else is there in tenders beyond those that could be potentially like large projects not necessarily saying that they're going to go to yourself but just so that we know what are the big things out there? Thank you. Henri Poupart-Lafarge: Thank you, Daniela, on your first question on free cash flow. I mean of course this is [indiscernible] quarter, so I'm not going to go into the details, you probably remember both our guidance in terms of long-term guidance of 2020 which is to convert 100% of our profit into cash. We have also detect some of the short-term impact both of the exceptional investment that we are currently pursuing, particularly in India and South Africa as well as some legacy cost or cash out which relates to the separation we did. We also said and I confirm that there is volatility in our cash flow. This volatility is due to a large down payment which can occur from -- for some contract but also from progress payments because we have [indiscernible] contract progress payments not only down payments but from time to time progress payments which can be of significance. So I do confirm that there is a volatility in our cash flow. Our intention and as you know this is one of the main focus of the company is to generate, I would say, regularly some cash taking into account this short-term volatility. In terms of order intake, I think we have said that basically the Dubai expansion order was around 2.6 billion for the total of the project and half of it is for [indiscernible]. So as we have not communicated our number, I let you do the math but that's round this number. On Italy, it's a little bit more complex because there have been some communication by the customer on the total value of the train contract which is around 4.5 billion but this train contract include three contracts actually one for diesel trains, one for high-capacity, diesel trains, high-capacity have been won by a competitor, and for medium capacity which is our part of the contract. In addition, this is basically 150 trains. In addition, there will a portion which will be firm and a portion which will be optional. So at the end of the day the orders which will be booked for regional trains will be of several hundred but not a very large contract. And this is yet to be finalized with the customer. So, if you take- that is 150 trains for us and 300 out of 400 are [indiscernible] out of 500, so you can make a proportionate amount that works more or less, 150 as compared to 500 for 4.5 billion. And then out of this proportionate amount there is a portion maybe one-third of that which would be for the third batch. Sorry for the lack of precision but we need to continue to discuss with the customer. On your order question on the commercial momentum in general, there have been orders which we have disclosed in the past, but we have for which there have been some communication like in Philippines, like in Egypt, like in Mecca, in Saudi Arabia where we also [indiscernible] some of this for which we are [indiscernible] for which we are still discussing and it can take a number of months to come to a conclusion. There was also very large one in the US, Amtrak high-speed trains for which we are still waiting for the final answer. So there are number of contacts for which we are waiting final answers. Then we have contracts which are more in early stage of tendering, particularly in Australia, particularly in France, where we are talking about the new suburban trains, double deck suburban trains for which we are waiting some news between - during next autumn. So, there are still a number of tickets, we have also a large contract in Netherland for which we are waiting also the final confirmation. So we have a number of projects at different stages, some of them like Italy and Dubai, we are just completing the contract, some of them we are still negotiating, some of them we are waiting for the answer to the bid, but all that make us confident that the yearly number for order intake should be in line with our expectations and should be in line with our growth perspective. Thank you. Next question?

The next question is coming from Guillermo Peigneux Lojo, UBS. Please go ahead.

Good morning, it's Guillermo from UBS. Maybe two questions if I may, I will ask them one by one. First regarding your revenue growth, I've seen reported figure is 9%, organic is 7%, so I wanted to get more details on the 2% that will come from structure and currencies, so how much was the currency contribution and how much is just acquisition if I may? Thank you. Henri Poupart-Lafarge: That's for Marie. Marie-Jose Donsion: So in fact in the revenues, we faced some adverse Forex effect compared to last year, I would say mainly two currencies played a role for us, it's the pound obviously with the recent evolution of the currency, roughly 10% compared to last year and as well as the South African currency which if you recall suffered a significant decrease last year during the summer. So obviously quarter one compared to quarter one we were still on the high level last year. So roughly I would say currency impacted us in the magnitude of 60 million negative. And then in terms of scope we have obviously the contribution of GE Signaling mainly, since obviously the acquisition joined our scope only November 2nd last year, so this contributes to roughly 70 million of revenue for the first quarter. Henri Poupart-Lafarge: Thank you. Next question?

The next question is coming from James Stettler, Barclays. Please go ahead.

Yes, thank you, good morning all. Three quick questions; can you talk a bit about how the execution is going in terms of PRASA, I guess you're now starting to build that plant, how things are progressing? In terms of another integration question, GE Signaling, how is that going, how is it performing versus expectation so far. And then just when you talk about these tenders, any change in the competitive environment in terms of conditions that you have observed? Thank you. Henri Poupart-Lafarge: Thank you, James. On PRASA I think there is nothing to report, the train are [indiscernible] one by one. So from Brazil as I had already the opportunity to say, the tests are going extremely well. So we are now, I mean, we are now quite secure on the quality of the train itself. And I think all the manufacturing in Brazil is now under completion. So this is going well and we have started to erect the factory and things are moving nicely there, there is nothing I would say to be reported. But I think I'm going to put webcam on [indiscernible] you can follow closely this contract, but I will report each time on this one, so it's going really nicely. On GE Signaling, I mean there is obviously some good news and not so good news. The good news is that the integration is going extremely smoothly, so this is now well in Alstom. The good news is actually they bring us a lot of expertise in terms of product and there is a number of things that we can learn from GE for our product business in signaling, there are also different ways of channels through the market, and this is quite interesting and enriching for us. The not so good news is the fact that the U.S. market has been down, particularly the site market and hopefully we see the return of the oil price a little bit up, and some positive signs coming from the oil industry in the U.S., this will come back to a better situation. As far as the European-type of facility, CBTC and ERTMS, we are now merging our product family, and this is going smoothly, I have to say. So overall positive timing of the U.S. market not optimal, but I think it will come back quite soon. In terms of tenders, to be fair most of the tenders I am talking about are actually relatively old tenders. I mean, when we are talking about these big tickets that we are waiting, whether it's Mecca, whether [indiscernible], and these are quite old tickets, so these are been tendered a number of months, if not years ago. We have not yet -- we have seen huge competitive changes apart from the global change that we're seeing over the recent years, which is globalization of number of factors, and particularly the Asian [indiscernible], with Rotem being more active worldwide, CRRC being more active worldwide as well. And this has not been noticed in the U.S., for example. Apart from that, for the -- in Europe we still have -- we have kind of stable situation among the recent players. So I don't see any change in times in Europe itself. So no particular change in the recent years, but the general movement of globalization of a number of factors which, as you know, we are entering by being local, and this is the way we are playing our cut. Okay. Thank you. Our next question?

The next question is coming from Martin Wilkie, Citi. Please go ahead.

Hi, it's Martin from Citi. Just a couple of questions, firstly coming back to the GE Signaling exhibition, you mentioned I think 70 million of revenue acquired there. From memory, that was a 400 million annual revenue business, and you mentioned that your U.S. freight is down, but presumably there's some seasonality in that number as well. If you could just clarify is this quarter sort of a seasonally low quarter for that business anyway, or was that drop relative to the 100 million run rate in a quarter really that badly affected by the freight market. So that was the first question. The second one, I'm not sure you might be able to comment on this, there was some articles in the newswires a little while ago, last month I think, about some dispute over the final payments for GE Signaling for working capital and so far. Could that be a substantial amount in terms of the difference or is it more of a technical point? Thank you. Henri Poupart-Lafarge: Thank you. I'll give to Marie-Jose. Marie-Jose Donsion: Okay. So on the GE Sig actually, we had mentioned that the volume of activity of GE Signaling was decreasing compared to the, let's say, initial discussions we had when we started the transaction with General Electric, mainly due to the market evolution in the U.S.. If you go back to our publication, end of March '16, we actually communicated and the contribution of GE Signaling for the first five months in our funds. So we disclosed the number of EUR130 million for five months of activity. So when you compare right now with one quarter of EUR70 million it's not actually massively different. For sure there is no recovery yet in the U.S., and therefore we are still on a low number in terms of contribution from this activity in our numbers. Regarding the dispute we've got with GE, since that's part of the, let's say, price adjustment that is part of the contract. So basically there is a price adjustment on working capital. And we've made put a notice to GE. There is a process to actually agree on the adjustments on this working capital level. The process is actually progressing. Hopefully we can come to conclusion either together or through an expert. And so nothing abnormal on this process I would imagine. The adjustment that we are asking for is to the notes incorporated in our books, so no impact to be expected from this claim. Henri Poupart-Lafarge: Thank you, Marie-Jose. New questions?

The next question is coming from Gael De Bray, Deutsche Bank. Please go ahead.

Yes. Good morning. Thanks for taking the questions. The first one is on the Signaling contract in Egypt, and the metro contract in the Philippians that you had signed quite a long time ago now and that have not yet been booked in the backlog. So can you perhaps give us some update on this, just trying to understand what's going on in here? And the second question is on the Africa-Middle East sales deliveries, which actually were down 6% in Q1 on a year-on-year basis, and also down more than 50% compared to Q4 sequentially. So since you're now executing on the South African project, what's driving the weakness here? Thank you. Henri Poupart-Lafarge: So, thank you Gael. First of all, I'm going to meet, in two hours, the customer from [indiscernible] after this meeting, but to be seriously a boost for the Manila contract and for the Egypt contract, yes, there are some difficulties to come to a final conclusion, and to come to the notice to proceed. And I'm not going to comment [indiscernible] contracts and several of them for each of the contracts. So I don't want to enter into the details of these two contracts, but suffice to say that it will not be booked now a number of months. I mean you should not expect in the coming -- in the very short term. And this is again -- I mean we are not just to enlarge the subject. Typically the contract takes time to come to, again, to a notice to proceed. And at the same time, sometimes we are bound for external communication by some events, like some signature, some visits, and so forth. So we are not necessarily hiding the communication behind some of the projects, and you should recognize that sometimes these projects are communicated quite at early phase, sometimes are communicated only when they are booked. So I can imagine that this is a little bit [indiscernible]. In Middle East Africa, I will answer to your question, but before that I will say that in Middle East Africa we have a number of pay last contracts such as [indiscernible], such as Riyadh [ph], so system contracts, such as Morocco. And therefore it creates some volatility in the sales. So if I wanted to answer to your question I would say yes, we have, as compared to last year, we had a lot of sales on the Moroccan very high-speed trains' project, which we are not talking about anymore because it's over now. But it's, I would say, numerical reason. But the general reason is that the fact that it will ups and downs because we have large contracts with large milestones. So let's not focus on one quarter particularly for [indiscernible] which is again quite bumpy weather. So in Azerbaijan we had delivered some metro in Baku. But all that is the negatives and you could wonder why don't we have more positive? It depends on the milestone on the different large contracts.

Okay. Next question?

The next question is coming from Andrew Carter, RBC. Please go ahead.

Hello and good morning. I had another couple of questions sort of around sterling and Brexit, if I may. And firstly just in terms of the question about sensitivity to movements in the currency, I have had quite a few questions on this. And I realize, I think to an earlier question, that you mentioned that the translation impact was relatively minimal, but is it possible to help us understand, perhaps give a sensitivity to both sales and profit so that we can better understand that impact? The next one was in, I guess, just thinking about sort of two sort of related issues. One was in terms of CapEx funds that you've got, I was wondering whether any of those plans include works that you are doing in the U.K. and if, given what's happened, there are any sort of changes to those items in your budget for the CapEx over the next couple of years. And then, maybe just sort of a [indiscernible] specific one, relating to some of the work, the service work that's being done in the U.K., are there -- is there any of the service that you're doing that you sort of like relatively, I'd almost say like things like cleaning services or anything like that, sort of relatively simple business in the U.K. that's using a lot of people and that might possibly be impacted, if we were to see quite a lot of U.K., sorry non-U.K. citizens, i.e., EU citizens decide to leave the U.K. in the coming months, because we have heard some businesses already talking about issues such as that and saying it's going to impact their employment plans? Henri Poupart-Lafarge: Thank you, Andrew. I will give the floor to Marie-Jose for this U.K-related question. Marie-Jose Donsion: Okay. So regarding the Brexit, we've actually indicated that roughly around 10%, a little bit less than 10% of our volume of business is done in the U.K. So, basically, if we simulate a 10% drop in the currency, we get roughly 70 million impact in terms of volume in our revenues, because most of our business in the U.K. is actually [indiscernible]. So based in the U.K., that's why we said actually most of the effects for us is the translation effect rather than a P&L effect. So the business' concern are mainly service and signaling since these are the two main activities we today operate in the U.K. and when we simulate, actually their contribution to profit, there is just a total profit of the group, I would say, potentially impact could be 10 basis points on the adjusted EBITDA of the company. So, pretty low impact in terms of conversion to -- for Alstom. Regarding the CapEx that we're performing in the U.K., we've actually, we're looking, as I mentioned, in the closing of last year, at lease contracts that we may have in various geographies from the time Alstom converged into very large program of leasing of their facilities. So, right now, in fact, I'm looking at the premises that we use for service and it's fair to say that we have decided to exit a leasing contract that we have in the U.K. and build our own, let's say, they pull for maintenance activities. This is a pretty limited amount of investment. So, nothing, I mean it's part of our recurring CapEx, I would say, nothing particular there. Henri Poupart-Lafarge: Thank you, Marie-Jose. Next question please?

The next question is coming from William Mackie, Kepler Cheuvreux. Please go ahead.

Good morning, Henri and Marie-Jose. Thank you for the questions, a couple please; just looking first of all at the order intake within Europe, I noticed the book-to-bill down there in the first quarter. Could you, when we come back to your business activity and tender activity, provide a little color on your expectations for order bookings in Europe this year? Do you think we'll see a book-to-bill above 1 as we close out the year? Secondly on revenues, strong revenue recognition it seems in Europe in the first quarter. To what extent, given the timing of projects and the execution of those, is that revenue growth sustainable into the following quarters in the year ahead? And also lastly on systems, when I look at systems, I noticed there is almost no order bookings. You've talked about Dubai. Is there a tender pipeline there which gives you some confidence you'll be able to replenish some of the orders that will be booked this year as we go through the rest of the year, excluding Dubai? Thanks a lot. Henri Poupart-Lafarge: Thank you for the question. On Europe first, the European market is sustained. We have, as you said, good commercial activity included in Europe. So we already discussed about Italy. I've mentioned as well the Netherlands. We've also a number of mid-sized contracts or small sized contracts in Germany, which is more than kind of signaling business for us. You may have heard about the last tender in Spain, which is coming as well in December. In France, as I said, we're disallowed double deck suburban trains. So all-in-all, I don't want to give too precise guidance on order intake, because it's quite bumpy as I said, but I would expect for the full year, some level of order intake in Europe as well as in the rest of the world. So we should have [indiscernible] we're targeting book to bill above 1. But again, there could be some bumpiness, but there is no signs of slowdown of the market and when I mentioned good commercial activity, this was typically including Europe. I think in terms of sales, maybe, Marie-Jose you can say a word on sales and -- maybe I should take the order in systems as well. On systems, these are typically large contracts. Dubai is the largest one and we probably remain the largest one for the year. We don't, I mean we don't need to, mainly Dubai, let's say, to replenish our order backlog. If you look at our sales in terms of systems, typically, these are, this kind of order of magnitude, but still we expect one or two order on the system business to come before the end of the year. So we should have Dubai plus one or two, but Dubai should be included in our full guidance. Marie-Jose Donsion: So regarding sales actually, sales remain at very robust level. I mean, the top three countries, we see for Europe, obviously like last year, so France, U.K. and Italy, I'd say Germany very close to those top three. And in fact, there, we see the volume, I mean, basically being in line with the delivery of the backlog that those countries have in hand. For the rest of the year, I would say, we're not adjusting the objective that we gave, which is roughly we expect an average organic growth of 5% and at this point in time, I have no other comment to make on this average number. Henri Poupart-Lafarge: Thank you, Marie-Jose. I think we cut the mike to Guillermo. So maybe, you got another question.

Exactly, sir. We have a follow-up question from Guillermo. Sir, please go ahead.

Thank you. I think you alluded to some extent, but I was wondering about regarding your mix and I understand these kind of changes quarter-to-quarter, probably a little bit more consistent throughout the years, but with bigger systems and signaling and to some extent, a smaller contribution from Asia Pacific, as we move forward, Middle East will be volatile with South Africa, but I wanted to check about mix going forward on this, on your backlog and then is it the year 2017 the year which you have to feel how the mix improves to a great extent? Thank you. Henri Poupart-Lafarge: The mix, I'd say there is some bumpiness and I think I said it during our full year results, I mean, we are less sure, in particular high growth in our service, signaling and system activities. This was above both our expectations and I would say the long-term trend. So as I said, you should not expect some further changing mix or huge change in mix in the coming period after this large shift. So, we still have [indiscernible] stock being less than half of our business and we continue to target this and to target, going to 40% at the end of 2020, but it was at 46 last year, so again, big chunk of the change has been in the last year and we continue to progress towards our goals, but at a smaller pace. Henri Poupart-Lafarge: I think this was ending our conference call. Thank you for your attention. I think this was nice activity during this first quarter and very pleased that the first quarter of the so called new Alstom, for the first year of the new Alstom. We're starting on a good momentum and thank you all of you and see you in the coming weeks and in coming periods. Thanks a lot.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.