Alstom SA FQ410 Earnings Call Transcript

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Alstom SA (OTCPK:AOMFF) FQ410 Earnings Conference Call May 4, 2010 12:00 PM ET


Patrick Kron – Chairman of the Board and Chief Executive Officer

Henri Poupart-Lafarge – Chief Financial Officer


Gael De-Bray – Societe Generale

Andreas Willi – JP Morgan

Olivier Esnou – Exane BNP Paribas

Mark Troman – Banc of America/Merrill Lynch

Irene Bermont – UBS

Martin Prozesky – Sanford Bernstein

Lisa Randall – Nomura Securities

William Mackie – MainFirst Bank

James Stetler – New Street Research

Christian Murray [ph]

James Moore – Redburn Partners

Patrick Kron

Good morning ladies and gentlemen, and welcome to our full-year results presentation for the fiscal year April 2009 to March 2010. I welcome you in the room as well as those of you who are joining us by conference call. The structure of my presentation, we will start with the key highlights of the year, and the operational review by sector. Henri will then go through the financial results, and I will come back for the outlook. I don’t need to remind you of the general context in which we operated in 2009/10, which was marked by global and strong economic downturn. The recovery is expected by – timing is still uncertain. We have seen growth resuming in a number of markets in Asian countries, more specifically at high level, while demand in the more mature countries such as Europe and USA has shown much slower growth. Economists concur to say that the low point is behind us and I hope they are right by saying so. So in addition to this marked slowdown of demand, which I just reminded you, the capacity built by Asian players pre-crisis has obviously triggered a redeployment towards exports, and has thus increased global competition. I will address this point as well and give you our views on this point.

Starting with the key figures, the Group has published this morning a record performance, both in sales and in operating income. This is obviously due to the delivery of our healthy backlog, which has led to a further growth in the sales, which are up 5% to EUR19.7 billion. A strong progression of the operating income, plus 16%, at approximately EUR1.8 billion. Therefore, the operating margin at 9.1% has exceeded the forecast of 9% that we have given. Finally, the net income at EUR1.2 billion is up by 10%. And these results will allow the Group, and this is a decision taken by the Board yesterday, to propose a 11% increase of the dividend per share at EUR1.25 per share for the fiscal year ‘09/10 compared to the EUR1.12 which was awarded last year. And this is going to be submitted to the AGM on the 22nd of June, and if approved it will be distributed one week later on June, the 29th. These are record financial performance, but at the same time they were done in difficult commercial environment, where all the intakes were heavy impacted by the downturn of the economy. At around EUR15 billion, the orders are down by more or less 40% compared to last year. So, this is a kind of double punishment, because in the previous year they were on an all-time high at EUR25 billion. So it was nice to report last year, but it created a very high reference for this one.

And last year, it did include a number of very large contracts. But the orders are down from EUR25 billion to EUR15 billion. The backlog, obviously, remain strong and robust. It is down slightly because of book-to-bill being below 1, but at EUR42.6 billion, it represents more than two years of sales, more precisely, 26 months. The free cash flow was obviously impacted by the expected deterioration of the working capital linked to the low level of orders and the corresponding down payments. It was nevertheless positive around EUR200 million, as the sound operational performance had more than offset the adverse impact of the evolution of the working capital. If I look at the situation of our market and its expected evolution, first, I told you last time, and I think this is still true that we don’t operate in a bubble outside of the real world even though we have been benefited, and will continue to benefit from the quality of the backlog.

And I said that obviously the crisis has impacted our markets. For 2009, and we start with Power. We have seen a strong contraction in demand for new equipment in comparison again to the very high level of 2008, and you have here a few data. And we estimate that in 2009, the worldwide demand was around 180 gigawatt versus almost 340 to 350 in the previous year. So this is due to the decision by a number of players in the industry to postpone a number of projects for new power plants because of the decrease of electric consumption and in some cases, financial constraints. This is the reality. This is something which we are – which is not new for us because we have been and will be in the market which has substantial volatility and will face cyclical ups and downs. But we consider that the mid-term drivers remain sound and robust and we have no reason to change our mid-term forecast, which we continue to view around 220 to 240 gigawatt. The reasons to sustain this assumption are still there, and I just repeat them for you.

You know that in emerging markets, demand is linked to economic development and power shortages and it has already – demand has already started to rebound in the matured markets. The aging fleets should benefit service, retrofit, and replacement markets. And in addition, the impact of the most stringent environmental constraints creates the need for cleaner power solutions such as hydro, wind, and nuclear, while fostering demand for more technology in the classical thermal plants in order to obtain better efficiency and higher cleanliness.

Concerning Transport, as you can see in the chart which is in Slide 6 that’s in front of you, the market was more resilient, notably for passenger transportation. Freight traffic has obviously been more affected by the crisis, but our sector – our activity in this field is much more limited than a number of our direct competitors. So in the long term, we confirm that we expect the market to continue to grow, driven by economic growth by demographics, by ever-increasing urbanization, as well as rising concern on environmental matters.

Concerning orders, you have here on Slide 7, the evolution of our order intake by quarter, by half year, sorry by semester. This is interesting to comment on at least two angles. The first one is that you have seen, as expected, when we published our half year accounts that we have reached a low point in H1 2009 and ‘10, and that there has been a rebound in H2 which has definitely been the best, but still is above last year. That’s the first remark. The second remark is that within the project which we have booked you can see that the small-to-medium size orders, typically below EUR100 million per unit has continued at quite a stable rhythm. But the major difference and the major drawback has been on the larger projects, the ones above EUR100 million. You see that over the year, we have been moving from 35 large contracts booked last year to the previous year in 2008/09 to 21 which were booked in ‘09/10.

Again, we continue to see tendering activity remaining active, but remained a question on how, at which speed, and when will this translate clearly into new orders. This is still a question mark. In geography, this is the other part of the presentation, in the slide, you see that Europe has been dominant in term of orders, about 60% of the total, with bookings covering large projects for a power plant in the UK, a coal plant in Slovenia, equipment for thermal plant in Germany, retrofit contract in Poland, hydro projects in Switzerland, as well as operation and maintenance contracts on gas plants in the UK.

For Transport, major European contracts cover regional and suburban trains in France, regional trains in Germany, tramways in a number of cities, and metro cars in Amsterdam. That’s around 62% of the total. In North America, which represents 13% of the total orders, the main contracts registered were for steam turbine retrofit in the USA, a geothermal power plant in Mexico, and hydro equipments in Canada.

Orders, we also saw in South and Central America, 5%. We booked a mass transit contract in Brazil, which was the main order booked during the period.

In Asia, 13% of the total booking, they include projects in boilers, environmental control system, hydro and signaling projects in India, as well as several contracts in Southeast Asia.

Finally for the Middle East and Africa region, which accounts for 7%, the major orders recorded were for tramways in Morocco as well as projects in South Africa. This 7% is substantially below the level of last year. As you may remember in ‘08/09, our orders in this regions were representing around one-third of our total booking, as it included a number of very big elephants that we booked over the period.

The backlog is described on Slide 8. And you can see that despite book-to-bill around 0.75, the backlog remain healthy. And as I said, it represents 26 months of sales, more than three years in Transport and around 20 months in Power. This will be detailed in the slide that we will give you in a minute. You have also, included here the phasing of the backlog because it’s clear that the backlog gives some visibility for the coming year, but part of it, as you can see, and more specifically, long-term maintenance contracts cover a period which goes further to the three-year horizon. And you have here out of the 43 billion of backlog, 15 are expecting to go through our P&L next year, 10 the following one – this year, 10 the following one, and 5 in 12 to 13. I thought it was interesting for you to get some elements on the phasing of this backlog. And it means to cut a long story short, that we still need to take orders if we want to be busy in the years to come. That’s the first comment. The second comment is, today, as yesterday and as tomorrow, the proper execution of the backlog remains our top operational priority.

If I look at the sales and income from operation, you can see on Slide 9, the good progression, both of the overall turnover and of the profitability – the increase over the five years of our sales represent 50%, 5% from the year-to-year. The operating income has been multiplied by 3.5 through the combination of good orders and the smooth execution. In March ‘10, it amounted to EUR1.8 billion, up 16% from last year, and the operating margin forecast of 9% that we have given has been slightly exceeded as the margin grew from 8.2 to 9.1. These are the numbers but at the same time, we have taken a number of initiatives. First, to adapt to the short-term environment, and two, to continue to prepare, future, which we expect will be good as we are on a long-term growing market, and well-positioned to grasp opportunities in them. So although we have no nicknames for, and worry over names for restructuring programs, we still have been moving to adapt our footprint to the evolution of the environment.

I take a few examples to try to convince you that this is what we have done, and on Slide 10, you can see that in line with what we previously announced, we have taken a number of initiatives, to improve efficiency and to control costs. The first effects of these short-term measures that we have taken have allowed for instance, the sales and administrative expenses, and more specifically, as you can see, the administrative expenses to go down, both in absolute terms as well as in percentage terms, and you can see the S&A decline from 7.4% in March 2009 to 6.8% in March 2010.

Similarly, we adjusted to the new environment on the manpower side. And you can see here the headcount evolution. After the recruitment of 11,000 new employees last fiscal year, the total workforce was adjusted. It decreased globally by 5000 people, half by natural attrition, and limited restructuring plans, I will come back to that, because you would see that we have had a number of adjustments in a number of our units, and Henri will comment on the restructuring costs related to that, half by the non-replacement of employees which fixed-term contracts. So globally between 31st of March 2009 and 31st of March 2010, the headcount decreased from 81,500 employees to 76,500 employees minus 5000 as described.

You may have seen that we are facing, as I mentioned earlier, competition from a number of Asian players, which have recently increased their activity not only in their domestic markets but also abroad. To make it simple, we are in a market which is highly competitive. We know what competitors mean. We have been fighting them and we are prepared to fight the other ones the same way. We believe that in this fight, Alstom has a number of strong differentiating factors. The first one is its global presence, its worldwide presence. Alstom has a broad international presence, which allows to provide local contents whenever requested. And as we buy two-third of what we sell, we have also the possibility to benefit from a large supply chain organized in a number of countries, and this is not that easy to build. Over the few years, we have also proven our ability to build the appropriate partnerships with local players when and where it was necessary to gain contracts and positions. We have a commercial network covering more than 70 countries, and this is another very strong asset, as well as the long-standing relationship that we have with a number of key customers.

The second competitive advantage is our offering. You will see as I dictate the numbers, that we have heavily invested in technology and this strategy will be continued both in Power and in Transport for all the types of products that we do supply. And for many years, technology and innovation has been a key characteristic of our strategy, and it will continue – it will remain so in the future.

In contrast with the number of Asian players that are usually – uniquely product-oriented, we are able to propose sophisticated turnkey power plants (organ) systems to our customers, and this is definitely an important factor in many locations – Middle East, India, et cetera. We are also the only company capable of delivering a very broad range of high quality after-sales proposals. We have just more than a hundred years of experience, and a worldwide presence in this field, and we operate the largest installed fleets in Power and have in total more than 20,000 specialists in over a hundred service centers throughout the whole Group.

Going forward, we need to reinforce the differentiating factors, which are our worldwide presence, and our technological advance, and I’m going to address the two aspects of this equation. If I start with our strategy by geography, we first need to continue to strengthen our position in our historical markets and will offer strong opportunities for both Power and Transportation. We are well-placed in Europe. We also well-placed in the USA, but need to reinforce our positions there in this area. The opening of the new factory in Chattanooga for turbines that we’re going to inaugurate the next month will help us in developing our offering in gas, coal and nuclear. Similarly, we are building a facility for wind turbine in Texas, which will allow us to penetrate the market. We were only present in Europe, we will develop a position there. For Transport in the USA, this is a market which will eventually grow, and the need to promote rolling stock and signaling, as I think that the stimulus packages are expecting to boost rail spending in this area in the USA.

Moving to the emerging countries, localization is a key word for both cost and financing reasons. I start with China, where our headcount represents 6,000 people. We have a strong presence in hydro with Tianjin unit and in nuclear we have a partnership with Dongfang Electric. We are going to ramp up in coal, thanks to our new boiler factory in Wuhan, who is now operating in its new premises. In Transport, it’s a market which is more difficult to penetrate, our presence is more modest and mainly through JVs, but we are going to continue to develop it.

In India, we have for hundred years now 4,000 employees, not the same ones, I mean in position. Here again, our position in Power is more advanced than in Transport. In Power, beyond our partnership with BHEL on boilers, we need to develop steam turbines and generators. This is an agreement that we have recently signed with Bharat Forge, who should help us. We have also started a couple of years ago a new hydro factory in India which is growing nicely. In Transport, we will target both which was a market which was not really available for us, as Indian Railways was really fully integrated. This is no more the case. And I think that we can target now both mainline and mass transit rolling stock, and will develop our existing base in signaling that we have there, but which is small.

Talking about Brazil, we employee 3,500 people and have a strong presence in hydro, and next year hydro – where we opened this year another factory in Amazonia to support the existing one, which is in the Sao Paulo area, and next year we are going to open a wind factory associated with some projects that we won in the country. As far as Transport is concerned, we need to leverage Lapa factory to ensure commercial successes in rolling stock and we are working in a number of projects including very high-speed trains as well as mass transit for a number of municipalities.

Russia, we made recently a strategic move for a partnership with TMH, and as you see from the number of employees, 250, our presence is relatively small, but we are going to develop it. We have a joint venture with Atomenergomash in nuclear, and we are going to work to develop Power in both thermal and hydro.

I spoke to you about the geographical components, and on Slide 17, I will focus a little bit on what we do in the technology area to remain a technology leader. The first one is regardless of the 1% plus or minus that you can see year-on-year. If you take an historical perspective, you can see that we have now a very high and substantial level of R&D, significantly above the numbers that we had a few years ago, and we expect to continue to maintain a high level of R&D.

In Power, R&D focuses primarily on clean power and on CO2 capture processes, as well as upgrades of our product lines across the board, but notably gas and steam turbines. Concerning the gas turbines, since its launch ten years ago, we have step-by-step upgraded our GT26 and its integrated combined cycle power platform by introducing upgrades in both technology into the existing proven machines and systems. The most recent GT26-based combined cycle power plant operating in Europe has a net power above 430 megawatt and an efficiency above 59%. And it demonstrates our competitiveness, the competitiveness of our technology, and our leading position in efficiency, but also in flexibility as this is a growing request from our customer base. And by the way, any upgrade that we have been successful in implementing over these ten years on the GT26 for the 50 Hz markets, we can do the same, we can transfer it for the GT24, for the 60 Hz market and this is what we are doing.

As you can also expect – as you would expect, we are – there are a number of upgrades which are in preparation work currently and which will be launched in the market when ready and when appropriate to maintain our positions in this market. And these upgrade programs will cover a range of the demand by the customer including the very large gas turbine 50 Hz market. That means combined cycle power over 600 megawatt and efficiency above 60%, and subsequently obviously the 60 Hz market.

In terms of renewable, the sector is enhancing its wind portfolio for the development of the ECO 110, which is a new 3 megawatt wind turbine. We had one already, but this one is adapted for the Class III sites, therefore broadening its range of deterioration. And we have put in place the necessary plants for the launch of the wind offshore turbine which will have a power of 6 megawatt, and which will be commercialized in 2014. We have also signed an agreement with Clean Current Power System, which is a Canadian company involved in the development of tidal products, and we expect that this will turn in orders in 2012.

R&D in Transport has been active as well. It was mainly focused on the AGV technology to keep the lead in very high speed for which the first train will be delivered this year. This is for a customer in Italy NTV. And R&D efforts cover also a broad of range of other activities, new Prima locomotive, development of a tram train which combine suburban transportation and urban transportation, combining suburban train and tramway requirements which will be delivered shortly to one French region, and so the progress in signaling.

On the portfolio evolution, as you know that we signed on 20th of January 2010, an agreement, Alstom and Schneider on one side and Areva on the other side for the acquisition of the Transmission and Distribution business. This proposed transaction was approved by the European Commission on the 21st, after the Phase I investigation, on the 26th of March. It remains subject to the approval of a number of competition authorities in certain countries and we expect that shortly. It’s difficult to say when because the ball is not in our hands but in theirs – Russia, China, South Africa and a number of authorities, but I have no reason to believe that has not moved fast and it’s now a question of weeks, and I hope too many S at the end of weeks. I said it would be in spring. We have until the 21st of June to make it happen, but I hope it will be shorter.

So the Areva’s transmission activities will be included into the new sector alongside Power and Transport, and as you may know, this new sector will be headed by our present CFO, who has all the necessary skills to do so, and I hope he’s going to provide the same charts from the IFO that the one I just presented on the Group level. If I go on corporate responsibility, which is an area in which a lot of key actions have been taken during the year 2009 and ‘10. First it’s important even (inaudible) to remind you that environment is at the heart of our strategy through the clean combustion access in Power, through promotion of rail transportation in Transport, which is a much more environmental friendly way than other modes such as cars and planes. It’s a fact. We have launched a number of environmental-related programs and initiatives in our own manufacturing sites. You have a few indications on this chart. We have, by the way, provided in our annual report detailed data on EHS, environmental issues and all what is related to this field. And additionally, this will be the first time that most of these data will have been audited by an outside auditor. We have, as you know, launched two years ago objectives to reduce energy and green gas intensity from our operations, minus 20% targeted in 2015. And we have put in place new targets to reduce water consumption and improve waste recycling at the same horizon.

Concerning earth and safety, we focus on our ongoing programs, and we have – and this is something that we are extremely proud – we have greatly reduced the number of work-related accidents, achieving a injury frequency level which is always too high, but which at 2.3 is half of what it was two years ago and less than one-third of what was the level four years ago. This is an effort that we intend to continue.

We have significantly maintained and increased – we have maintained and increased, sorry, our training efforts through the regional campuses of the Alstom University that we created a few years ago. We have offered 80 courses in seven languages, was attended by more than 6,000 employees, up 13% compared to last year.

In terms of Governance, culture of integrity is a top priority for the Group. We are taking continuously action to ensure that ethics and compliance rules are applied, and based on Alstom’s value, and make sure that they are fully respected throughout the whole organization worldwide. We have re-launched in March 2010 a new updated version of our code of ethics which has been distributed to all our employees. We have reinforced training in this area through a new learning module called e-Ethics, which is mandatory for the 35,000 managers and professionals. We have put additionally in place a community of approximately 200 ethics and compliance ambassadors which are appointed throughout our organization to support internal programs. So, a lot of activities going on in this field of corporate responsibility.

If I want now to move on to the second area of the agenda, which is the operational review by sector. I will go fast on some points as I already gave the global picture in my introduction.

Starting with Power, you can see here that the orders were substantially below the previous year. First, because they are in absolute term low due to the postponement of some new projects by the customers but also as I said earlier because the previous year was a record high level. You have the list on this Slide 21 of the main successes that we have registered by the three activities covering the Power business. Thermal Service and Systems and Products received orders for a large gas plant in UK, coal plants and major equipment in Slovenia, Germany, and India, as well as a plant management system in South Africa. Thermal Services registered a flow of small and medium term orders, particularly in Europe and USA for both retrofit and regular service, and booked three operation and maintenance contracts during the fourth quarter in the UK and in Singapore. For those who were worried by the low level of the service orders in Q3, they will remark, I hope, as positively as they negatively remarked what happened in Q3, that the service orders for Q4 represented approximately EUR1.3 billion.

In renewable, the main orders recorded during the period were for hydro projects in Switzerland as well as wind contracts in a number of European countries. I will not come back on the geography for the orders, as it is available here on the slide. Just remind you of the difference in the Middle East/Africa, which is far below last year just because we booked a number of very large contract in ‘08 to 09.

Concerning the sales, as you can see on Slide 22, they are up in our three activities and they are driven by the large past order intake. By geography, Europe accounts for the largest sale, 43%. North America and South America representing 20%. As you can see, Asia-Pacific contributes 13%, with contracts for a turbine island for nuclear power plant in China, supply equipment for hydro power plant in Vietnam, and contract for a gas plant in Australia, represented most of the sales generated in this area. And you can see the big share of Middle East/Africa in line with the past high contracts off this area, accounting for 25% in the sales. This is the execution of the major contracts taken in Saudi Arabia, in South Africa, Algeria, Tunisia, and Arab Emirates. This explains the strong production.

Looking at the key figures, I won’t come back on orders and sales that I have already discussed. Just want to highlight that the backlog still represents EUR23 billion, which is a 20 months of sales. You also can see that profitability went up by 18%, with an operating margin at 10.6%, 1% above the level of last year, and in-line with the guidance we gave of operating margin between 10% and 11%. This performance was driven by a healthy backlog, focus on project execution, and cost control.

A few words on technology. I’m prepared to spend a lot of time on technology. So relax and enjoy. Now I wanted to say on Slide 24, that here you have a number of examples about where we spend the money. You can see that I mentioned that briefly, I will come back one second. We signed a cooperation agreement with Clean Current Power System Incorporated, which is a private Canadian company specialized in design and testing of tidal stream energy technology. Both party are working to position Alstom as provider of tidal stream farms and we expect, as I said earlier, to commercialize these products in 2012. We have initiated wind offshore technology with the aim of entering UK market in particular, but not only obviously. Alstom is focusing on developing the 6 megawatt offshore wind turbines, both prototypes and pre-series are planned to be available in 2012 to 2013 with series production in 2014.

Another interesting example on something that we have delivered successfully in the UK, which is a combined coal and biomass plant (inaudible), Drax, and we also have been awarding geothermal plants in Mexico. So, this is a niche, but we are well-positioned in this space and expecting to get opportunities. In terms of CCS development, Alstom and American Electric Power (NYSE:AEP) which is the largest, if I’m not wrong, US coal-based utility. We both inaugurated at the end of October 2009, a fully integrated 60 megawatt CCS prototype in West Virginia, which will be able to capture and store 100,000 metric tonnes of CO2 per year, and for the first time, it will also include compression and underground storage.

Finally, we launched several products in energy management system such as the ALSPA Series 6, which is a new generation of distributed control systems. Lot of money spent also on CapEx. The capital expenditure exceeded EUR300 million this year, slightly down compared to last year, but at an historical very high level. Among the programs that has been a major candidate of these spending was the new facility in Wuhan for boiler manufacture that we inaugurated in the vicinity of the Wuhan City last November, the construction of the facility for rotating equipment in Chattanooga, Tennessee that will start next month, and the new hydro project in Brazil for the support of the Amazonian located projects, and this was inaugurated last April. We will continue the development of capacities, and the two factories which will come into service in 2011 for wind turbines, one in Texas, Amarillo, the other one in Bahia in Brazil. And this will have an annual capacity of 300 megawatt each, if I’m not mistaken, I hope I’m not.

Concerning Transport, the orders decreased by 32%. Overall, the orders were – the book-to-bill was just below 1. So it’s more or less in line. The decrease from the level of last year is mainly due to the fact that eight to nine, including two very large projects, which themselves had a strong long-term and maintenance components, which is great, but inflates the yearly numbers without bringing next day some activity. I reminded you at that time, it was – I just said that at that time as well. This was the AGV contract in Italy, EUR1.5 billion, and the Virgin Pendolino maintenance contract which was representing more than EUR2 billion. So these two contracts represented more than EUR3.5 billion of the EUR8.1 billion of the last year orders. If you look at what happened this fiscal year, a large number of regional trains in France and Germany, suburban trains in France, metros in Brazil and in the Netherlands, tramways in Brazil, Morocco, and France, as well as various maintenance contracts, I don’t want to go into too many details, as it is on Slide 26.

Moving to the next one, you see the Transport has grown a little bit in sales compared to last year at EUR5.7 billion. Europe remains – represents the bulk of the sales, two-third. The main contracts traded this year include the delivery of high-speed and very-high speed trains in France and in Spain, metros in Turkey, France and Spain, regional trains in France and Germany, as well as signaling contracts in a number of countries including Italy. North America 14%, the increased trading of the New York metro contract, which is now completed, and the ramp up of the supply of the metro system in Mexico. South America, some projects in the Sao Paulo network metros, as well as in Chile, main contracts traded in the Asia-Pacific, 10 – 9% of the total sales, suburban trains in Australia, turnkey automatic metro in Singapore, as well as regional trains and locos in China.

Sales in Middle East/Africa, progressive delivery of some trams and locomotives in Maghreb in North Africa. Looking at the key figures, I don’t come back on the sales and orders, the backlog is high EUR19 billion, which is over three years of sales. Profitability slightly increased, as the income went from 408 to 414, still in the right direction, leading to an operating margin of 7.2%, which is in line with the objective I gave between 7% and 8%. You know that we are moving in the implementation of our partnership with Transmashholding, and we have to adapt to the Russian speed. And this is ongoing. We will acquire. It will take the necessary time to get all the documentation. But we will ultimately acquire 25% of Transmashholding, where we will make a down payment of $75 million upfront, and pay the rest based on the result of this company over the 2008 to 2011 period. We have already established a joint engineering company registered in Russia, which will create a center of excellence for the design and the manufacturing of rail system equipments and key components which will use our technologies, but also we adapted to the very specific needs of the Russian markets. The first product under development is locomotive, and we hope that this will move towards practical consequences – I mean contracts. This, again, the contractual discussions are ongoing. It takes time, but this is life.

A few words on technology and CapEx in Transport. We continue, obviously to keep focus on innovation on both rolling stock and signaling systems, both on the urban and mainline applications. Over the summer of 2009, the AGV completed its tests to validate our new very high-speed platform. It then moved towards operational tests, trial trips, that are being done currently, after being done in the test centers, are now done in the regular lines in Italy and more specifically in the Rome-Naples high-speed track. And they are ongoing in order to get the final validation in Italy for our customer NTV. Also working on the new generation, as I said of locomotives, the Prima II, which was delivered in Morocco and we are making some tests in operating conditions. We presented last February our new Dualis tram-train model. This is again the idea of being able to meet the requirement of suburban and urban transportation, and is the way to operate – the aim of this product is to create the link between a city center and its suburbs without the need of offloading, be able to be applied as a tramway within the city, and as a suburban train outside of the city in the suburbs.

Concerning CapEx, they decreased a little bit, but remained strong. This is due to the fact that we strictly prioritized the programs and we have, over the period worked on a number of upgrades of our European manufacturing base, notably for high-speed tramways and components in France, Germany, Italy, and Poland.

After this very brief introduction, I’m going to hand over to Henri, who is going to give you a few technical details on the numbers, and then come back.

Henri Poupart-Lafarge

Thank you, Patrick. Good morning ladies and gentlemen. I will comment the results of this year. So, first let’s start to look on the P&L. The sales have grown by 5% at EUR19,650 million, and operating income has increased by 16% at EUR1,779 million. I would not come back on these numbers, which have been extensively commented by Patrick earlier on.

So moving below the line, first, restructuring costs. This stands at EUR96 million, which is an increase as compared to last year. Obviously, this is related to the optimization of our industrial footprint, both in Power, where for example, we have sized down a factory in (inaudible), or in Transport where we have optimized our footprint in the US and in Brazil. These restructuring charges would continue to increase over the next years as we are continuing to adapt our industrial footprint to the new context described by Patrick earlier on as well.

On the capital gains and other, EUR54 million. This includes the fines which have been given by the European Union on the transformers – on the previous alleged cartel on transformers. This also includes the acquisition cost of the Areva T&D. Under the control of my colleagues, the auditors, we are adopting IFRS 3 by anticipation, as you probably all know, this important accounting rule. So, the EBIT itself is increasing by 13% to EUR1,629 million.

Financial results, were negative at EUR42 million. This is because also we have a net cash position. We see the gross cash as low return, while we are paying debts, interest, sorry, on our gross debts. And we have also issued some bonds for the refinancing of the acquisition of Areva T&D earlier in the year, which also is getting some interest.

The tax rate stands at 24%. You know that I have got long-term guidance of around 25% tax rate. This is a combination of geographical mix, comprising both low tax rate like in Switzerland and high tax rates like in France, but also this recognition of past deferred tax asset advances that we had in some countries. Minority at EUR15 million, so altogether the net income has increased by 10% to EUR1,217 million.

If you move now to the free cash flow, nothing exceptional in this table. Restructuring cash out at EUR112 million, a little bit above the P&L as we have some long-term restructuring plans, particularly in Germany. Depreciation is increasing as compared to last year, as we are spending in CapEx more than the depreciation. So normal and logical that depreciation is gradually increasing. CapEx, commented by Patrick, regularly decreasing now, and it will continue to decrease next year. Capitalization of R&D has been slightly higher than the previous year at EUR56 million, and this due to the start of the capitalization of R&D on CO2 capture, as it was announced previously.

Pensions, nothing particular this year. Last year, there was a – I would say a particular funding of a pension plan in Sweden. This year this was more of a recurring level. Change in working capital has been very negative this year at EUR953 million. This is directly linked to the order impact.

I used to give as a rule of thumb that you should take around 15% to 20% of the difference between the order intake and the sales. I think if you take 20% as the difference this year, it gives EUR946 million, not far from this level, but it’s safe to recognize that there is an element of bumpiness, as well. But in broad terms, this is explained by the level of order intake of this year.

Tax cash out at EUR191 million in line with last year level, which is 12% cash tax rate, which is obviously a very low level of cash tax rate. We have said also in the past that we will save around EUR100 million per year of tax. So the difference between the – I would say the P&L tax rate and the cash tax rate should be around EUR100 million. We’ve exceeded this guidance this year, and I hope that we will continue to do so in the future years.

The global cash flow stands at EUR185 million. And again there are two ways of looking at this free cash flow. It’s a low level clearly, but considering the extremely low level of order intake of this year, I think it proves that Alstom can still generate cash under very very low commercial tide.

Moving to the net cash evolution, thanks this positive free cash flow generation, despite the payment of the dividend. But also thanks to some capital increase, and the 50-50 joint venture of hydro, which has been, as you know, which we have closed this year, and we have acquired the 50% of the (inaudible) stake in hydro, but because this was accounted for as a debt on our balance sheet and because we have reimbursed this debt by issuance of new capital, this has a positive impact on our net cash position. And this is why the net cash position has moved from EUR2 billion to EUR2.2 billion. The price of T&D, which today – the contractual price is in equity value. But as far as we know, the current debt of T&D, this would represent net cash outflow of around EUR2.3 billion, which means that on a kind of pro forma basis, we are more or less at neutral level – cash free, debt free level after the acquisition of the transmission activities, which will occur in the coming weeks as Patrick had mentioned.

Equity evolution, on top of the net income, and partially offset by the dividend, there are a number of small positive items, the pensions, which as you would see, has moved positively, again the hydro 50:50 joint ventures, and some other – some capital increase, some positive impact of the (inaudible).

So altogether we can say that we have recorded a much improvement of our equity this year from EUR2.9 billion to more than EUR4.1 billion. Last year, we had a very positive net income, but this was partially offset by the dividend and by negative impact on the pensions. This year all these moves have been in the same direction and therefore, our equity has been strongly and positively impacted.

Last point on the funding of the company. We have EUR5.3 billion position of gross cash, if you include the syndicated line, this gives us a lot of visibility. This is obviously being done because of the financing of Areva T&D, as you can see on the right hand side. You have got our new bonds, we have reimbursed the old bonds, and we have issued three bonds over the current period maturing in 2014, 2017 and 2020. I must say that the interest rates were, I would say, in line with the market ones, which are decent one. And I must say that I am pretty happy to have this financing behind us. As you know, the debt market is still open, but what’s happening in the market one never knows, when it close. So, I am more than happy to have all the financing of T&D behind us, And now, the only funding of Areva T&D will be through gross cash. We have also renewed our bonding line. You know that we are operating with EUR8 billion of bonding line. We renew it every two years, actually this time we have renewed it for three years, and we have maintained the conditions. I was a little bit disappointed, but my friend, the banker has been extremely greedy.

As far as pensions are concerned, the pensions underfunding has remained stable over the years. This is due to the good performance of our assets on the market, in line with the stock exchange market. There was no extraordinary thing, but in line with our benchmark. So from EUR2.7 billion to EUR3.3 billion of assets. At the same time, our liabilities have increased from EUR3.7 billion to EUR4.2 billion. This is due to the decrease in tax rate, and more particularly to the decrease of the spread of AA rates. So the fact that, although the recent year, I would say, our underfunding has remained relatively stable, means that, we are more or less – our asset liability management under control. And when interest rates goes up, sometimes we lose in terms of asset. When interest rates goes down, we gain in terms of assets. This is what we probably call asset liability management.

Thank you very much. Now, I would hand over back to Patrick after showing you this slide of the dividend, which is the last slide here. But I let Patrick maybe comment about the coincidence with my tenure as the CFO of the Group. Thank you very much.

Patrick Kron

Well thank you Henri. And no comments on this last point. We gave a very impressive, comprehensive but a bit longer presentation about the financial results and I will try to conclude briefly.

On what’s going to happen next. It’s always more difficult to predict than the past. If I look at our priorities, they remain, for Power, focused on developing our position in high-growth areas, keeping the lead in clean power, leveraging opportunities in the installed fleets, which is in my view, extremely promising. Transport, we want to continue to strengthen our positioning in mature markets, but also targeting emerging ones with suitable solutions. For the group, obviously we’ll make sure that integration of the transmission activities get smoothly integrated in the organization. And we’ll try to boost its growth through selective acquisition, and if opportunities arise, more generally, again, we rely on organic growth, but definitely may look at the selective acquisitions if opportunities make sense.

Concerning the outlook, on the operation priorities first. We need to take order and once we take orders, it’s easy, but we will look at profitable orders, that’s more difficult. We’ll continue to adapt to the load while keeping flexibility. It’s important that any decision we take to adapt, we include a component of how are we going to remain as reactive as possible to face the uncertain environment. We are going to focus on quality and project execution. And this is not well. This really is the center of our focus and of our attention, continue to strictly monitor costs, why we’ll continue to spend money because it is easy to cut R&D spending. It is not obvious that at the end of the day you still have a good business in your hands. So we’ll maintain a high level of R&D – a high level of CapEx. You know, EUR20 billion company, EUR500 million CapEx, and so it is not sky high. And I don’t – I am not going to kill our strategy to save EUR50 million in CapEx, although we will prioritize and be selective. Mr. Joubert, this is not a commitment, and we will maintain a high level of R&D and CapEx.

And now as far as the numbers are concerned, it’s clear that the low level of order intake will have consequences on both our sales and our operating income. I would say this year ‘10/11, we are clearly below last year, which was a record high. And as far as the operating margin forecast is concerned, our forecast over the two years is that it will be within the target of 7% to 8% and this is based obviously in our ability to continue to deliver correctly the backlog and we assume that the demand will maintain and gradually rebound. This numbers in theory do not include T&D or at least T activity, because it’s not here in, and we will integrate, create a budget, and develop a plan. But frankly, I’m not expecting the day this business will be in our hands to change this guidance. So, again the orthodoxy is to give a guidance on what we have in hand, but I hope that the orthodoxy and practical consequences of the orthodoxy will match and we will keep this guidance. Here is, ladies and gentlemen, my conclusion.

Just on the practical standpoint, concerning the next events, before answering the questions both in the conference and in the room, we have the shareholders’ meeting, which is to be held on 22nd of June in the Palais des Congrès de Paris. We will communicate our orders and sales for the first quarter 2010 to 2011 on July, the 20th. And our next Analyst Day will take place on the 22nd of September, just a few days before my birthday at (inaudible) and will be dedicated – this happens every year, by the way, the birthday, I mean the presentation. And this will be dedicated to the transmission activities.

So, ladies and gentlemen, this is the end of this presentation. Before we take any questions that you may have, both on the phone or in the room, I would like to thank Henri for his great achievement as CFO of Alstom over this past six years, and I wish him all the best in his new role, he will discover the pleasures of running operations. By the way, I’m also happy to have here in the room, Nicolas Tissot, standing in the first row. We have the privilege and the pleasure more importantly to sit Henri’s place for the next shareholders meeting and analyst presentation. Thank you very much. Sorry for this a bit longer presentation, but we’re available for all the questions you may have. I will start with the first question in the room and then give the floor to the teleconference.

Question-and-Answer Session

Gael De-Bray – Societe Generale

Good morning Gael De-Bray from Societe Generale. I’ve got a few questions, please. The first one is on the – on your competitive advantages. You highlighted in the presentation that project management was actually one of them. However, we have seen a number of Chinese players being a bit more successful outside of China lately, in particular, Shanghai Electric winning pretty large contracts either in Vietnam or in Africa worth $1.5 billion to $2 billion. So how do you explain these commercial successes and how do you judge their ability to manage large turnkey projects?

The second question is about the US plans on the high-speed trains. Apparently, the Chinese government has recently signed some cooperation agreements with the State of California and GE to build a railroad, and probably also some high-speed trains in California. So what is now the likelihood that Alstom wins some high-speed train contracts in the US? And how this cooperation with the Chinese has changed your commercial strategy if – well in any way?

The last question would be also on your strategy, overall. Do you believe that not having a financial branch is currently an issue for you to secure new contracts, particularly in emerging markets such as Latin America, which tend to put a higher priority on cost and financial assistance?

Patrick Kron

On the first one, again, I never discarded the fact that Chinese competitors are significant competitors, such as Koreans, such as others we face, General Electric, Siemens, Japanese, Chinese, Korean, and others. And we are going to fight against them tomorrow as we did last year. I have no doubt that Shanghai Electric can win some projects in Vietnam, Africa. I don’t know the conditions as they were obtained. I am not a shareholder of Shanghai Electric, so I don’t care that much. The thing which is important is, okay, what are the competitive advantage that we have. I have the example of India that I already mentioned. The Chinese massively sold some equipments in India. And the Indian government is now begging us to step in as a number of international players, because they are not 100% satisfied to have the choice between BHEL which has capacity limitations, and the Chinese which has not provided exactly what was expected. So we are going to see what happens and where it develops. And I think that we have the competitive advantages that I described. So I mean – every time Shanghai Electric wins a contract, doesn’t mean Alstom is dead, neither the other way round. And we have seen that we can fight.

Same applies on high-speed. I’m not that aware of any contract that we have lost against the Chinese on high-speed, not a single one. So let’s wait for it first to happen before you conclude. As far as – I don’t know what will be the requirement of the US societies or the US users. I mean we have 30 years of experience in high-speed, high reliability, high safety, zero fatal accidents. And the Chinese will probably have that as well, but in 29 and half years, and if they are looking for something that we are not able to provide, we will not compete, because we will not participate. We participate where we think that what we have in hand is making sense. If a customer is looking for Mercedes – to get a Mercedes and we may try to compete. If he is looking for a Logan, and you have a Mercedes in hand, you don’t try to sell it. So that’s what we will do for the time being. I have no reason to believe that the playground has changed in the US. And we are absolutely comfortable in bidding there if the rules of the games are corresponding to what we do. I don’t know the details of the signatures between the State of America and the Chinese. They didn’t consult me, and I don’t know specifically.

Concerning the strategy in new financial arm, we tried vendor financing with the marine business a while ago. It was just when I joined. I had no real time to study the details, but with what I learned, I am not happy to start again. So we have no means to finance our customers and no intention to do so. So I think that the good projects, we will find the right financing, and we have no intention to step into this business.

Gael De-Bray – Societe Generale

Because there was a slight ambiguity which does not mean that we don’t provide financial assistance.

Patrick Kron

We don’t finance ourselves, but we have experience over the years that the customer is not only looking for an equipment, but he’s looking for an equipment plus a number associated services. And these associated services include the health of the customer in order to provide the right financing. I answered to your question on the financial arm. We don’t want to do it ourselves. But it is clear that we help the customers and provide – and the bankability of what we do is probably something which helps the customer in getting the financing.

I’ll take one question from the conference. May I ask Andreas Willi from JP Morgan to make the first question, and then I come back here in Paris.

Andreas Willi – JP Morgan

Good morning. It’s Andreas here from JP Morgan. Thanks for taking my questions. I have two questions, please. The first one on restructuring. You haven’t given any specific guidance – what you want to spend the next two years, I assume also for now excluding Areva. And if I look at your geographic footprint, is there room to use this more subdued market environment to move more aggressively to low cost countries also in terms of your value-added?

The second question on Transport, sales slowed quite a bit in the second half of this year. How should we model out the next couple of years in terms of how the still strong backlog is coming through? Is this now a business that should be flattish, or can that still grow?

Henri Poupart-Lafarge

On the restructuring. we have not announced as Patrick has mentioned. We’ve not announced large restructuring plan with a number attached to it. Like, if you were going to spend X million euros over the next X years, and so forth and so forth. What we are seeing that – we are continuously improving and optimizing our industrial footprint, which means, by the way, that as you are mentioning, we are progressively increasing the weight of Asia, not only because there are low level (inaudible) but also because the market is there. So, we are progressively increasing the weight of Asia in this footprint. In terms of numbers what does it mean? That means that our restructuring charge, yes we will continue to increase. So, instead of having a guidance between 50 and 100, which was our previous guidances, we are going to exceed these numbers over the next two years. How exactly, that I cannot tell you – I mean we are not targeting a particular number. We are targeting at optimizing our industrial footprint. So, whether it would be between 100 and 150 (inaudible) probably. But clearly, this is not like a package. This is something that we are discussing item by item.

Patrick Kron

On Transport, we are completing currently – we have completed some large contracts, namely the New York metro, which represented in ‘09 to ‘10, if I’m not wrong, close to 7% to 10% of the total sales of the Group, in Transport group of the sector. So, it’s looking unchanged. Just the completion of these contracts puts it down close to – a high-single digit. So we expect that classically, other contract will take over and compensate this shortfall. But I’m expecting a modest growth in Transport sales. I don’t know whether if your definition of flattish is a positive flattishness.

Mr. Olivier Esnou (inaudible).

Olivier Esnou – Exane BNP Paribas

Oliver Esnou from Exane BNP Paribas. Thank you for taking my question. I start with, I would like to drag you a little bit more into some granularity on the order pipeline. If you can give some ideas where you see opportunities coming back, first, in terms of region and maybe technology. You were kind enough to tell us in March that H2 would be above H1. Is it something you think you can already give some indication for H1 2010/2011? That’s the first question.

Second one, coming back to service, which you highlighted, had a strong comeback this quarter, in thermal services I mean. Do you think now we have seen sort of the worst of the electricity decline and its impact on utilities, service spending and we are back on the growth path, or are we likely to have volatility again in that business?

And maybe a last one. You highlighted on Transport, the good enough strategy. I’m quite keen to know as what you see as the key milestone to get there, to have instead of the TGV, the very high technology, or maybe on other product, how you would develop this good enough strategy.

Patrick Kron

Okay. You said thank you for taking my question or my questions? I can’t decide.

Olivier Esnou – Exane BNP Paribas

My three questions.

Patrick Kron

So, look, on the granularity of orders, I may be a little bit disappointing. Again, we keep a high level of demand and a high level of answering to tenders. And I don’t want to give the numbers, but you will be puzzled by the high level of the order – tenders to which we are committed by some answers. The problem is not to answer a tender, the problem is will the tender and the project be implemented. And it is extremely difficult to say. And again I am quite cautious. I don’t want to tell a fairly tale. I am quite cautious on the speed of the recovery of our end markets. Because today, a number of customers are still quite cautious themselves in the – the market is there. No one questioned the fact that medium-term, long-term demand is there. But the question is when are they going to stop CapEx. They have to first check whether their own end demand is strong enough, so that they reinvest. It is a very – the fact that this is the large projects which has been deferred, when you see the granularity of our order intake. And this is the question that we have. We are working on a number of significant elephants.

If they come in, your orders in H1 will be nice. If they don’t, they may not be up to H2 levels. So it’s extremely difficult. I don’t want to give a guidance there not because I am shy, but because I frankly don’t know. And this remains an uncertainty, and a period of uncertainty, and I don’t want to mislead you, neither being negative or positive, just don’t know. And the more you short-term the period in which you want the guidance, the more difficult it is. And I cannot say what will be the orders this week, and it’s waste on asking me for a month, a year or whatever. So that’s the first part.

On Service, I think the demand remain good. There is a combination of retrofits, and classical service. (inaudible) probably not the level which will be repeated quarter after quarter, but all of you were so concerned by the 500 that we gave the previous quarter. But it gives – it’s just a question that it may have volatility, so that the level of orders include the three OEMs that we took for something representing EUR300 million to EUR400 million – EUR400 million. But nevertheless, out of the OEM which are specific events, the rest was between 800 and 1 billion, which is not – close to 1 billion, which is not bad. So I mean, again, the 500 was on the low side. 1.3 is a nice one. But the demand is and remains good. Again, we have seen in 2009, because of the bad demand, the low demand, a number of customers delaying some of their maintenance contracts – maintenance programs, just to safeguard, which is normal. But this cannot be done endlessly, so there is definitely, some which are going to come back. But depending on the assessment of the market, the retrofit activity will be at this level or another one.

So, it’s again, it’s less volatile, and less uncertain than new bids. But there still remains a broad range of possibilities. Concerning, the good enough. Again, I would say that we are better in the high end of the spectrum than probably at the low end of the spectrum. So we don’t want to jeopardize safety. I mean for instance high-speed trains are high-speed trains, and we would not build high-speed trains which will be cheaper, but will not have the same safety requirements. So I mean this is not something that we can do. But what we can do is, just take the example of the high-speed. The issue of making a high-speed train or another high-speed train is not only this. What is expensive in building a new high speed line is the track, is all the infrastructure. We have very good Pendolinos where the track can be used – the existing tracks can be used. So it saves substantially the amount of investments.

So we will push Pendolinos in areas where running a 250 km is considered as good as running a 320. At the same time, in a number of countries in Asia, we are going to – the requirements in term of the quality of the metro of the mass transit system is not the same as the one you have in Western Europe, as an example. So you cannot from Valenciennes or from Barcelona provide the product. So we have organized our footprint differently. We are building some capacity in Katowice in Poland. We will also open a new manufacturing unit for mass transit in India. But we are in the chicken and egg situation. We have not yet an order to support the startup of this factory, and possibly we have no order because we have not the factory to support the order. So, we will break it. I hope that we get in the near future an opportunity to enter the mass transit in India, and we will use the platform we are going to build this, obviously to support this initial contract, but also to broaden the (inaudible). So, this is same as our units (inaudible) Shanghai, as well same with Lapa in Brazil. Obviously in TMH, in Russia, would also give opportunities for components. So this is the way we see. That’s what I called a good enough product.

May I go to the conference call and ask Mark Troman for his question?

Mark Troman – Banc of America/Merrill Lynch

Thank you very much, Patrick. Just two questions, please. Firstly, on the tendering activity that you mentioned, could you just comment if that is biased to certain regions like the emerging markets, and if, you know, coal plants contribute in that tendering activity? In other words, is there a mix change from what we’ve seen in the past in your bidding activity?

And the second question, I think related to one maybe a little earlier, on the Power Service, would you expect – how do you expect that business to grow? Would you expect that to grow in line with GDP developments, or is it a later cycle business than that?

Henri Poupart-Lafarge

On the tendering activity, no, there is no change in mix whether it is a geographical mix or whether it’s a technological mix. We have independent activity both gas and coal, we have both European tenders, as well as emerging countries tenders. So the pipe is fueled a little bit, I would say, in all geographies and all technologies. You cannot draw a conclusion from the pipe on that aspect.

In terms of Service, we have orated that it will grow faster than the GDP, probably more than 5% a year – between 5% to 10% a year. This is the sales and revenue level. As we have said, order intake is a little bit bumpy in Service due to the OEM contract and even during this quarter, even though we had no large gas fire power plant, still we had some prolongation old OEM contract, which has brought some – like EUR400 of orders. So, is an element of bumpiness in orders, but as far as revenues are concerned, this would grow 5% to 10% per year.

Patrick Kron

By the combination of the demand associated to the growth of the capacity, but also aging fleets, retrofit of existing factories to make the power plants – to make them meeting the new regulations et cetera, et cetera, and also some outsourcing. Then you have to check that the growth will not be the same in China because the fleet is newer than in the more developed countries et cetera, et cetera.

Question in the room.

Unidentified Analyst

Two questions, please. The first one, a quick one, on the order mix, on Slide 7. Wondering if there is also a margin mix there. Is it fair to assume that smaller orders would eventually come at a higher margin?

And my second one is a broader one on forthcoming orders. I certainly don’t mean to upset you. I’m not asking for any guidance or outlook. I’m more seeking your help and experience to rightly understand the right triggers to look at. We’ve seen rising energy demand in China, rising coal prices. We’ve seen a number of power utilities reporting excellent earnings. Some CapEx plans remain ambitious, especially in Northern Europe with a high proportion of CapEx committed. And look at – looking at the US, some say that actually a number of (inaudible) projects have been just delayed by the bad weather and could eventually catch up in the coming quarters, with a lot of the stimulus money yet to be spent. How do actually these factors, or others you may find more relevant, influence your business or at least your confidence in the business?

Patrick Kron

I remember the weather factor, if I have some lousy quarterly numbers, I may use that in the future but I hope I do not need it now. Coming on to the first question on the margins in the backlog, it’s fair to say that as we have had no large – or limited number of large power plants in the order intake. I mean the mix of the orders we have taken has been good. And actually the margin in backlog has materially improved because of no deterioration of the backlog margins during execution. So we executed in line with expectations globally, ups and down, but globally in line. The orders that we have taken has been globally good because of the mix impact. I wouldn’t say that in each category everything has moved up. No, there has been – it’s clear to say that when the tide gets down, I mean, you don’t expect to get the same margin as when the tide is up, but globally the mix has been favorable, now when we go back – but it is clear that if you need a normal activity, the combination of power – of turnkey plant equipment and so – and we need all of them to adapt – to execute our business correctly. So I mean the margins are good in the backlog. The question is what is going to come in? When? Both in quality and in quantity. And this is more challenging to judge.

Concerning the factors, I will go fast because I don’t want to repeat. But again, the long-term demand is positive in Power. There is capacity, is okay. There will be efficiency improvement downstream et cetera. But the demand will remain – will grow – the demand will grow faster in emerging countries. Thus the question is to position ourselves accordingly. The demand will grow. And the reasons for this demand to grow are economy, environmental protection, and social welfare. I mean when the economy, when the social situation is improving, then the peak they are creating besides the global economy – the global consumptions, there are peaks up and down. So you need to adapt to the peak demand. You need to have different type of supply mix. And as far as the technologies are concerned, the situation in long-term is unchanged. It will be a combination of fuels. The non-CO2 emitting fuels are probably going to grow faster. That is typically nuclear, hydro, wind and to moreover solar and others, and will be there and concerning thermal, it will continue. The weather is not necessarily the issue in a specific market. I mean in the US, the regulations were unclear for nuclear, so there was no demand for nuclear. But the administration has clarified the framework and now each operators can move nuclear, and is going to start. We are a little bit back on this field.

On the coal area, the Obama administration has not yet defined a framework for the future of coal. And therefore it is difficult for operators to start a coal plant which will have several decades of life. Today, there is a need of coal for the balance of power in the US. And coal will resume, just need to define the rules of the game. Otherwise it is a very capital intensive, but again you’re right to say that when you look to the utilities, when you look at the programs, they have investment programs.

But today you know 2009 has been down, (OECD) has been 5% down. It has created some margin in electricity demand. So it is not absurd for an operator – not on this small project, because they keep the flow. But for larger projects, they will take the time to check the business model, if and why, when and how they will decide to make 1 billion investments. But still we are working on a number of crocodiles. And as I answered Ms. Esnou’s question, if they turn into orders, it would be a good quarter and half year. If they don’t, it will be more challenging. Ms. Bermont?

Irene Bermont – UBS


Patrick Kron


Irene Bermont – UBS

Hello, hi, this is Irene Bermont from UBS. Most of my questions have actually been answered. But I wanted to ask more on the Asian competition and the technological barriers to entry in gas that you mentioned in your presentation, as well as clean power. Can you perhaps elaborate on that a bit – what are the barriers and how are you more advanced?

Patrick Kron

Well, this is something which is a little bit, I can extensively explain. So I just, in both terms. If you talk about Chinese competitors, for instance, you don’t see them massively on gas because there don’t use gas in their own energy mix. So you may see them in different technologies, typically hydro, coal, and nuclear, and wind. Because that’s what their mix is composed of. So we have the classical issue of a competitor relying on a strong domestic base, and using the strong base, especially when demand collapses. Because you have growth in numbers but you should have in mind that there have been extremely strong swings in the demand on some geographical areas.

Just to give you an example, the hydro market in China was around 40 gigawatt, I’m speaking under your control Philippe, it was around 40 gigawatt in 2008, and very close to zero in 2009. I think 2 gigawatt is probably the max. So it’s just a decline of 95%. Is it going to remain at 2 gigawatt where you have tens of hundreds of available gigawatt to be equipped in the future? The question is absolutely no. But as all adjustments, they are – exceeding, I mean they are hyperbolic in both directions. This, obviously, when you see your domestic markets which is moving from 40 to 2, or to zero, you say "oh maybe I should look a little bit elsewhere. That’s what they have been doing.

Now we will see how successful they are, and it is not the same game. We have experienced that to our expenses for a number of decades. So, we will see. We consider that we have a competitive advantage. We consider that we have an execution advantage. And we consider that the way we address a project in a specific country provides some merits versus the way a Chinese do. This being said, they will get contracts and will have – will fight us, as we have done with deals with them, as we will do with others. And again, clean power, the fact that the demand is moving to the high end of the spectrum is a good news for us.

Now the question in the room, yes sir. And then I will ask Lisa Randall to ask a question, but here in Paris first.

Martin Prozesky – Sanford Bernstein

Good afternoon I am Martin Prozesky from Sanford Bernstein, and two questions please. The first is, getting back to Power orders and the high tendering activity. I just want to try and link that with your guidance, the 7% to 8% operating guidance. We’ve seen, last week, Siemens was referring to a Mexican stand-off between the utilities and the power equipment providers in terms of tendering activity remaining high, but there being a real expectation from the utilities for pricing relief. And given the utilization of their plants are down, they’ve got some time to wait. So is that your experience as well? Are you seeing significant, or at least pockets of pricing pressure from the utilities and therefore a reluctance from them to convert tenders into orders?

And also, if that continues, how are you positioned relative to your competition? Given your strong backlog, your good financial situation, do you think you are in a better position if that continues for long? The second question is on Chattanooga, which you said, opening next month. Given that that’s a nuclear steam, coal steam, and a gas turbine facility, are you planning on ramping that up fully quite quickly, or are you going to stage it, given the uncertainty about the US demand outlook, especially given that there’s no coal orders coming in, and you have not seen gas orders? So can you just give us a sense of how you plan to integrate that facility into your global production?

Patrick Kron

On the second one, it’s quite easy. I would just go – the second is easier than the first. You know that such a plant is 200 to 300 million. So it’s expensive. But this is not highly capital intensive. Which is expensive is the thousands of skilled employees who are going to join these plants and work to supply the turbines and generators to the customers. So we will definitely ramp it up according to the demand, and it’s – a critical site, so we cannot put ten guys in such a factory. But we are going to gradually ramp it up. I mean, the worst case scenario is ramp up, and then the markets falls of off the cliff, which is not the case. It fell off the cliff, and now we hope it’s going to resume. In the US, again if there is no nuclear, no coal, no gas, we are going to talk and see how the rebound, where will it be plugged from us. I mean, we have our Texas facility (inaudible) but I am not 100% sure that it will fit. So you know we are going to gradually ramp it up, and probably more slowly than we originally thought when we started this plant. And this is not a drama. It will have a little component of under-absorption, but it will not make us go upside down.

Concerning Power. It is safe to say that, as I said, the margins created by the slowdown of demand for the utility created some reserve margins. The fact that there is uncertainty about the rebound of demand for them, that’s for us. The fact they hope that their suppliers will become less arrogant and probably more prepared to accept price concession. This probably is all included in what we see today, which is the difference in the timeframe, this time of constipation of the market, where nothing – it doesn’t move, while at the same time, we were hoping that the high tendering activity would make tenders come out – I mean projects come out faster. So, it’s difficult on the prices. What can I say? I mean first of all, we apply a price discipline.

Secondly, it is likely that in the low tide, the margins you can expect will probably be below the margin that you could get where everyone was eager to get power plants from the existing competitors. So, make it simple, do I factor in the price pressure? Yes. Do I factor a price war, no. But we will see. I will not challenge this fact that in an extended low demand situation, there are no risks in pricing. I have trouble to convince you of that and to convince me myself. But this being said, we always position ourselves to have the choice between accepting a lousy contract or adapting ourselves. And this is important to keep that balance. It has obviously limits, but this is important to have this choice. Lisa?

Lisa Randall – Nomura Securities

Thank you. Good afternoon. Question first. Would it be fair to assume from what you have said so far that you expect fiscal ‘11 to be free cash flow negative? And then on the basis of the acquisition of Areva Transmissions, your comments about leaving some scope for future strategic acquisitions, how should we understand your thinking around the dividend for fiscal ‘11, especially given the increase year-on-year you have announced for fiscal ‘10?

And then the second question is, I guess, for Henri as much as anyone. Henri, are you concerned at all over the time lag between the announcement of the acquisition of Areva Transmissions and the actual closing of the deal in terms of the contracts that have been won in the interim?

Patrick Kron

Look, I answer the two first one, and then I check what Henri is going to answer on the third.

On the two first ones, first, no, I don’t think that I indicated that the free cash flow would be negative in ‘10 to ‘11. This is not at all. If you include in the free cash flow the disbursement of T&D, it may be the case. But more seriously, you just consider the free cash flow as we view it. No, don’t expect it to be negative. I would put the classical disclaimer. This depends on the orders we take. But I mean currently our assumption is we are not working on the negative free cash flow.

The second one, on the dividend. This is a philosophical issue. It’s fair to say that the guidance is below the current year’s performance, and therefore one can assume that the net profits may go down. Now I leave you with the philosophy on whether the dividend is revolving the yearly performance or revolving potentially future performance. I think that Alstom shareholders have had a bumpy road. I have been in an ugly situation for some years to tell them that I cannot distribute the dividend because the numbers are not good. I don’t want to be in a situation to say I cannot increase the dividend because our numbers are great but they may not remain as great next year. So I have to play some consistency in the approach.

This means that, no I’ll never give you any guarantee that the dividend will remain at this year level next year, because it is impossible to say so far. But I think it is fair to say, that when we restarted the payment of the dividend, we started with a very cautious payout level. I said that I would gradually try to increase the payout and hopefully with the increase of the earnings, we will have the double impact of a modest and gradual increase of the payout, and of the denominator, which is the earnings per share. Maybe you consider that we have to be aggressive, but we are moving the payout from 29% to 30%. We started at 25%, and 25%, 27%, 29%, 30%. Next year will be another year. Henri, are you concerned?

Henri Poupart-Lafarge

First, just to, maybe to correct your impression. The timing of the Areva T&D closing is for the moment as quick as it could be. So, there is no delay in that respect. We are following all processes and all administrative authorization in a very smooth way, and again, as quick as possible. In terms of order intake, we have some views but with some limitations due to legal restrictions on the tendering activity of Areva T&D. So, we have some ideas about what’s going on. I would say that, first, I would rely on their professional competencies, not to do stupid things, but also we are controlling that – things are well-controlled, which does not mean that there’s no pressure on the market. I mean, you can refer to what ABB or Siemens are saying in terms of changing markets. There is some pressure in terms of volume as well. Not very different from what we know in Power. So, this is controlled, but with some, I would say, some pressure and some tightness.

Patrick Kron

But again as Henri said, I think that we were selected as the preferred bidder in November. We signed the deal in January. We have the authorization after phase 1 only of the antitrust authority in Europe. In April, we are expecting to close, hopefully before the end of May. I mean all this is not in term of timing. It’s not a disaster. And at the same time, within the limits of what we are allowed to do, we are progressive with (Schneider) and the management in the way we speak. So we are not losing time at all.

May I ask William Mackie to ask a question. I have several question on the phone, and I have tried to speed up the answers, as we will get late in the afternoon for our French colleagues. Yes, William, you have a question?

William Mackie – MainFirst Bank

Thank you Patrick, and good morning to everybody. A couple of questions, please. First of all, on the order backlog that you have provided for the Group. Could you give a little more color on the phasing that you see within the power-related divisions? And that rolls into a question regarding your guidance and expectations for revenue development over the next two years. You have already talked to the Transport division being relatively flat given the size of the order backlog and the market outlook. Are you prepared to offer some indication as to the size or scale of the decline that we may expect within the Power division given the workoff in the order backlog and the current market conditions?

And my last question is really one of detail. Just going back to IFRS 3, I think, and the M&A anticipation on the Areva Transmission, should we expect further charges linked to the Areva Transmission acquisition in the coming periods?

Henri Poupart-Lafarge

I will take the second one and then Patrick will the answer the first one. Yes we will have some further charges this year, as some of the costs will only be incurred at closing. For example, the banking fees, which only be paid at closing. And we just incurred the cost which has been expensed. So, it will – again this year, we will have some charges, but again, it will be limited charges. Don’t expect anything significant.

Patrick Kron

Well I don’t give guidance on the first question about the detailed numbers per sector, but it is clear that we will experience in Power a decline both in sales and profits, and this is why our guidance is that there will be globally a decline in the sales for this year for the Group, and that globally we move from 9.1 to something in between 7 and 8. The bulk of the – I mean the impact will be the consequences of the lower order intake in Power and the fact that this will create some under-activity here and there. And obviously when you miss sales, you miss the gross margin corresponding to the sales, and that’s mechanical. We will try to offset it by managerial actions, but still it will impact the Power.

Mr. Stetler, and then a question in the room, and then final one will be for James Moore.

James Stetler – New Street Research

Thank you. Two questions, please. First of all, on Service. What was Service as a percentage of your Group sales? And where do you see that in the medium term, especially given increased competition from Asian players? You could become more of a service company focused on mature markets.

On the second question in wind, do you really think you have the size that it takes to make this a profitable business? And given the huge amount of capacity being put in at the moment, does it really make sense to invest a lot of money here?

Patrick Kron

Well on the first question, we don’t intend to become a service provider if we have no ability to fight and to be present in the new-builds turnkey equipment and services. At the end of the day, we are going to shrink the business. We may provide some nice numbers for a sequence of years. But then I have to be extremely specific on the timing we decide to discontinue the new-builds and the age of retirement in France. But I have another route to leave you with the keys before running away. Because this is not the way you can build a profitable future to this business. So we needed to have the right combination between new equipments and services, and within the new equipments, I mean the new-build, we have a mix between turnkey, because we can value, as an integrator, the competencies that we have in a number of products and equipments, the way we put them together creates value for the customers and sell equipments. So we are not in the (inaudible) of becoming a service provider in the mature markets.

Concerning wind, you are right, James, we are small in wind. But I think that we have – we are putting the money which is necessary to position ourselves profitably. For us the question is, will it one day make sense to target broader acquisition and make it happen. I don’t say no, I don’t say yes. We will see, but I mean this strategy of remaining a small player is not the dead one. And there is – I would not consider that you cannot be profitable by being a small player. We are seeing competition by much larger players than ourselves, and it’s clear that we will remain a fair big player (inaudible) if we remain as such. But you can be a big player and happy as a big player. So we will try to be happy as a big player and then we will decide whether we change league.

Questions in the room. Yes one, and then James Moore and then I have to leave.

Good Afternoon. Christian Murray speaking. I have a question with respect to T&D. What can you tell us about the possible impact of T&D in the accounts of 2010 to 2011?

Patrick Kron

When I get questions for former boss of mine, I ask Mr. Poupart to answer.

Henri Poupart-Lafarge

First, from a technical standpoint. T&D will only be consolidated at the time of the acquisition. So, whether it will be 1st of June or whether it will be 1st of July, we will see. And also from a technical standpoint, we are having to consider only the part which would be acquired by Alstom, even though the split between Alstom and Schneider will be positive during the first months of the acquisition. Still we are having to consider only our part.

First, let’s remind the relative size of the transmission activity as compared to the Group. So whatever the impact will be, it will be a smooth impact. As I said, we don’t know today what will be the margin. We are not totally in the (wool) yet. So, we will see. So, whether it will be slightly dilutive or not for the first year, in the long-term, the margin of T&D should be above the Alstom average, but short term, as it is more of a product business, it may be more impacted short term, by margin fluctuations as systems business are. So, I may not be totally surprised if there is more dilution, but again, of a relatively small impact.

Patrick Kron

On the operating margin (inaudible).

Henri Poupart-Lafarge

Operating margin (inaudible).

Patrick Kron

Mr. James Moore?

James Moore – Redburn Partners

I have three questions. Two for you, Patrick, and one for Henri, if I could. Firstly, the Middle East orders. I see that your Group orders are down EUR10 billion last year, and half of that was the Middle East. Patrick, when you’ve been out there, have you got any feel for whether there is an improved picture in the near term, or whether it’s going to stay very difficult as a region for the next 12 months, specifically that region?

Secondly, a question on your gas strategy, if I could. We note from Siemens, and GE and others that they have launched prototype H class gas turbines in the CCGT space. Are you going to follow? Is that what you allude to with your 600 megawatts 60% plus new product, or are you going to focus more on peaking power?

And then maybe a question for Henri on pricing. Could you tell me what the pricing environment in new orders in the second half or last year as a whole was in percentage terms? And could you marry that with a comment about the gross margin in those orders, as to whether they’re above or below or in line with the current P&L?

Patrick Kron

On the two first questions which are for me, the pricing being for the CFO. On the Middle East outlook, we have booked in the previous year very large contracts coal plants in South Africa, diesel plants in Abu Dhabi, a large oil-based unit increase in Shoaiba in Saudi Arabia, plus a number of transport projects in North Africa. So I mean this is a combination of very positive events, which combined a fiscal year. I don’t know if customers wanted us to be happy while reporting this numbers. I think it’s just a coincidence. So, we are still active in a number of projects in this area. There are a number of ongoing tenders and ongoing opportunities in Saudi Arabia among others. I mean, I said very clearly that 35% of our orders in Middle East/Africa is not the benchmark, is not the reference. 5% is probably the low side. So, we will see, again, when you get 1 billion or 2 billion contract, it creates an up and down which is very material and very significant.

So, again, I consider that there are opportunities, there are needs. You go inside the Arabian city, you have blackout. And therefore opportunities exist and we are well positioned there. What I mentioned on turbines is that we are definitely working on a number of upgrades. We are not going to create to an H class. We are going to expand our offering towards the power and the efficiency which are targeted by our competitors as being H class machines. So, what we see as a proper strategy for ourselves, and simply our H class turbines, our GT26 is much younger in age than the one of our competitors. So, it has more opportunities to become a teenager and adult. So, it has opportunity to grow and we are going to upgrade and improve both the power – increase the power, including the ranges which are covered by the H class as well as the efficiency moving from 59 plus towards above 60, but we will do this in gradual steps. I am not going to move from 430 to 600 and above. We will do gradually and we will also work on the 60 Hz plus and we will do it without any change in our overall budget in R&D spending. But this is obviously something which will use material (inaudible).

Henri Poupart-Lafarge

Just to add to point that this is I think the last question, on gross margin and order intake which is probably H2. If you look on the face of it, this gross margin is extremely good but the first reason behind that is the mix impact. And as you have seen in the last quarter we received a number of OEM contracts and operating service and the service levels of others was quite good. So, on the face of it, these are extremely good orders. They are good gross margin i.e. quality than the one we had. If you look category by category and if you just look at the large orders, the large orders have added margins which are in line with past orders. So, we have not seen during H2, to answer to your question, any deterioration of the pricing environment which would have translated into a gross margin deterioration during this half year, which does not contradict with Patrick’s sense for the future and see that’s what all our comments regarding some pressure in terms of (inaudible) concerning tendering activity. What we have booked during the last half year was in line with the past (inaudible).

Patrick Kron

Okay last question. Ladies and gentleman, thank you very much for those in Paris, those in London. I appreciated your interest and your presence and any additional questions don’t hesitate to ask our future ex-CFO as well as our present Investor Relation. Thank you everybody.

Henri Poupart-Lafarge

There will be a happy to welcome you in (inaudible) will be guy in blue (inaudible).

Patrick Kron

Don’t believe. It does not work that way.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


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