Alstom Cuts Margin and Cash Flow Outlook as Demand Falls

Alstom SA (ALO), the French maker of trains and power equipment, cut its forecast for operating margins for the second time in nine months because of weaker-than-expected sales of thermal-power equipment.

The operating margin will remain at about 7 percent this fiscal year ending March, and “may slightly decline next year,” the company based near Paris said in a statement today. Alstom previously forecast this year’s margin to be little changed from fiscal 2013’s 7.2 percent, before gradually rising over the next two to three years to about 8 percent of sales. Alstom shares fell as much as 14 percent.

“Confidence is broken,” said Gael de Bray, an analyst at Societe Generale. (GLE) He cut his target price for Alstom shares to 26 euros from 32 euros. “The expected deleveraging process was the main support to the shares but is further postponed.”

Chief Executive Officer Patrick Kron in November outlined plans to sell as much as 2 billion euros ($2.7 billion) in assets including a minority stake in its rail unit by the end of 2014. The CEO also announced cost cuts to curb debt and regain “strategic mobility” as demand for gas turbines weakens and price pressure hurts profit from onshore wind turbines and power-transmission gear.

Photographer: Chris Ratcliffe/Bloomberg

An employee works on the coil of an industrial power transformer at Alstom SA's factory in Stafford, U.K. Close

An employee works on the coil of an industrial power transformer at Alstom SA's factory in Stafford, U.K.

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Photographer: Chris Ratcliffe/Bloomberg

An employee works on the coil of an industrial power transformer at Alstom SA's factory in Stafford, U.K.

Alstom, whose competitors include Siemens AG and General Electric Co., fell 12 percent to 24.52 euros at 12:32 p.m. in the French capital.

Cash Flow

Alstom has no need to renegotiate lending covenants, Kron said on a call with analysts today. Asked whether Alstom should eliminate the dividend payment, Kron said a decision will made by the board in May, and added that today’s release “doesn’t give a favorable ground for a positive decision on the dividend.”

Quarterly orders climbed 11 percent to 5.62 billion euros. That beat the 5.15 billion-euro average of four analyst estimates collected by Bloomberg. Revenue fell to 4.8 billion euros from 4.92 billion euros, short of the 5.06 billion euros estimated by analysts, hurt by the rising euro.

The French company, which previously predicted a positive free cash flow for the 2014 fiscal year after a negative 511 million euros in the first half, now forecasts a “moderately negative” free cash flow in the second half “as customers’ downpayments and progress payments are affected by delays in expected bookings.”

Booking Orders

A previously-announced record train order in South Africa and a contract for a coal-fired power plant in Poland may be booked this quarter, Kron said today. Alstom has also won “a number of gas projects” which have yet to get administrative approval or reach “financial close,” the CEO said.

“In our current assumptions, we expect a positive free cash flow next year, but it is not a guidance,” Kron said. The focus remains on implementing and accelerating cost-saving initiatives, he said.

Revenue is still forecast to “grow at a low single-digit” rate this fiscal year, excluding the effects of acquisitions, disposals and currency shifts, the company repeated today.

Alstom, which reduced its workforce in Europe and the U.S. as utilities’ demand for power equipment slumped after the 2009 recession, is cutting 1,300 jobs, mainly at its information technology department and the boiler unit to reduce costs by as much as 1.5 billion euros by April 2016.

Asset Sales

The company has named Bank of America Corp. and Deutsche Bank AG to prepare the sale of a minority stake in its rail business, people familiar with the matter told Bloomberg last week. It has also named Goldman Sachs Group Inc. to explore a sale of its air preheaters and gas-gas heaters unit, people told Bloomberg in November.

Alstom needs to save cash in Europe as it spends money to build partnerships and plants in countries such as China, Russia, Brazil, India and South Africa to tap local demand for trains and turbines.

Moody’s Investors Service cut Alstom’s long-term credit rating by one level in June to Baa3, the lowest investment grade. Standard & Poor’s, which gives Alstom debt its second-lowest investment rating of BBB, has said that it may make a similar move.

To contact the reporter on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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