Alstom Adds Disposals to Extra Savings in Agility DriveFrancois de Beaupuy
Alstom SA will deepen a cost-cutting drive and sell as much as 2 billion euros ($2.7 billion) in assets by the end of 2014 as the French maker of power equipment and trains seeks to sustain profit amid declining markets.
Possible disposals include a minority stake in train and railway-equipment unit Alstom Transport that may attract both industry and private-equity buyers, the company said today. Operating profit in the six months through September was 695 million euros, beating the average analyst estimate of 664 million euros. Alstom stock rose to a five-month high.
“In the current low-growth environment, we need to further reinforce our competitiveness,” Chief Executive Officer Patrick Kron said at a press conference at Alstom headquarters in the Paris suburb of Levallois-Perret. “If tomorrow we were to look into growing in railway signaling, as some have done, I wouldn’t want to increase debt.”
Kron cut his forecast for sales and margins in May, citing a slowdown in the global economy. Alstom outlined plans today to reduce costs by as much as 1.5 billion euros by April 2016 as demand for gas turbines weakens and price pressure hurts profit from onshore wind turbines and power-transmission gear. German competitor Siemens AG, which reports earnings tomorrow, ousted CEO Peter Loescher after saying in July that it will miss a fiscal 2014 profit target.
Alstom jumped as much as 8.1 percent to 29.29 euros, the highest intraday price since June 4, and was trading up 5.9 percent at 1:21 p.m. in Paris. That narrowed the stock’s decline this year to 4.8 percent, valuing the company at 8.85 billion euros.
First-half free cash flow was a negative 511 million euros, partly because of payment timings, Alstom said. Orders in the period fell 22 percent to 9.43 billion euros, while sales were little changed at 9.73 billion euros.
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 said. The operating margin in the 12 months through March 2014 will be little changed from fiscal 2013, before gradually rising over the next two to three years to about 8 percent of sales. Free cash flow should be positive annually over the period.
“Tendering is active, and we expect stronger order bookings by the end of the year, which will support free cash-flow rebound in the second half,” Kron said.
Alstom ranks behind General Electric Co. and Munich-based Siemens in the power-equipment industry. It also competes with Siemens and Montreal-based Bombardier Inc. on train and subway cars, and with Siemens and Zurich-based ABB Ltd. in power-transmission markets.
The French company said in October that it won a 4 billion-euro contract for suburban trains in South Africa and a 1.2 billion-euro project for metros in Saudi Arabia. Kron said he hopes Alstom will book orders for at least nine gas turbines in the second half after selling just one in the first six months, “but the market is difficult, and we have a financial policy that forbids us from doing just whatever.”
Alstom, which reduced its workforce in Europe and the U.S. as utilities’ demand for power equipment slumped after the 2009 recession, is also shutting some plants that make windmills and power-grid gear. It’s expanding production lines for trains and turbines in countries such as China, Russia, Brazil and India to tap local demand.
The manufacturer plans to cut 1,300 job, mainly in Europe, Kron said. The reductions will affect the information technology department and the boiler unit, and may be extended to other operations if needed, he said.
The 1.5 billion-euro savings plan is “ambitious, possible and necessary,” Kron said. The asset-disposal program, of 1 billion euros to 2 billion euros, will reinforce Alstom’s balance sheet and help it fund acquisitions “if needed,” the CEO said, adding that he has no large purchase on the agenda.
Kron didn’t rule out a share sale for Alstom Transport as a way of reducing the parent company’s holding. The strategy is designed to prevent Alstom’s debt from rising, and the manufacturer doesn’t need a capital increase, he said.
“Transport is, in our view, Alstom’s most stable asset, and the sale of a stake in the business is therefore not a positive signal,” Arnaud Schmit, an analyst at Natixis in Paris, said in a research report.
“Implementing a capital increase at current valuation wouldn’t have been acceptable for our shareholders,” and “increasing debt isn’t an option,” Kron said.
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, said last year that it may make a similar move.