(News Bulletin 247) – The railway equipment manufacturer has issued a heavy warning on results and now anticipates a largely negative free cash flow for the financial year ending next March, with a disbursement of between 500 million and 750 million euros.

Will the already rather fragile bond of trust between Alstom and the market overcome this profit warning?

The railway equipment manufacturer will in any case have to redouble its efforts to regain credit following Wednesday evening’s announcement, which is a cold shoulder for investors. This Thursday morning, its action is not yet listed and is reserved for a decline around 9:10 a.m. But the variation is not in doubt: the theoretical opening price of Euronext showed a drop of 40%. On Wall Street, Alstom’s ADR (certificates of deposit which allow investors based in the United States to position themselves in foreign securities) plunged by 18.71% on Wednesday evening.

The company has revealed preliminary figures for its half-year results, ending at the end of September. Let’s quickly move on to the turnover, up 6.5% on a comparable basis to 8.3 billion euros, as well as the adjusted operating margin which should stand at 5.2% compared to 4. 9% over the same period of the 2022-2023 financial year, ending last March.

The main indicator that focuses the attention of the market and analysts remains cash generation, Alstom remaining a relatively indebted group and which also saw its credit rating downgraded a few months ago by Moody’s. The group is now operating on the last notch of the “investment grade” category, at “Baa3”, just before the “junk” (speculative) category.

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A billion in cash burned in the first half

And the problem is of course cash. Alstom estimates that it should burn more than 1 billion euros of cash in the first half (1,050) compared to a disbursement of 45 million euros over the first six months of its 2022-2023 financial year.

The railway equipment manufacturer details the elements leading to this clearly negative figure. Seasonality plays a certain role, as in every financial year, with cash flow traditionally being more robust in the second half of the year than in the first. But this time, three extraordinary elements weighed in. “We have execution issues to resolve,” agreed financial director Bernard Delpit during a conference with analysts.

The first element, which represents around half of the negative variation over one year, is linked to inventory effects.

“The strong growth in Alstom’s order book (now exceeding 87 billion euros) over the last two fiscal years has resulted in a strong acceleration in the ramp-up of production, thus exceeding 10% per year in average growth in volumes for our rolling stock activity”, explains the group.

“This, combined with more restrictive supply chain conditions, results in a sharp increase in inventory and contracted assets, built to avoid any disruption to production lines as well as delivery times during this first half, in particular in the Americas and Europe regions,” he adds.

Clearly, Alstom anticipated an increase in its production rate that was greater than it actually was, which led it to create excess stocks of electronic components, parts and raw materials, thus increasing its need for working capital and weighing down its cash generation.

Alstom expects improvements on this point to occur in the second half of the year and believes that these “negative factors” will be resolved “in the years to come”.

Delay in UK program

Second element: the delay in finalizing the Aventra program (peri-urban trains) inherited from Bombardier Transportation in the United Kingdom penalized cash generation, accounting for around a third of the difference compared to the first half of 2022-2023. Bernard Delpit explained to analysts that 95% of the trains in this program had been produced but only 87% had been paid for.

“This will only be partially compensated in the second half of the year as the finalization of the program is now expected at the start of the 2024/25 fiscal year,” the company warned.

Third and final factor: Alstom received fewer advance payments on its contracts than during the first half of 2022-2023. “Alstom expects that advances received in the second half of the 2023/24 fiscal year will be higher than in the same period of the previous financial year, thanks to a solid level of order intake,” the company indicates.

As a result, the company has drastically lowered its cash generation forecast for the entire 2023-2024 financial year. The company expects to burn between 500 million and 750 million euros of cash while the cash flow was initially expected to be “significantly positive”.

Small consolation: the other objectives for the year are confirmed, namely like-for-like growth in turnover of more than 5% and an adjusted operating margin of around 6%. And the medium-term outlook was also reiterated.

Ultimately, Deutsche Bank judges that these announcements are “a hard blow to the credibility of the management” of Alstom, in a note published this Monday morning. The German bank lowered its earnings per share forecast by 8% on average over the period 2023-2025. The German bank reduced its price target on the stock to 23 euros compared to 30 euros previously.

The group seems to have “a seemingly endless free cash flow problem,” she asserts.

A capital increase ruled out

This heavy warning risks reviving market concerns about Alstom’s financial results. The Barclays bank had already expressed fears on this subject last month, and judged that a downgrade of the group’s rating was possible.

“The group’s investment grade credit rating now appears to be under threat, with a capital increase becoming more and more likely,” warns Deutsche Bank in its note published this Thursday morning.

Asked about the exchanges with Moody’s by an analyst, Bernard Delpit spoke on Wednesday evening of a very good dialogue with the rating agency which will continue in this way. “There is no specific reaction (from the agency, Editor’s note) that I am in a position to share with you,” he also declared, adding “to think” that the agency was working on preliminary data shared by the group.

The financial director, on the other hand, assured that a capital increase, feared by the market, “was not on the table”. “Organic debt reduction is the priority” and the company has “ample liquidity,” he said.

Bernard Delpit also assured that the company was not remaining “inactive” in the face of the situation. “We see room for improvement,” with new actions and a new “cash focus” program, he said. The manager explained that the group’s cash flow efforts would focus in particular on reducing stocks, with an approach that would be carried out “site by site”.