Alcatel Lucent (ALU)

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Alcatel-Lucent (ALU)

Q3 2012 Earnings Call

November 02, 2012, 08:00 am ET

Executives

Ben Verwaayen - CEO

Paul Tufano - CFO

Analysts

Alexander Peterc - BNP Paribas

Sandeep Deshpande - JPMorgan

Kai Korschelt - Deutsche Bank

Anuj Krishan - UBS

Sebastien Sztabowicz - Landsbanki Keppler

Presentation

Operator

Ben Verwaayen

So, good afternoon, good morning, good evening, depending on where you are. Thank you for joining us for our Q3 results. As always, I am going to point you to the Safe Harbor statements and I hope that you will read it at your leisure.

So the story about Q3 is a story about transition of the market and transformation of the company and those two things coming together. If you look to our three most important objectives, it’s of course number one, the improvement of our margins, both on the gross margin and the operating margin. At the same time, it is about maintaining and even building on the core value of the company which is to be an R&D innovation company and during I think the presentation I hope that I can give you the proof that it is recognized and increasingly recognized by the market. And of course, last but not least is the strengthening of our balance sheet. So those are the three main transformation points in our agenda and we cover today with the results.

Let me start with the improvement of our gross margin and operating margin. Of course crucial in that element is what we do in our performance plan, the cost improvement plan. Now I don't have to remind you of all the various elements to it, but one of the most immediate points to focus on is the timeline. It is the act immediately and you will see during the presentation that it is already the fact that we are focused tremendously on bringing our cost base down with great urgency.

So I want to go through all those six points to discuss with you where we are. First one is on the cost. The cost reduction was as you remember for 2012, Euro 500 million and we added that Euro 750 million for 2013, so by the end of ’13 we need to have a cost reduction realized of at least Euro 1.25 billion. It’s good to announce that to you today that we have achieved 35% and I would say we have achieved that in the places where it matters. For example, our SG&A is down year-over-year 12%.

So that was one of the sticky items maybe in the past; we are focusing very much on the cost improvement there where it matters; our real estate cost, our IT costs are down 5% year-over-year and all-in-all, we have done a third of what we need to do for a whole period of 24 months year-to-date. It's about fixed cost and it's about variable cost. In the variable cost, half of it is better negotiations and renegotiations with our suppliers and third-parties and half of it is in I would say productivity improvement internally. If you slice the cost of tickets, the handling of repair, the process that we have on looking to define detail of getting things done for a much more focused and I would say across the business organized way that will generate a lot of cost savings.

So 35% at the end of September means that we are not just the delivering on the totality of the Euro 1.25 billion, it also will tell you that for the target of 2012, 90% is done by the end of the third quarter, which gives you an opportunity to over achieve on the cost issues for the whole year. The focus on cost is truly throughout the organization.

Now one of the issues around cost of course is people. You have seen us detailing our reduction program a couple of weeks ago and we are focusing on not just the 5,500 that we have announced as a reduction in headcount, in ALU headcount, over and above that, we have a reduction on contractors, historically the company has a lot of [badge] contractors and amidst it's operations, you will see a similar program there and we have of course the opportunity to reduce costs by addressing some of our managed service contracts.

So overall the total headcount reduction will be of a different nature than the 5,500, but focusing on the 5,500 is important. That is addressing the issue where it matters; 60% plus will be in Europe. So it’s not that we try to go to the territories where it’s easy to adjust your headcount, we will try to address it and we will address it, there where it matters and 60% is in SG&A. So it is very clear for the organization that the improvements that we are going to make in headcount are real, the faster we do it the better it is and we are I think engaged in all the necessary regulatory and legal processes and negotiations.

At the same time, we are going to cut pretty deep in our corporate executive population with a reduction of over 30% and we are going to cut two layers in the organization. So from the people perspective, this is quite a drastic step that we are taking. The same that we do when it comes to contracts and as I said last time, if you look to our managed service contracts, 25% of that is not up to the standard that we need to be, that is a substantial bleeder for the organization; we need to address it as soon as possible. We have taken all the actions necessary to have the information which allows us to be capable to address those issues and a third of those issues will be addressed by the end of the year. And I think the good thing here is that it will gradually improve our results starting early in 2013.

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